Renewal of electricity grids: no transmission, no transition

Plenisfer Investments SGR

Electricity grids are the infrastructure through which energy is transmitted from production centers to consumers. The global push towards energy transition results in a significant need for investments in transmission networks. Several factors underpin this necessity.

The first is the change in the energy production paradigm, driven by the growth of renewable sources, especially wind and solar. According to the IEA[1], in 2023 the average worldwide share of wind and solar energy in the energy mix was 13%. By 2040, wind and solar are expected to account for 50% of electricity production[2].

This represents a structural change in the production and distribution model. From an infrastructure with a limited number of large coal and gas power plants to a model with numerous renewable installations to be connected to the grid.

[1] IEA, “Electricity Grids and Secure Energy Transitions”

[2] IEA, “Electricity Grids and Secure Energy Transitions”

Various estimates suggest that for every dollar invested in renewable energy generation, between $0.70 and $0.80 is needed for structural investments in distribution and transmission networks[1]. This highlights the centrality of grids in decarbonization and the continued progress towards energy transition.

STATE OF THE ART 

 In 2022, 23% of energy in Europe came from renewable sources, up from 22% in 2021[2].

In the Fit-for-55 plan[3], the European Union aims for 40% of electricity to be generated from renewable sources by 2035, with this share expected to increase further in the future. To achieve these goals, more renewable energy production facilities will need to be built.

Renewable energy production facilities are typically located far from end users. For example, offshore wind farms in the UK are in the North Sea, and most renewable energy plants in Italy are in the south, while the industrial base is in the north. Similar geographic dispersion is found in other countries, where production sites need to be connected to allow electricity to be transported over long distances[4].

Therefore, we believe that due to the changes in the nature and volume of the energy paradigm, networks require significant renewal. Much of Europe’s infrastructure was built between the 1950s and 1980s. According to EU estimates[5], 40% of distribution networks in Europe are over 40 years old and need to be renewed, given that the average lifespan of cables is about 30 years. Obsolete networks lose reliability and performance, making it increasingly important for transmission companies to invest in their replacement and modernization.

^[1] McKinsey & Company: “How grid operators can integrate the coming wave of renewable energy”

[2] European Environment Agency: “Share of energy consumption from renewable sources in Europe”

[3] Reforms and economic and social regulations package promulgated by the European union, focused on combating climate change and reducing greenhouse gas emissions

^[4] Eni Plenitude: “Eolico offshore in Sud Italia: situazione e prospettive”

[5] European Parliament: “The design of the European electricity market”

HOW TO GAIN EXPOSURE TO GRID MODERNIZATION?

In our view, the energy transition represents a secular opportunity for investors with significant implications for portfolios. Two investment areas are particularly relevant in this context: electrical cables and infrastructure development.

Investing in leading companies in electrical cable production allows investors to benefit directly from the increasing demand for efficient and modern network connections, which are essential for linking new renewable energy plants to end consumers. In this market, it is important to identify companies well-positioned to capitalize on the need to update and expand electricity grids, which require advanced cables to manage growing volumes and distances.

At the same time, investing in companies specializing in infrastructure offers the opportunity to contribute to major projects necessary for modernizing transmission and distribution networks. Key players with established experience in building critical infrastructure will play a crucial role in renewing obsolete electricity grids and expanding large-scale connections.

Combining these two themes could provide strategic exposure to the transformation of the energy sector, positioning the portfolio to benefit from the growing need for resilient and sustainable electrical infrastructure.

Disclaimer

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