Electric infrastructure, the weakest link of the green transition

TLDR — Summary

Why is making our grid “smart” so critical?

When talking about transitions to net zero we often think of wind farms and solar fields, rarely do we consider the power lines and systems that supply our energy. This electric infrastructure needs our attention if we’re to succeed in delivering a successful green transition.

The coming years will see a considerable increase in electricity demand as we transition to more sustainable methods of transport, heating, and manufacturing — with solar and wind supplying 80% of our energy by 2030. However, renewables have a downside, the intermittent nature of renewables disrupt the conventional methods for planning the daily operation of the electric grid.

These factors combined mean that our energy grid will need to transport a much higher volume of energy and deal with enormous volatility in supply generation. To solve this problem, we need to make our electric infrastructure “smarter”.

The transformation of our current electric infrastructure to solve load risks and optimise energy use will be achieved through the implementation of “smart grids”. These new ‘smarter’ electricity networks use digital technologies, sensors, and software, to better match the supply and demand of electricity in real time while minimising costs and maintaining the stability and reliability of the grid.

Tailwinds

1. The need to make our grid more secure — Our grid infrastructures, particularly in the US, have become outdated and are increasingly susceptible to instability which can lead to mass power outages. Real-time monitoring and improving the reliability of our energy source is becoming critical.
2. The importance of supporting the green transition — As we shift towards renewable energy sources with fluctuating energy generation patterns, the adaptability and resilience of smart grids become essential. To decarbonise the world, we need to increase our renewable energy sources by 800%. Smart grids represent a crucial component of our journey towards a sustainable future, ensuring efficient power usage and supply.
3. Optimising energy consumption — In a world of rising energy costs, it’s essential to monitor and optimise our energy consumption. Smart grids enable two-way communication between utility companies and consumers; which means suppliers can better control distribution by understanding patterns and preferences, while consumers can manage their energy needs more effectively and make use of lower prices during off-peak hours. For example, the United States could save $35 billion per year if they used existing grid infrastructure more efficiently.

Obstacles

1. Considerable investment needs — Countries would need to double their investment in transmission lines and other infrastructure to reach net zero. This would amount to around $600 billion per year by 2030.
2. Policymakers need to improve regulatory frameworks — The IRA has allocated a substantial package to renovate the grid infrastructure. But, red tape will need to be cut to speed up investment in this emerging market.
3. High initial costs for retail consumers — Establishing up residential homes as an active component of the smart grid infrastructure requires significant investment. Adoption by consumers may take time (worth talking about slow uptake of smart meters in the UK? Feel like that has been an ongoing project for at least a decade now…).
4. Cybersecurity and data management — As digitisation permeates into even the most analogue of current grid infrastructure, the risk of cyberattacks is increasing . Notably, there have been recent instances of Russian hackers breaching the US grid system. Also, the smart grid implies a large amount of digital data to manage. Data which is largely unstructured and needs analysis to acquire critical insights.

Key Takeaway

The International Energy Agency estimates that investment in electricity grids must average around $600 billion annually through 2030 for the global energy sector to achieve net-zero carbon emissions by 2050.

Every big nation is massively investing in grid renovation. From the US with the IRA to China who announced a focus on investment into smart energy networks.

The modernisation of our electric infrastructure goes beyond national grids but extends to residential homes with the increase decentralisation of the energy supply and residential single homes becoming integral part of the energy distribution system.

We see the emergence of large provider of Distributed Energy Resources (DER) solutions like Enpal, Palmetto or Cloover who are accelerating the grid decentralisation and it’s digital transformation.

The presence of large historical utility players in the market gives tangible perspective for consolidation and M&A opportunities.

From an investor standpoint, this sector is particularly exciting as we are at the beginning of a wave of transformation. Although many hardware companies play a crucial role in the grid transformation, we see many software solutions with compelling business models.

What shortfalls exist in our current grid infrastructure?

In the early days of establishing the electric grid in the US, there was a fierce debate between Thomas Edison and Nicolas Tesla over the use of Direct Current (DC) and Alternating Current (AC). Tesla ultimately prevailed, with AC deemed more efficient for long-distance energy transmission. This was thanks to the introduction of transformers, which allowed AC grids to manage higher voltages and distribute energy over longer distances. Almost a hundred years later, this initial choice for AC faces a major challenge with the green transition. Inconveniently, renewables like wind and solar generate DC electricity which needs to be converted to AC for transmission through our existing grid infrastructure.

This is one of the many structural problems our legacy electricity system needs to solve — the grid was not built to transport such a high volume of energy and deal with enormous volatility in supply.

In the 1930s the US Government allowed the formation of monopolies to supply all regions of the country, creating a very centralised structure. But, then the grid started complexifying. Regions started connecting their grids together to pool resources. These interconnections led to the creation of 5 power grid systems in the US. In the 1970s, the US Government started opening the grid to companies that could generate cheaper electricity. With new interconnections, the delivery chain became more complex and the energy load unstable.

In February 2021, an electric failure caused 4.5M homes to lose electricity access in Texas. A few months later, in August 2021, wildfires (probably triggered by electric failures) caused major blackouts in California. The American Society of Civil Engineers subsequently sounded the alarm about the state of the US grid infrastructure. The SCE highlighted in its report that 70% of transmission and distribution lines were reaching the end of their life span.

The situation of grids around the world is not comparable to the state of the infrastructure in the US, but what is common is that no legacy systems were built to support our current demand for electricity.

The way our grids were built cause two major problems.

· Grid instability: When there’s a need for electricity, energy providers must immediately channel the requisite amount of energy into the grid. If the energy supply is insufficient, the frequency drops, and when this gets too low, an automatic load-shedding plan kicks into action to prevent power outages. On the other hand, when there’s too much electricity in the power system and not enough demand, the electrical frequency increases. And since some power plants can only operate within a certain frequency range, there is the potential risk that they disconnect from the power grid as a result. Because of potential instabilities on the grid, operator have to constantly monitor supply and demand to avoid imbalances that can damage power plants or the network.

· A backlog of new projects: Today everything is aligned for wind and solar to account for 80% of new electric capacity. However, new projects are waiting in line to be connected to the grid. There is currently at least 3,000 gigawatts of renewable energy waiting for permission to connect to power lines. That’s equivalent to five times the amount of solar and wind installed last year. In the United States, wait times to connect new power plants is currently up to five years or more.

To solve these issues, we need to considerably expend the grid system. The International Energy Agency said in an extensive analysis that nations around the world will need to build or upgrade roughly 50 million miles of power lines by 2040. That’s equivalent to nearly doubling the size of the world’s existing electric grids in just two decades. Countries would need to double their investment in transmission lines and other infrastructure, to $600 billion per year by 2030.

Furthermore, we need to optimise the existing grid infrastructure. One recent report by the Brattle Group estimated that utilities in the United States could save $35 billion per year if they used existing grid infrastructure more efficiently. That’s where the concept of “smart grid technology” comes into play.

Why we need real-time monitoring and power control ?

As the IEA neatly summarises: “Smart grids are electricity networks that use digital technologies, sensors and software to better match the supply and demand of electricity in real time while minimising costs and maintaining the stability and reliability of the grid.”

The concept of smart grid allows real-time data to balance electricity flows, thereby enhancing energy efficiency, facilitating distributed energy resources, and improving the overall electricity supply system across the grid.

Key components of smart grid technology include sensors, wireless modules, monitoring systems, and robust ICT infrastructures.

Unlike conventional energy grids, which function on a one-way distribution model from producer to consumer, smart grids employ IoT technology to establish a new, intelligence-based model that integrates monitoring capabilities.

Through the real-time exchange of data facilitated by smart meters, grid operators gain precise insights into when and how electricity is used. IoT devices and technologies then enable power grids to communicate with each other to balance supply and demand effectively, preventing network overloads and resulting in a more secure electricity supply.

The need for intelligence and digitalisation is not only limited to the grid infrastructure itself. It is also essential “behind the meter”. This area is also known as grid edge technologies. These involve devices and systems located at the edge of the power grid, including electric vehicle (EV) infrastructure, home energy management systems, and smart thermostats etc.

These innovations enable consumers to interact with the grid and manage their energy usage in a more efficient way. The deployment of DER and VPP also leads to the decentralisation of our grid system and making our home energy independent and even supplier to the local grid.

Solutions — a mix of hardware and software

Included below is a broad mapping of the different sectors and sub-sectors of innovation that is changing grid infrastructure for the better. Although several innovations consist of hardware and other IoT tools, this research places an emphasis on the different software solutions. These technologies range from network monitoring tools, AI and data analytics tools, energy marketplaces, DERs and other behind the meter solutions.

Network monitoring and demand flexibility

The energy network monitoring and demand flexibility market is undergoing a transformative evolution in response to the growing demand for sustainable and efficient energy solutions. This dynamic sector is shaped by the need for real-time monitoring, optimisation, and flexibility in energy distribution.

Large energy providers (Schneider, Siemens, or GE) have been the main acquirers of innovations in the space.

Several startups are working on solutions to prevent blackouts and optimise energy use on the grid. For example, UK startup Synaptec specialises in optimised sensing technology to reduce outages and electrical downtime while Sweden’s Flower Technologies solutions to demand response presents an opportunity for companies to strategically vary their energy usage to balance the grid, lower their costs and receive a monetary kickback for being flexible.

Market data software

Other companies are working on data analysis. Data software solutions in the energy space are specialising in the collection, analysis, and provision of real-time and historical data related to the energy market.

Data analytics and AI allow utilities to analyse vast amounts of data for grid optimisation, predictive maintenance, and load forecasting. Innovations in this area improve the efficiency and reliability of the grid.

Swiss-based startup Urbio is working on an energy planning solution for utility companies and energy consultants to better visualise and design energy infrastructure. The software uses machine learning to analyse vast amounts of data to build urban digital twins and design optimal energy infrastructure renovation.

Energy trading and exchanges

The electricity trading and exchanges market is a critical component of the broader energy trading sector, specifically focused on the buying and selling of electricity. Current market participants include utility companies, Independent Power Producers (IPPs), Renewable Energy Developers and other energy traders.

Like other markets, there is a spot and forward market. Electricity is traded on open markets, for example European Energy Exchange (EEX), the Nord Pool, and the North American Electricity Reliability Corporation (NERC) in the United States, but a lot of electricity is also traded Over The Counter (OTC).

It is in the OTC market that several interesting startups are building innovative solutions. UK-based startup Electron is developing an energy trading platform designed to offer digitally optimised marketplaces. The result is a service that reduces energy waste and provides a more competitive price to consumers.

Residential energy solutions

With the rise of energy cost and the multiplication of Government subsidies, the installation of home solar energy solutions has become increasingly popular. Many service providers now include a large range of other technologies alongside the installation of solar panels.

These services are described as Distributed Energy Resources (DER) energy systems, batteries, EV chargers, smart meters, VPP software and other microgrid components. These technologies allow for the decentralisation of energy generation and storage, reducing dependence on centralised power plants. Many of these companies offer attractive models of financing and schemes to access public subsidies.

The market for home energy hardware has been growing rapidly, with the global market expected to be worth $580.8bn by 2027. One of Germany’s unicorns, Enpal, is a good example of the success of such providers.

EV infrastructure

As the car industry projects that more than 50% of sales will be EV by 2030, policymakers and industry needs accelerate the deployment of EV infrastructure. Innovations in this sub-sector involve developing charging infrastructure, grid integration solutions, and demand management strategies to accommodate EV charging while maintaining grid stability.

A lot of interesting innovations in this space aim to become the backbone of the EV system. For example, Volteras aims to be the connective tissue between electric vehicles and everything they might touch — from chargers and home batteries to energy retailers and mapping apps.

Energy storage

Advancements in energy storage technologies will play, and have already played, a critical role in optimising grid operations, supporting renewable energy integration, and providing backup power during outages.

The market is gaining certain maturity, with companies like Tesla providing different types of lithium-ion batteries. Different chemistry is being tested to optimise cost and move away from certain rare earth such as Cobalt (NMC or LFP). We’ve traded lighter Lithium-ion batteries for heavier but cheaper Sodium Ion batteries, but there is no clear winner in the available battery solutions.

Innovators like Form Energy are working on alternative chemistry called iron-air battery which can be very promising. Until we find the right chemistry for our battery, startups such as Twaice are also providing software designed to optimise the development and operation of batteries.

Building energy optimisation services

Advanced Meeter Infrastructure (AMI) often referred to as smart meters is an essential component of the smart grid infrastructure. Innovations in smart meter technology enable real-time data collection, two-way communication with utility companies, and improved accuracy in measuring energy consumption.

Innovations in demand response technologies enable IPP to share excess energy to the grid in exchange for cash. This allows utilities to manage and optimise energy usage during peak demand periods. Smart grid systems can communicate with smart appliances and HVAC systems to reduce energy consumption when needed.

A number of startups are working on building energy use optimisation. UK startup Elyose Energy provides an energy management platform to help commercial buildings optimise their energy consumption and automate participation in demand response markets. Another notable startup in this space is SNRG (developer of smart grid networks for the residential, commercial, social housing and retrofit sectors, UK).

Market dynamics

In 2022, the global smart grid market was valued at $48.7 billion. Analysts believe it will continue to increase and reach $206.25 billion by 2030. The market will grow at an approximate CAGR of 19% during the forecasted period.

Public investment in the space is reaching an all-time high. Around the world, we are seeing significant programs being passed to support electric infrastructure renovation.

North America held the largest share of 35% of the global smart grid market, and $5Bln is pledged by the Biden administration via the IRA to improve the grid infrastructure.

Canada’s Ministry of Natural Resources introduced the Renewable and Electrical Pathways Program in 2020, a four-year scheme that aided in the roll-out of smart grids. With $4.8 billion received in funding, the project aims to improve the dependability and capacity of its smart grids.

From the Green Deal (2019), to Fit for 55 (2021) and RePowerEU (2022), numerous programs have been passed by the EU to support the green transition and renovates its grid infrastructure.

Private investors are also extremely involved in the space. Some VC firms are building their investment theses on the electrification of the world, such as Energyze Capital.

We have also seen a decent number of exists in the space, mostly lead by M&A operations, but also a few notable IPOs. It is important to highlight that most of recent IPOs are happening in China, with the most notable exception being DLaboratory from Sweden.

Major corporate energy payers like Cisco and Siemens are also focused on this subject and keen to collaborate. Cisco’s Distribution Automation solution use data communication infrastructure to remotely monitor and control parts of the electrical distribution grid. Meanwhile, Siemens partnered with EnergyHub to expand its ecosystem of partners and empower utilities to move towards a holistic and scalable end-to-end next generation Distributed Energy Resources (DER) management solution.

Takeaway

The next decade will require a radical transformation of our grid infrastructure. As we transition to renewable energy and as our electricity need skyrocket, grid infrastructure in every country will need to be upgraded to transport higher volume of energy and deal with greater supply volatility.

To do this, Governments and the private sector will need to invest considerable amounts in Smart Grid Technology and other Grid Hedge Technologies. This could amount to $600 billion per year by 2030.

Fortunately, the critical nature of this challenge is leading to regulatory and financial alignments. Around the world, Governments are passing ambitious pieces of legislation to accelerate the renovation and modernisation of the grid systems. Transcontinental plans are being established to connect ‘Super Grids’. High Voltage Direct Current (HVDC) line are being built to bring energy across continents and oceans. With the support of public subsidies, the private sector is developing innovations in many areas to make our energy supply safer, efficient and more sustainable.

From an investor standpoint, this sector is particularly exciting as we are at the beginning of a wave of transformation. Although many hardware companies play a crucial role in the grid transformation, we’re excited about the many software solutions with compelling business models.

One major question in this space is the size of the addressable market. As many of these software companies will be selling to utility companies, one could question the scale of the potential growth of these businesses if there are only a handful of potential clients. Another question to consider has to do with the effective decentralisation of the grid and the actual adoption of solar, DER and other VPP solutions by retail customers. Cost of installation remains high and the value of solar is still questionable in certain region of the world.

With these concerns in mind, we are still convinced about the breadth of opportunity in this sector. Investors will find business with software margins, recurring revenues, and capital efficiency. The presence of large utility and energy companies leading M&A activities is another reason to believe in positive dynamic in this sector. As many of these companies are building underlying infrastructure and standards for the energy system of tomorrow, winners will be creating substantial value for investors who took the risk to back them early.