new pipelines of the global economy

The expected doubling of the world’s power grids by 2050 creates opportunities for companies with the materials and know-how to create a new backbone for the global energy system, write Charlie Donovan, Harry Boyle and Will Gray of Impax Asset Management.

The drive to decarbonize the global power system has so far focused on developing energy sources such as solar and wind power generation. In its World Energy Investment 2023 report, the IEA estimated that a record $659 billion was invested in new renewable energy capacity in 2023.

However, investments in network infrastructure have not kept pace. Meanwhile, demand for electricity is rising and the risk of potentially devastating power outages is increasing.

Expanding and modernizing the network will be key to the transition to a more sustainable economy. According to BloombergNEF, more than $21 trillion should be invested in the world’s electricity grids by 2050 to support a global net-zero emissions trajectory. Having deemed the sector “boring”, we see a very dynamic investment landscape emerging.

A multi-billion investment trend

Although investment in renewable energy generation has increased rapidly, capital flowing into the grid remains static, according to the IEA in its report on electricity networks and secure energy transitions for 2023.

According to the Energy Transition Commission, increasing electrification and higher economic growth in developing economies mean that global demand for electricity will triple by 2050. Investment in networks will need to increase proportionally through 2050, along with additional spending to expand energy storage capacity .

The main reasons for this growth are the electrification of industrial steel production, the production of green hydrogen and other processes, as well as the development of artificial intelligence and energy-intensive data centers. In emerging markets, reliable energy is still needed to meet basic needs such as heating.

Increased demand is only half the story. The power system of the future must become smarter for three reasons:

• First, low-carbon energy systems will be powered by millions of generators, ranging from huge wind and solar farms to individual rooftop installations.
• Second, more interconnections between grids and large-scale batteries will be needed to manage the intermittency of solar and wind generation.
• Third, electricity grids are becoming bidirectional, with more and more users becoming both consumers and producers (electric vehicles will charge when electricity is cheap and discharge when it is expensive).

Investment opportunities as the network is modernized

We see that the required global expansion creates investment opportunities in four broad sectors.

In markets such as the UK and Spain, integrated utilities that own and operate electricity networks can offer investors the prospect of consistent, regulated and inflation-linked returns.

Network operators’ revenues should increase with long-term increases in electricity consumption, as a percentage of final electricity prices are typically passed on to transmission and distribution service providers.

To prepare for this growth, these companies are building capacity to address growing electricity consumption and manage more geographically diverse and intermittent renewable energy generation. Much of the additional spending will go to companies involved in engineering, procurement and construction of energy networks.

BloombergNEF estimates that the global power grid of overhead, underground and undersea cables must double in size by 2050, reaching 152 million km to meet net-zero targets.

Aging network infrastructure needs to be replaced: two fifths of networks in Europe are over 40 years old; the average age of an American large power transformer is similar.

Regional networks of high-voltage direct current cables will be created, which will connect areas rich in renewable energy generation capacity with demand centers. This is a specialist market, particularly for submarine cables.

This increase in production will support demand for key components, including converters and voltage control equipment.

As energy generation becomes more distributed and more “prosumers” emerge, there is a growing need for advanced systems to help manage them, including smart grids that use sensors and the “internet of things” to more accurately track power flows and changes in supply and demand.

The increased intelligence of the system is based on smart measurements. Even in mature markets, large investments are planned in smart grids, with the EU aiming to invest €170 billion in network digitalization by 2030.

It is a supporting environment for smart grid solution providers.

The intermittency of solar and wind generation is driving investment in a range of energy storage technologies, including utility-scale lithium-ion batteries, innovative solid-state batteries, longer-life flow batteries, and established technologies such as pumped storage.

New wind and solar farms with co-located battery storage facilities are being built more and more often. Utility-scale battery storage can contribute to a low-carbon grid by storing excess renewable energy and balancing electricity supply and demand.

There is a growing demand for energy storage that can provide energy on a large scale over days and weeks. Here, in addition to the well-established pumped storage technology, companies are placing large bets on electricity conversion.

Eliminating bottlenecks in the clean energy transition

In many markets, it is currently cheaper to build renewable energy sources and storage than to operate existing coal-fired power plants. However, the bottlenecks in combining cheap supply with rising demand will not resolve themselves. Fortunately, we are seeing a renewed focus from governments on plugging the gaps in market incentives and regulatory designs needed to redirect capital toward the electricity value chain.

Price competitiveness in renewable energy generation, broad policy support, market incentives and technological improvements are likely to drive rapid and sustained growth in grid infrastructure investment. This dynamic creates opportunities for enterprises, from network operators to suppliers of key and emerging industrial technologies.

This is a condensed version of an article previously published by Impax Asset Management