The clean energy economy demands massive integration investments now

The expansion of renewable energy and electrification is growing rapidly in many parts of the world as momentum behind the global energy transition gathers pace. While the renewable energy technologies driving this change are well-known and, in many cases, cost competitive with fossil fuels, the fundamental infrastructure required for their deployment is lagging. Insufficient grid capacity to integrate growing shares of renewable energy with demand centres is threatening to undermine progress and potentially stifle future investment.

The lack of grid capacity has significant implications for international climate and energy goals too. And the task to correct it is daunting. Globally, over 80 million kilometres of grid infrastructure will need to be added or refurbished worldwide by 2040 if countries are to fulfil their national climate commitments on time and in full. That is the equivalent of doubling the length of the existing grids worldwide.

Investment in electricity networks is a challenge facing advanced, emerging, and developing economies (EMDEs) alike. In mature markets, demands on existing electricity networks are soaring with electric vehicles, heating, and cooling systems, previously powered by fossil fuels, taking greater market shares, and requiring access to already stretched systems. In markets such as the US and Europe among others at least 1,500 gigawatts of wind and solar PV projects in advanced stages are backlogged and currently waiting in grid connection queues, five times the amount of new solar PV and wind capacity that came online in 2022.

In developing economies, particularly the poorest countries, outages caused by ailing or outdated grids are a constant concern affecting critical systems such as hospitals, food production, and business operations. Yet, in EMDEs—where grid upgrades and expansion could unleash the biggest financial, environmental, and social returns—investment in grids has been declining. Whereas meeting national climate pledges would mean increasing grid investments threefold over the next 15 years from today’s levels, meeting the Net Zero Emissions Scenario would require a five-times increase.  For example, India and Africa would need to sustain average annual growth of 15% and 12% respectively through to 2040.

While there is a clear need to support EMDEs, not all countries within this bracket share the same challenges. For those in Latin America and Southeast Asia, where electricity infrastructure is already in place, there is a need to bolster capacity, resilience, and flexible grids to support greater shares of renewable energy.

Insufficient infrastructure or a lack of grid capacity also has implications for investments in renewables more broadly. For example, without reliable and flexible electricity networks, the risk of renewable energy curtailment – effectively discarding power or switching off installations altogether for periods of time – is high and potentially also deters investment by developers.  A major ramping up of clean energy investments is needed across the board, with meeting the shortfall in grids and other integration investments a key priority.

But of the $770 billion funnelled each year into clean energy for EMDEs, only one-fifth is currently directed into building, scaling and future-proofing electricity grids. This is in large part due to potential investments not matching risk-return expectations of private investors, highlighting the important role of concessional financing in strategically important infrastructure projects.    

The need to modernise and upgrade the world’s grids is highlighted in the work carried out by the International Energy Agency (IEA) and through the Climate Investment Funds (CIF) Renewable Energy Integration investment program, which draws on a 15-year track record of transformational climate finance in developing countries.

Investors and policymakers must understand that investing in grid infrastructure presents an opportunity that will pay dividends not only in financial and development terms, but for our planet too. Vast quantities of harmful emissions can be eliminated if the world’s electricity systems are rapidly modernised and expanded. In addition to accommodating more renewable energy, the optimisation of electricity networks will also realize energy efficiency gains and reduced wastage. Our grids must be made smarter and more flexible, to respond in real-time to fluctuations in the supply of renewable energy, which is dependent on daylight or stable weather patterns. In many developing countries, the gaps caused by these fluctuations are being filled by highly polluting diesel generators. Moreover, a focus on grid expansion has the potential to facilitate access to electricity for the millions of people who still lack access to modern energy services around the world today. 

With grid investments in EMDEs, excluding China, needing to triple by 2030, attracting more capital from the private sector will be key. There is a series of steps that can help to attract private sector investment:

1. A robust, transparent, and forward-looking regulatory framework is essential. This includes transparent incentives and strong governance—such as streamlined procurement processes and laws on grid use by private producers— to ensure private capital pulls in the same direction as national climate, energy, and development goals. India provides an example of the regulation facilitating private participation, via public-private partnerships, which have been implemented successfully for inter-state transmission lines. Additionally, the 2023 draft for Electricity Amendment rules suggests that no transmission licence will be necessary to connect the producer and the storage system, aiming to streamline the process and remove unnecessary regulatory barriers.
2. Adequate and robust remuneration structures to attract private capital and foster efficient grid investment and innovation are another essential component for private investors. This can be done by improving visibility of future remuneration by defining the scope of investments ahead of regulatory periods and by reviewing remuneration mechanisms to ensure compatibility with specific policy objectives. For example, allocating remuneration tranches to innovation (Brazil) or introducing a remuneration element on smart meter roll-out indicators (India), can strategically attract investors by enhancing the appeal of the investment.
3. Finally, in markets where access to commercial finance is challenging, large-scale concessional finance – such as the funding offered by the Climate Investment Funds – is necessary to boost investor confidence. Recent analysis by the IEA and IFC shows that concessional funding can help to improve risk return profiles and manage project risks such as revenue and payment risk that are needed to draw in private capital. This support is particularly crucial in the early stages, facilitating the development of new business models. Within a well-established policy framework and with appropriate tariff structures, concessional finance serves as a key enabler to transition to a stage where commercial finance alone can deliver sufficient and affordable capital for the energy transition.

In July, Brazil received $70 million from CIF’s Renewable Energy Integration program to finance grid flexibility and scale up green hydrogen production. This injection of concessional finance is expected to support the doubling of the country’s renewable energy capacity and pave the way for attracting approximately $9.1 billion from partners by 2030, including $8 billion in private investments for green hydrogen, to meet Brazil’s ambitious clean energy goals.

The risks of a business-as-usual approach to grid infrastructure are abundantly clear, and the clock is already ticking. Rolling out a new wind or solar project can take between one to five years, but new transmission and distribution networks often take five to 15 years to plan, permit and complete. Building or modernising 80 million kilometres of new lines is an ambitious ask – but it is not optional. Without rapid action to clear the bottlenecks in grids around the world, the power sector will have pumped out an extra 58 gigatons CO₂ emissions by 2050 – equivalent to the total global power sector CO₂ emissions from the past four years.

Different country experiences offer valuable lessons that can facilitate knowledge sharing and lessons learned with other nations, demonstrating what can be achieved when multilateral partners, government agencies, and private investors come together. It is time to make sure our grids are robust enough to be the backbone of the clean energy revolution.  

This commentary was published on Climate Investment Funds The Clean Energy Economy Demands Massive Integration Investments Now | Climate Investment Funds (cif.org), on 24 January 2024.