Key to unlocking renewable energy potential
Electricity is the backbone of global society and economy, with the global demand expected to grow by 150% by 2050. Its importance continues to grow as technologies like electric vehicles, artificial intelligence and cryptocurrency emerge and evolve. Currently, power generation is one of the largest contributors to global CO2 emissions, with electricity and heat production together accounting for approximately 31% of global greenhouse gas (GHG) emissions. As the demand for electricity keeps rising, the burden on existing grid infrastructure keeps increasing as well. The power grid which is a complex network designed to deliver electricity from producers to consumers, therefore needs to be modernised and expanded. As the world transitions to renewable energy, there is a need to deploy a sufficient grid infrastructure that links new electricity supplies with demand, ensuring that the momentum of energy transitions does not falter.
What is grid modernisation?
Electric grid modernisation is a transformative process aimed at upgrading the grid’s infrastructure and incorporating cutting-edge technologies to enhance efficiency and resilience. It combines innovative technologies such as like smart grids, microgrids, energy storage systems, advanced energy flow management systems, and real-time monitoring and control systems to make the electric grid more reliable, secure and affordable. A modern grid design is essential, as it not only revitalises existing infrastructure and assets but also enhances them to better handle a wide range of climate-related anomalies and cyber threats.
In the US, more than 70% of the power grid is 25+ years old, 40% of Europe’s power grids is over 40 years old, and the majority of the distribution grids of industrialised countries are more than 20 years old. These statistics emphasise the aging nature of electrical grids globally. The existing grid is not adequately equipped to meet the escalating energy needs or the requirements of energy transitions. Without grid modernisation, all the efforts aimed at integration of renewable energy sources (RES) won’t be as fruitful.
Existing financing for grid modernisation
Global move towards decarbonisation has necessitated integration of RES into grids. According to McKinsey, by 2040, RES could account for 60-70% of global power supply, necessitating significant grid upgrades. Currently, major portion of investment in grid infrastructure comes from 3 regions – the United States, Europe and China. Their share amounts to roughly US $300 billion every year. However, these investment levels must increase significantly to achieve the global climate targets.
Investments towards grid modernisation are especially important for emerging and developing economies (EMDEs) since power systems are still being developed and expanded. EMDEs currently receive about 25% of global grid investment, averaging US $72 billion annually from 2016 to 2020. However, according to International Energy Agency (IEA), investments in grid infrastructure across EMDEs must rise to US $300 billion annually by 2030; a significant surge of 317%. The IEA also warns that without urgent upgrades or additions to 80 million km of power lines by 2040, outdated grids could delay renewables, adding 60 billion tonnes of CO₂ and risking global temperatures exceeding 2°C. Therefore, its crucial to establish better capable power grids which can efficiently integrate high volumes of renewable energy requirements.
Challenges to financing grid modernisation
Current estimates indicate an investment gap of US $14.3 trillion by 2050, that could hinder the transition to a cleaner, more reliable energy future. Some key challenges that impact financing of grid modernisation are discussed below:
- High initial costs: Setting up smart-grid technology requires a large upfront investment because of the long-technical process involved. It begins with upgradation of existing infrastructure, installation of smart meters and building communication networks. The Levelised Cost of Electricity (LCOE) for grid extension can range from $0.11 to $0.42 per kWh from 1 km to 40 km. Acquiring adequate funding is a major challenge, especially for smaller entities who don’t have the necessary financial resources
- Regulatory and policy barriers to investments in grid modernisation: Outdated regulations which were originally designed for traditional power grids are inadequate to support the needs of modern grid technologies. Additionally, inconsistencies in policies across different regions, make it harder for adoption of these technologies on a large scale. Another major challenge is handling the massive amounts of data generated by smart grids which must be collected and stored in a way that consumer privacy is not breached
- Long-term returns: Even though the upfront capital investments required are huge, the long timeframe for realising returns on these investments creates financing challenges. Especially to attract private capital, shorter payback periods have generated better results
- Technological uncertainty: Another complicating aspect is the development timeline of grid infrastructure, which is 3x slower than that of renewable energy installations. When coupled with rapidly evolving technology, this creates additional financing complexity. Since it creates an uncertainty for the investors who must consider the risk of infrastructure becoming outdated before delivering expected returns
Strategies to enhance investments for grid modernisation
Since RES systems are essential for a reliable and sustainable energy transition, its large-scale deployment requires new financial models. By combining public and private funding, innovative solutions are emerging to make these technologies more affordable and bridge the gap between costs and long-term benefits.
- Innovative financial strategies: Using innovative financial strategies and tools, grid modernisation projects can be made more appealing to investors by overcoming funding limitations by turning revenues generated through the project into assets that are easier to buy and sell and more stable. For example, Green Securitisation, a financial process that creates security on green financial assets, is one such tool. Another example is of Transmission Revenue-Backed Securities, where cash flows are paid from the revenues generated by electricity transmissions.
- Public private partnerships (PPPs): PPPs between governments, utilities, technology providers and investors can foster open collaboration and generate private sector finance for grid modernisation. An example is of the New York State Energy Research and Development Authority (NYSERDA), who opened NY Green Bank in 2014 to generate private finance in RES, which was difficult to access at the time. Later, they even requested proposals from organisations that were adept at product development, implementation projects and conducting research studies, to create and install smart grid technologies. These systems help in smooth integration of RES like solar and wind, as well as make the grid more efficient and reliable.
Coming to policy reforms, regulators need to create policies that are more flexible and dynamic rather than following the one-size-fits-all approach. Using existing mechanisms like price ceilings and performance benchmarks combined with additional incentives can help utility companies recover the costs of their grid modernisation investments faster. Such schemes will motivate the investors to proactively invest since they will have a clearer and predictable idea of financial incentives.
Grid modernisation is essential for a successful global energy transition, ensuring electricity systems remain resilient, efficient, and capable of integrating renewable energy at scale. With electricity demand projected to grow exponentially and climate goals dependent on a sustainable power infrastructure, immediate action is necessary. Governments, utilities, investors, and technology providers must collaborate to scale up investments, particularly in emerging economies where the energy transition is most critical. By bridging the financing gap and implementing forward-thinking policies, modern grids can unlock the full potential of renewable energy, drive economic growth, and contribute to a cleaner, more sustainable future.
References
https://www.trccompanies.com/insights/what-is-grid-modernization/
https://climatecompatiblegrowth.com/wp-content/uploads/GGI-Climate-Finance.pdf
https://www.bruegel.org/policy-brief/upgrading-europes-electricity-grid-about-more-just-money
https://www.energy.gov/gmi/about-grid-modernization-initiative
https://www.cnbc.com/2023/02/17/why-americas-outdated-energy-grid-is-a-climate-problem.html
https://energyevolutionexpo.com/challenges-in-smart-grid-technology/
https://www.c2es.org/content/international-emissions/
https://www.ferc.gov/understanding-and-participating-california-iso-caiso-processes
https://www.nyserda.ny.gov/All-Programs/Grid-Modernization-Program