Electrification - Infrastructure’s staggering task ahead

The current electricity grid environment

Electricity transmission networks traditionally connected large power generators, such as coal, gas or nuclear, generally located a long distance from where people live and work, to the lower-voltage distribution networks in our cities and towns.

In many countries, the system evolved to connect networks between countries or states. For example, the UK National Grid now connects to various other European counties, and Australia’s east coast now has the longest interconnected electricity system in the world. The expanding electrical grids help diversify the sources of energy, which improves reliability as well as access to and transport of the lowest- cost generation.

While the private sector traditionally owned the electricity grids in the United States, in many parts of the world, grid ownership and development were managed by the public sector. However, over the last few decades, we‘ve seen governments in many countries sell down, privatize and publicly list electricity grids—providing much needed funds for other expenditure items. Today, the private sector is a key stakeholder in distribution utilities, with around 29% of them privately owned. However, in high-income countries, there is a much larger proportion; around 40% to 45% are privately owned². After a utility has been privatized, governments often continue to play a major role in the privately owned grids via regulation of the sector. Private or listed ownership of electricity grids is facilitating private capital investment into the ongoing capital expenditure of electricity grids, and we believe this will help facilitate the energy transition and grow the rate/asset bases of the electricity grids.

Electrifying a lower-carbon economy

As aging, coal-fired, gas-fired or nuclear generation assets are retired, they are increasingly replaced by renewables such as wind, solar, geothermal or hydro. Unlike traditional fossil fuel generation, where a large amount of capacity is in one location (i.e., the “power plant”), the new mix of renewable sources are often in many different locations, requiring a lengthening and expansion of transmission networks into new areas.

We are believers in electrification’s role as a key pillar in a lower-carbon economy. Advantages of electrification include sourcing low emissions electricity generation from renewable sources and facilitating improved efficiency through electric technologies (such as EVs and heat pumps) compared to fossil fuel-based alternatives.

Developing energy storage systems

Renewable energy intermittency will also require a mix of fast-start thermal generation and/or a large increase in energy storage solutions, such as: batteries, pumped hydro or potentially newer technologies such as hydrogen. Many of these will need to be incorporated into existing grids.

At times, new generation creates bottlenecks within electricity networks; therefore, the location of energy storage will be far from universal. For example, if the bottleneck is between a remote solar or wind generation source and a major load center, then locating the storage near the generation source may make sense. However, if the bottleneck forms within an existing city due to peak load growth, then more-localized energy storage makes sense. Urban planning is also now considering and incorporating the energy transition, through better building designs and smarter cities that harness and store energy.

Hydrogen (or ammonia) is an interesting technology but comes with various challenges around production, energy losses, water use, current high costs, and difficulty with storage and transport. For many applications, battery storage appears to be a much better solution any may prevent or slow widespread global use of hydrogen. However, in some countries with high demand and limited land mass to generate renewable electricity, offshore hydrogen may well be part of the solution. For example, Australia is utilizing its large land mass to produce green hydrogen for export to Japan or Korea.

Funding of energy storage systems will come from multiple sources, and investors appear keen to deploy capital into energy transition. Traditional utilities integrating storage into management of their existing supply and demand are employing a wide mix of different methods such as traditional equity and corporate debt, as well as traditional project finance for these critical investments. We are also seeing non-traditional stakeholders such as mining companies, IT billionaires, family offices and mutual funds enter the energy storage space using a wide range of traditional structured financing methods. Many are based on long-term offtake contracts to the traditional utilities, and some are even taking on more risk via developing projects without price or revenue certainty. This is based on a view that the transition will accelerate increasing energy price volatility and hence potentially increase returns on storage investments.

Smart grids and energy efficiency

Given that existing energy systems were not originally designed with such massive change in mind, we also believe that smart grids and energy efficiency will feature prominently into the future. In particular, they will help alleviate the challenges associated with the intermittency of many forms of renewable energy and also help manage the costs of bottlenecks arising within the networks.

Smart grids basically use real time information to adjust electricity demand and flows. This ensures better energy efficiency and distributed energy resources and improves the overall electricity supply system across the power grid, ultimately improving the efficiency of flows, smoothing supply and demand and lowering costs for all participants.

Growing policy support

Strong policy support for the energy transition is occurring around the world via a mix of direct incentives or emission reduction policies, such as Australia’s Safeguard Mechanism, the European Emissions Trading System and the US’s Inflation Reduction Act (IRA).

• While clearly stimulating capital investment into the listed utility sector, these incentives will also catalyze significant investment by industry. For example, New Zealand dairy processor Fonterra is investing directly in heat pumps and biomass to exit the use of coal-fired boilers³.


• In the United States, the IRA is expected to incentivize significant investments into clean energy initiatives, including renewable energy projects and battery storage. Duke Energy describes it as “game-changer” and “a once-in-a-generation legislation that funnels nearly US$400 billion of federal funding into clean energy initiatives"⁴.

Developed-market case study: Australia

The Australian National Electricity Market (NEM), which is managed by the Australian Energy Market Operator (AEMO), is one of the largest interconnected electricity systems in the world. It covers around 40,000 km of transmission lines and cables, supplying around nine million customers for Australia’s east coast and southern states—approximately 80% of Australia’s electricity consumption⁵. AEMO was established in 2009 by the Council of Australian Governments (COAG) to manage the NEM, and is made up of members representing federal and state governments, in addition to industry, to manage generation, production, and distribution of energy, as well as the wholesale and retail energy markets.

The NEM is currently undergoing significant change to accommodate and respond to changes in emissions, integrate new and emerging technologies in generation and storage and meet changes in consumer energy needs and preferences.

AEMO has published an Integrated System Plan (ISP), which is basically a whole system plan for supplying affordable and reliable electricity to homes and businesses in the eastern and southeastern states, while supporting Australia’s net-zero ambitions⁶.

Exhibit C highlights the forecast changes in NEM capacity to 2050 under the step change scenario, which is the scenario that most closely resembles our team’s views around significant growth in new energy sources. Martin Currie Australia also believes there will be a closure of aging thermal generation, particularly on the coal side but perhaps with slower shutdown schedules given the massive task of building and connecting all the renewable energy.

_{Source: Australian Energy Market Operator Limited (AEMO). 2022. 2022 Integrated System Plan. Sydney: AMEO. F=forecast. There is no assurance any forecast, projection or estimate will be realized.}

Australia’s population continues to increase, as seen in Exhibit D, due to its immigration program and its lifting of COVID-19 travel restrictions. At Martin Currie, we expect that this population growth will also drive strong electricity demand growth. When combined with a transformation of the electricity network, we expect to see a significant growth in the electricity network, and opportunities for listed utilities to benefit financially from this growth.

_{Sources: UN Population Division; United Nations, Department of Economic and Social Affairs, Population Division (2018). World Urbanization Prospects: The 2018 Revision. New York: United Nations. F=forecast. There is no assurance that any estimate, forecast or projection will be realized.}

Emerging-market case study: India

India is the world’s third-largest electricity consumer with installed power capacity of over 400 gigawatts (GW) in March 2022, as seen in Exhibit E⁷. India’s strong urban population growth, combined with a rapidly growing middle class and electrification of energy use, is expected to result in installed capacity of almost 600 GW by March 2028⁸ and to greater than 800 GW by March 2030 to meet national net-zero targets⁹. This is a whopping 9.5% per year growth rate.

We expect the Indian electricity sector to undergo a massive transformation in the years ahead to deal with this demand growth, and we also expect to see significant changes in the energy mix, as shown in Exhibit F, with an acceleration in clean energy investment. This means that the electricity transmission and distribution networks will require significant expansion by the listed utilities to connect new demand to new supply and storage sources.

However, given the demand growth is so strong, we do expect to see growth in not only renewable energy but also traditional thermal energy generation. We highlight that the Central Electricity Authority (CEA) estimates that the share of renewable energy generation would increase from 18% to 44%, while that of thermal energy is expected to reduce from 78% to 52% by 2030¹⁰.

_{Sources (for both charts above): Powergrid India, CTUIL Rolling Plan, CEA. F=forecast. There is no assurance that any estimate, forecast or projection will be realized.}