Powering the future: the crucial role of the ‘Great Grid Upgrade’

Generating renewable energy is all very well, but it needs to get to its destination. This is where the ‘Great Grid Upgrade’ comes in, as transmission and distribution infrastructure adapts to meet the growing demand for electricity. In the UK, National Grid and Scottish Power have announced ambitious plans to expand capacity, with similar initiatives undertaken by power groups around the world.

The urgent need for expansion

National Grid estimates that electricity consumption in the UK will increase by approximately 50% by 2036 and more than double by 2050* as electric cars and heat pumps are adopted more widely. This could create capacity problems for the electricity grid, with the potential for supply distribution if it is not addressed.

Equally, the distribution of energy generation will change as renewable energy sources come on stream. Rather than coal-fired power stations, electricity is increasingly generated offshore (wind) or in remote parts of the UK (solar). The UK has the world’s largest wind farm – Dogger Bank – but it is situated 70 nautical miles off the Yorkshire coast**. The electricity it generates needs to move to the areas of greatest demand, particularly the UK’s major cities.

The grid upgrade also needs to address the intermittency of renewable energy. The wind doesn’t always blow and the sun doesn’t always shine. Energy needs to be managed to ensure it is available to meet demand. Inter-connector transmission lines are part of the solution, helping smooth supply by moving it over a wider space. This could help minimise the difference in solar output in two regions, for example. Battery and storage solutions are also a vital part of managing volatility in energy generation.

Will Lough, co-manager of R&M Global Sustainable Opportunities, says: “Grid capacity is currently one of, if not the, largest bottleneck to progress towards net zero. Investment is required to ‘smarten’ the grid, primarily with investment in software and automation, which would in turn help expand capacity, but also to ‘harden’ the grid against extreme weather conditions.

“Grid capacity needs to keep up with both the ‘electrification of everything’ as the key enabler of net zero, but also the different burden that a shifting energy mix towards renewables brings. Transmission capacity must increase by around 60% (47K GW miles) by 2030 to support clean energy deployment in the US. For every GW of offshore wind installed, there is $300-400m of transformer/substation equipment required.”

The overall investment required is enormous. Bloomberg New Energy Finance (BNEF) estimates annual grid spend will rise by around 2x from $274bn in 2022 to $424bn every year by 2030***. Under BNEF’s scenarios, transmission equipment is expected to grow between 6% and 14% each year****. In the US, $100bn of spending is included in the US Infrastructure Act for power grid infrastructure, with a further $370bn of related spending included in the Inflation Reduction Act****.

The UK grid upgrade

In the UK, National Grid’s £16bn ‘Great Grid Upgrade’ was launched in April. It includes the upgrades to the grid infrastructure, building new transmission lines and distribution networks. It will also introduce large scale storage systems, but also local storage options, such as the Tesla Powerwalls, which absorb sunshine during the day and store it for later use. There are also giant ‘water batteries’, such as the Dinorwig power station in Wales.

National Grid is also building vast high voltage cables called interconnectors to allow electricity to be shared with neighbouring countries. In April, a deal was announced between the UK and Dutch governments to build a power line between the two countries. Due to be up and running by the 2030, the ‘LionLink’ will create connections with offshore wind farms, and allow the transfer of electricity. When built, it will have the largest capacity of any cross-border electricity line in the world^.

Scottish Power announced its £5.4bn upgrade of the country’s electricity network in January 2024. Its parent company Iberdrola says the project will connect 80-85GW of clean renewable energy to Britain’s transmission system^^.

Sara Bellenda, co-manager of JPM Climate Change Solutions, believes the grid upgrade will facilitate the expansion of renewable energy still further. She says: “Renewable energy is already experiencing rapid growth, with the amount of renewable energy capacity added to energy systems globally having increased by 50% in 2023, according to the International Energy Agency.”

With improved grid infrastructure, a number of other factors should drive renewables adoption, she adds: “There is the economic argument; the cost of renewables has dropped significantly making it far more economically viable, with renewables now the cheapest way to meet new power demand.  Secondly, there are strong supportive government policies in place, for example, the introduction of the Inflation Reduction Act in the US and RePower EU, which are driving renewables deployment to new records.

“These policies support the rollout of renewables; the introduction of incentives such as tax credits help lower the price of renewables and therefore accelerate demand, while at the same time, the policies have also eased the planning restrictions on renewables in a bid to speed up adoption.”

The investment opportunity

The upgrade of electricity infrastructure brings a range of opportunities. By increasing capacity, transmission and distribution groups will grow their revenue base. There are also the companies involved in the supply chain that will help infrastructure development. There will also be a knock-on effect for the renewable energy generation companies that can boost their revenues as power is distributed.

This should be a stronger backdrop for funds focused on climate change and the energy transition. It has been a tougher period for these companies: share prices were inflated during the pandemic, and the downward adjustment has been painful. Equally, some governments have wobbled on their commitment to renewable energy. However, the environment now seems to be turning and a stronger pathway of growth emerging.

Four funds to back the Great Grid Update

JPM Climate Change Solutions combines expertise in artificial intelligence and data science with analyst research to identify companies with the ability to develop, deliver and scale solutions to the climate challenge. Its top holdings include Iberdrola, SSE and Schneider Electric^^^.

Ninety One Global Environment focuses on companies that can thrive in a low carbon economy, including Vestas Wind, Ansys and Autodesk^^^. The portfolio has complete conviction, with just 24 holdings^^^, and is set to benefit from the massive tailwind of the some $2.4 trillion of annual spend required to meet global temperature goals.

R&M Global Sustainable Opportunities has a broader remit, assessing all of its holdings through three pillars: people, innovation, and environment. This value-oriented fund offers a real alternative to the average global sustainable fund and currently has 5% in energy^^^.

VT Gravis Clean Energy Income taps directly into renewable energy and energy-efficiency, while still looking to generate an attractive income for investors. The fund is expected to offer defensive characteristics. The projects that are invested in are designed to be stable and deliver predictable returns. The fund currently yields 5.98%^^^^.

Finally, it is worth noting that while this is a significant undertaking, it has been done before. There was a major upgrade to the grid in the 1950s, and forward-thinking engineers designed the system to be able to accept future upgrades. These are ambitious projects, but not out of reach.

*Source: National Grid, 17 August 2022

**Source: Equinor, 19 October 2023

***Source: BloombergNEF, 8 March 2023

****Source: River Global, January 2024

^Source: BBC, 24 April 2023

^^Source: Scottish Power, 12 January 2024

^^^Source: fund factsheet, 31 December 2023

^^^^Source: Gravis Capital, at 26 January 2024