How can sufficient grid infrastructure be deployed and enhanced to meet energy transition targets – and what opportunities for investment are there? Jason Holland reports.
The use of renewable energy technologies is rapidly increasing as part of the global energy transition – but the infrastructure needed to deploy these technologies is lagging.
According to intergovernmental organisation the International Energy Agency (IEA), insufficient grid capacity to integrate growing shares of renewable energy with demand centres is “threatening to undermine progress and potentially stifle future investment” on a global basis.
The task of adding the grid infrastructure to deploy renewable energy is a massive one. Two complementary and essential elements need to be in place – the infrastructure to generate that energy, and the infrastructure to transmit to end-users in a smart, reliable and efficient manner.
The flexibility in the grid today needs to be doubled, which includes facilitating the build out of batteries that can be charged up during periods of excess supply.
Tom Furlong, CCLA
Imraan Mohammed, portfolio manager of Border to Coast’s Climate Opportunities strategy, explains that up until three to four years ago, the grid in most developed countries still had the capacity to be able to absorb new renewable capacity coming online.
“However, as investment in renewable energy generation has surged over the last five years, existing capacity to absorb renewables within the grid has been utilised, and at the same time investments in grid infrastructure enhancements have lagged,” he says.
Tessa Younger, better environment lead at CCLA, describes the delays in grid connections across the UK as a “major headache” for the renewable energy sector. “Developers are facing waiting times of 7 to 10 years in some cases, with some projects being told they won’t get connected until the 2040s,” she says.
This has major implications for project economics, Mohammed notes, not least in the “level of uncertainty that project developers and investors have to contend with.” He also points out that renewables present further complexities for the grid to contend with compared to fossil-fuel based sources: intermittency, as renewables are not ‘on’ all the time; and decentralisation (or geographical dispersion).“This means that to make the most of the renewable energy sources that are being harnessed through investment, the grid requires not only significant expansion, but also modernisation, resilience and flexibility,” Mohammed says. “In short, not only do we need more pylons and high voltage transmission lines over longer distances, but we also need the ability to store renewable energy at scale (through battery storage), smart metering, and synchronous condensers to maintain grid stability, amongst other things.”
Younger agrees that the delays are not only throwing project timelines “off course” but also “make it harder for investors to commit, knowing the grid infrastructure may not be ready when needed”. Tackling this issue “requires real action, streamlining connection processes, prioritising renewable projects, and getting government, regulators, and industry working together more effectively”, she adds.
Policy reform
In the UK, as of December 2024 the government has committed to legislation to provide connections reform, as part of a Clean Power 2030 action plan. Backed by regulator Ofgem, the plan aims to ensure reform “aligns with strategic energy and network plans and supports delivery of clean power by 2030”.
A new control centre to “turbocharge the government’s mission to provide Britain with cheaper and clean power by 2030” was also created in July 2024. Called ‘Mission Control’, it is described as a “one-stop shop, bringing together a top team of industry experts and officials to troubleshoot, negotiate and clear the way for energy projects”.
Mission Control works with energy companies and organisations including Ofgem, the National Grid and the Electricity System Operator to “remove obstacles and identify and resolve issues as they arise”, with the aim of “speeding up the connection of new power infrastructure to the grid, and [providing] cleaner, cheaper power to people’s homes and businesses”.
CCLA’s Younger describes Mission Control as “a positive step”, but “it’s just the beginning”. She adds: “By 2030, the UK needs a grid that can fully support a clean energy future. This will require investment in both physical infrastructure and digital solutions, such as smarter grids and better demand forecasting, to ensure the grid can meet future energy needs. It’s a complex challenge that will require coordinated action across all sectors to make it happen.”
Expanding on this, Tom Furlong, portfolio manager, alternatives at CCLA, believes that the UK still needs a “substantial acceleration” in the pace of deployment of renewables to meet the current targets that the UK has set as part of its de-carbonisation policy. He notes that DNV, an independent advisor to the energy value chain, recently concluded that the UK is not currently on track to meet its net zero target by 2050.
“However, the UK could achieve net zero should policy become more supportive to accelerate the transition,” he says. “To address these supply constraints, the grid needs to become an enabler not a blocker to the energy transition shift. This requires a different approach to how networks are planned, built, and operated.”
One key policy shift would be incentivising renewable development by solving the backlog of grid connections, so that “new renewable projects can come online and start generating electricity”. He notes that some projects have been given grid connection agreements but will “never connect due to the projects stalling” – in sharp contrast to those now being given far-off connection dates.
“The backlog has been caused by poor initial policy, whereby Ofgem initially allocated connections on a first-come, first-served basis, which encouraged the submission of applications for connections even if development was unlikely to actually take place. Ofgem published a ‘Connections Action Plan’ in November 2023, but it is still too early to establish whether this is sufficient to clear the backlog,” Furlong says.
Additionally, addressing the increasing variability in the electricity supply caused by more variable renewable energy sources being used will be vital, he thinks.
“The flexibility in the grid today needs to be doubled, which includes facilitating the build out of batteries that can be charged up during periods of excess supply. Currently, the electricity system operator is underutilising batteries due to reasons such as old computer systems that are not well suited to running batteries, so instead they continue to favour buying electricity from gas-fired power stations during periods of high demand. This underutilisation reduces the attractiveness of their development,” Furlong says.
Given that energy is such a significant proportion of the carbon footprint of most products, driving electrification through renewables will have a cascading effect of reducing carbon intensity across sectors
Imraan Mohammed, portfolio manager of Border to Coast
“It also has a negative impact on the pace of renewable development as without batteries renewable energy generators will be told to shut down during periods of low demand or high supply, which in turn also reduces their attractiveness as an investment.”
Finally, private capital is required to facilitate the transition, but investment will only take place if attractive returns are on offer. “We highlight the fifth contract for difference allocation round in 2023, where there were no bids by developers for offshore wind projects. The price that offshore wind projects were offered for the power that they would have generated was too low and uneconomical given higher financing costs and build cost inflation. In response, the maximum strike price for the next auction round was increased by 66% for offshore wind which then attracted developers to bid in,” he says.
Border to Coast’s Mohammed agrees that planning reform is essential, with the UK’s current planning system making “applications for the kind of infrastructure needed to build and connect renewable energy projects to the grid exceedingly complex, costly and time-consuming”. The government’s mooted Planning and Infrastructure Bill “should go some way toward making this system easier to navigate, and unlock more investment in energy infrastructure”.
But at a more granular level, Mohammed thinks a strategic overhaul of the grid’s design tis needed “to accurately forecast future supply and demand much better; expedited planning is required for basic infrastructure such as pylons and high-voltage transmission lines; and a commitment to reduce the wait times for generators seeking to connect to the network, which in turn reduces investor uncertainty allowing more investment to flow into generation infrastructure”.
Investment opportunity
While the grid bottleneck could put off some investors, Mohammed thinks there is actually a strong investment opportunity, “with long-term structural tailwinds behind it”.
Once little thought of, grid infrastructure is indeed now receiving serious attention from investors. Mohammed describes it as “an exciting subset in the infrastructure space”.
Border to Coast, for example, has invested in grid-level battery storage and synchronous convertors, which Mohammed says are “pieces of kit to convert variable power generated by wind and solar energy sources into the constant kind needed in the grid”.
Such grid management infrastructure is crucial, he thinks, and more of it will be needed as the UK electrifies more of its economy in the coming years.
From an investment point of view, the primary impact from an enhanced and smarter grid will be to drive greater electrification across the economy, including in industrial sectors that have traditionally relied on energy from fossil-fuel based sources, such as steel, Mohammed says.
“Given that energy is such a significant proportion of the carbon footprint of most products, driving electrification through renewables will have a cascading effect of reducing carbon intensity across sectors,” he adds.
Institutional investors will have a “huge role” to play in supporting the development of renewable energy and the grid, Mohammed says. Through its Climate Opportunities Fund, Border to Coast is investing in a range of renewable energy generation assets, as well as grid-level infrastructure of the kinds described in this article.
These types of investments will need to be added to in order to smooth the UK’s transition – and while there are still many challenges to overcome, there are also many opportunities.