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  • Chloe Coates

Modernising the grid: the case for investment

This is the first article in a two-part series about grid technologies. Here we cover the need for grid expansion and improvement, and in the second part we take a deeper dive into the technologies. Read the technology deep dive here.


Introduction


The energy transition is underway. In order to decarbonise most sectors of the economy we will need to electrify everything. Everything from our cars, our homes, our travel and heavy industry could be powered by green electrons from renewables. We are making excellent progress in some areas: solar and wind are the cheapest forms of electricity generation, and their deployment is exponential. (As I am writing this on a windy week in April in London, the UK is getting over 50% of its electricity from wind power, and has done for the past week.) EV sales are growing: it’s now possible to buy an electric vehicle for under $10,000. And heat pumps are set to double their share of heating in buildings by 2030 (they meet about 10% of global heating requirements today). Some sectors are considered harder-to-abate—very high temperature industrial processes like steel and cement production, and long-haul aviation, but there is no doubt that with investment and technological ingenuity, that these will decarbonise too.


The grid is the backbone of our electricity system and will be critical to enabling the decarbonised future. In recent years, the critical role of the grid has received increasing attention, with the International Energy Agency (IEA) publishing its comprehensive grid report in 2023, bringing the challenges and opportunities of grid modernisation to the forefront. The rapid adoption of renewable energy sources, the electrification of transportation and heating, and the proliferation of distributed energy resources (DERs) have already introduced new complexities and challenges. New loads, increasing congestion and ageing infrastructure, are putting global grids under strain.


At ZCC, we have been looking into the sector over the past few months. In this blog post I share our research on what the challenges are and which technology areas we are keeping an eye on.


The grid of the 20th century


The electrical grid is a complex network of wires, poles and technologies with the main purpose of delivering electricity and balancing supply and demand at all times. Centralised electricity generation and electricity transmission were developed in the late 19th century, and rapidly rolled out at the start of the 20th century. Although networks grew and voltages have increased, the structure remained largely unchanged throughout the 20th century.





The grid consists of transmission networks and distribution networks that connect generators to end-users (generators and end-users are usually considered separately or as the ‘grid edge’). Transmission networks carry very high voltage power (>110 kV) across long distances, which is then stepped down to a lower voltage (by transformers) to a distribution network, which then connects to end consumers. High voltage transmission is more efficient—there are fewer energy losses due to resistance—so is more suitable for long distances, but lower voltages are used for distribution for safety reasons. Some high voltage users with high power demands, like heavy industry, connect directly to the transmission grid.


The main function of the grid is the transmission and distribution of alternating current (AC) electricity. AC electricity is used rather than direct current (DC) because, at the time that grids were developed in the late 19th century, it was not possible to straightforwardly increase DC voltage for long distance transmission. Alternating current simply means that the current changes direction constantly at a given frequency, while DC has a constant magnitude over time. To be a bit more technical: this is due to the way in which they are generated. In AC, a rotating coil between two magnets changes the direction of the electrons flowing through the coil as it rotates, resulting in an alternating current. The grid operates at a frequency of 60 Hz in North America and 50 Hz in most other regions, and cannot deviate by more than 0.5 Hz. In order to keep the lights on and prevent blackouts, grid stability needs to be ensured by maintaining technical parameters like frequency and voltage within certain limits.


Who keeps the lights on?

Ensuring that the grid operates efficiently involves a number of stakeholders. The operating structures vary across the world: in some places it is run by a state-owned utility that manages electricity supply all the way from generation to transmission and distribution, but most often transmission and distribution are operated separately from generation. These organisations can be state or independently owned. Either way, because of the need for safety and reliability, grid operations are an effective monopoly. The names of organisations can be a bit of an alphabet soup, with different acronyms in different places–I will try to simplify it here.



Transmission system operators (TSOs) oversee the high-voltage transmission networks, balancing electricity supply and demand across large geographic areas.

  • In the UK in 2019, the electricity transmission owner and electricity system operator were separated into two independent companies, the National Grid Electricity Transmission and National Grid Electricity System Operator (ESO).

  • National Grid Electricity Transmission is the asset owner—it owns and maintains the high-voltage electricity transmission network in England and Wales, and is responsible for the physical infrastructure of the transmission system, including power lines, substations, and other assets. It also plans, develops, and invests in the transmission network to meet future demand and support the transition to a low-carbon energy system.

  • The ESO manages the supply and demand of electricity; manages the connection and access to the transmission system for generators, suppliers, and consumers; conducts long-term planning and forecasting to ensure adequate generation and network capacity, and importantly operates the Balancing Mechanism and the Capacity Market to maintain system balance and security of supply.

  • In France a single state-owned company RTE owns and operates the transmission grid, whereas in Germany there are four separate, privately-owned transmission operators.

  • In the US, these are called independent systems operators (ISOs) and regional transmission organisations (RTOs). ISOs are TSOs that operate at a state level, and RTOs have a broadly similar mandate but cover a larger geographical area.

Distribution system operators (DSOs) manage the localised distribution networks.

  • In the UK, the distribution networks are owned and operated by regional Distribution Network Operators (DNOs) such as UK Power Networks, Northern Powergrid etc.

  • DNOs are responsible for the lower voltage distribution networks that carry electricity from the high voltage transmission system to industrial, commercial and domestic users.

  • Their roles include maintaining and investing in the regional distribution networks, connecting new customers, and managing distribution constraints.

  • In Europe, there are hundreds of DSOs, often aligned with regional/city boundaries. For example, in Germany there are around 900 distribution system operators.

Regulators are the government bodies at the national, state, and local levels that establish rules, regulations, and policies that govern the grid's operation, pricing, and environmental impact.

  • This is done by Ofgem in the UK (short for Office of Gas and Electricity Markets), by FERC (Federal Energy Regulatory Commission) and NERC (North American Electric Reliability Corporation) in the US, by the Bundesnetzagentur (or BNetzA) in Germany and CRE (Commission de Régulation de l'Énergie) in France.

The solution providers e.g. hardware/software providers, developers, construction EPCs sell their services into the transmission and distribution system operators and asset owners.

  • ABB, Siemens, Hitachi and General Electric are some of the corporates that dominate in this space.

Policymakers have a key role to play in providing funding, grants, and tax incentives to enable new technology providers and to facilitate grid expansion and innovation.


Who pays for the grid?

Ultimately, it is the consumer who pays for the grid via their retail electricity costs. The remuneration mechanism is usually set by the regulator, with the aim of ensuring security of supply and value for money for the consumers.


The challenges


The grid as we know it is under strain in many countries—electricity demand is rising, the grid is ageing, extreme weather events are making it more vulnerable to outages and addition of renewables is changing the distribution of power generation and power quality.





Increasing demand

The energy transition is placing increasing strain on the grid. Thanks to energy efficiency measures, electricity demand has been largely unchanged in Europe and the US since the early 2000s, having more than doubled in the preceding 30 years. And demand has actually been declining in many European countries, like the UK and Germany, over the same period. However, over the next 30 years, electricity demand is set to increase again as we add new electrical loads to the grid: from EVs and home heating to industrial electrical loads as we move away from the use of fossil fuels in each of these sectors. We need additional transmission and distribution capacity to serve these new loads.


Even without these new loads we need new transmission to relieve the congestion that is already occurring as we transition towards renewables with new points of access to the grid and intermittent delivery. Grid congestion—when transmission lines reach their maximum capacity due to excessive power flows—is becoming a major problem in the US and Europe. In the UK there is congestion between big offshore providers in Scotland and the big demand centres in the South of England. Even though Scotland provides 40% of offshore wind capacity, it is subject to 95% of the congestion experienced in the UK. This congestion leads to reliability issues and grid instabilities. It also leads to curtailment of low-emissions renewables as well as requiring dispatchable load (often emissions-intensive fossil-based sources, usually natural gas in the UK) to be used closer to demand centres, raising both emissions and costs for ratepayers.


Increasing complexity

Not only do we need to increase the electricity carrying capacity of the grid, but we need to manage the increasing complexity. Over the 20th century the energy system as a whole relied on (mostly) fossil-based power, and the grid was set up to support that. Fossil-based thermal power generation has three key attributes that wind and solar don’t share, namely:

  • dispatchability: where using coal or natural gas, these power plants can be ramped up and down on demand to provide power when it is required

  • grid stability via inertia: the rotating masses of the turbines produce kinetic inertia which is a key feature of the grid. If there is a failure on the grid - these masses keep spinning and help to maintain the frequency within acceptable limits to prevent blackouts.

  • locational flexibility:  an offshore wind-farm must be placed in the sea where it’s windy, a wind farm must be placed where it’s sunny. A fossil plant can be built almost anywhere – so they have historically been located close to large population centres, which makes transmitting and disitributing that energy more straightforward.

As a result, electricity was always provided by a smaller number of very large dispatchable fossil-based generators close to population centres. Generation today is more distributed, located where renewable resources (wind/sun) are available, or on the grid edges. Moreover it is coupled with the additional challenge of bidirectional power flows with the rise of distributed energy resources (DERs) like rooftop solar and emerging vehicle-to-grid (V2G) deployment. A decentralised grid could make a big contribution to grid resilience; the large energy capacity of EV batteries means they offer a large potential load, but also means that our grids have to cope with quite peaky load as EVs are plugged and unplugged. Ofgem estimate that by 2030, V2G deployment could provide about half (~16 GW) of the UK’s peak power capacity (based on 11 million EVs, with 50% V2G enabled, this would open up 22 TWh of flexible EV discharging capacity per year).


The attributes of wind and solar make them more challenging to integrate than historic fossil generators. The intermittency of wind and solar introduces power quality challenges. Unlike turbine-based generators that inherently provide inertia, wind and solar do not. Solar natively produces DC energy, and so connects to the grid using an inverter, which is a device that converts the power to AC. Wind turbines do generate AC power, but it is not synchronised with the frequency of the grid, so provides no inertia either. This increased complexity requires more flexibility and monitoring.


Increasing challenges to safety and security

Safety and security are of paramount importance to grid operators. The digitalisation of the grid that has already begun (and will be required to manage the increasing complexity) introduces cybersecurity challenges. Moreover, climate change-induced extreme weather events create additional hazards for the grid, particularly when coupled with higher risk ageing infrastructure.


Barriers to progress

There are structural factors that make investing in and expanding grids more challenging. Grids operate as a regulated monopoly, and can be state- or privately-owned, but it is the regulators who decide on the mechanism for remuneration. This means that too often grid operators are not incentivised to make the (large) upfront investments that would lead to efficiencies and cost savings for the rate-payer in the future.


Permitting timelines for new grid infrastructure are prohibitively long—constructing new grid infrastructure often requires 5 to 15 years for planning, permitting and completion, compared to 1 to 5 years for new renewables projects and under 2 years for new EV charging infrastructure. Permitting timelines are affected by long approval processes for regulators, NIMBYism (Not In My Back Yard), challenges over rights-of-way, and exacerbated in the US by the large number of utilities that are federally remunerated but where the benefits might be accrued elsewhere.


The opportunity


All these challenges represent a huge opportunity for investment and innovation. The IEA estimates that we will need 80 million km of new lines globally in order to meet decarbonisation goals—that’s double the current length of lines. Not deploying additional grid capacity will increase emissions, based on IEA scenario modelling. Their "Grid Delay Case"—which models delays in upgrading and reforming grids—depicts slower uptake of renewables and sustained reliance on fossil fuels if grid investments and innovations fall short. Under the Grid Delay Case, cumulative power sector emissions until 2050 are projected to be 58 GtCO2 higher compared to scenarios aligned with national climate pledges.


Delaying grid investment and expansion raises costs for both the grid operator and for rate payers. And congestion is already raising costs: for example, even if there is sufficient wind energy generation at any given time, but there is congestion on transmission lines, then National Grid is both paying paying the wind farm to curtail its output and paying for additional (often gas peaker) generation to compensate. It’s estimated that congestion in the UK has cost National Grid $1.5 billion in extra grid congestion charges between 2021 and 2023, and in the US, these grid congestion payments have nearly tripled from ~$6 billion in 2019 to more than $20 billion in 2022.


Governments and operators are recognising the necessity and opportunity for grid expansion, and investment has started to pick up, with investment of $310 billion globally in 2023, following a decade of stagnation. It’s estimated by BloombergNEF that we will need a total 21.4 trillion dollars of investment in our grids to get to net zero: this is a huge challenge, but also a big market for the taking.


What does this mean in terms of opportunities for startups and VCs? Of course, much of this funding will go towards building the poles and wires and substations. And a number of emerging technologies—we will explore these in the next blog post—are starting to be commercially available, and so need customers and customer adoption, rather than venture capital funding. But there are emerging technologies with the particular value proposition of managing the changing power flows on distribution grids, and enabling renewables penetration—these are areas we are excited about at ZCC.


In the second article in this series we will explore some of the emerging hardware technologies that will enable the grid expansion and flexibility we need for the energy transition.


Further reading


ENTSO-E Technopedia library (European Network of Transmissions Service Operators) has a factsheets covering new technologies related to Transmission System Operators.

Next-Generation Grid Technologies U. S. Department of Energy (2021)

Inertia and the Power Grid: A Guide Without the Spin Paul Denholm et al. National Renewable Energy Laboratory (2020)

The Energy Academy Modo Energy

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