Head of Saxo Strats
Summary: Renewable energy projects are being developed at a blistering pace to meet the fast rising demand for electricity as our transportation and heating sectors are being electrified. But one thing is to built new electricity generating units, another is to get these units plugged into the grid. What is called the grid connection queue is becoming a big problem that ultimately could slow down the entire green transformation. In today's equity update we put a focus on the grid and outline the issues the green transformation is facing in our electric grid infrastructure. Finally, we highlight some of the publicly listed stocks in the grid infrastructure industry.
Blistering growth in electrification is ahead
As BP Energy Outlook 2023 shows the growth in electricity generation and consumption is rising (see chart) and especially driven by renewable energy as society is electrifying. We recently wrote an equity note European utilities: The second age of electrification in which we described the strong growth outlook for electric power generation. As BP puts it the future of global energy will be dominated by four major trends: 1) declining role for hydrocarbons, 2) rapid expansion in renewables, 3) increasing electrification, and 4) growing use of low-carbon hydrogen.
However, the fast expansion of renewable energy and the rise of electricity production to meet the demand from electric vehicles and heat pumps substituting gas boilers is not without risks and roadblocks. The lack of large energy storage systems are making electricity markets in Europe volatile and the other day hourly prices in the Netherlands went negative to a big boost in renewable energy production. Elon Musk recently said that the lack of lithium refinery capacity is becoming the biggest choke point for growth in deliveries of electric vehicles. But even if this problem is overcome, another little-known and hidden risk is lurking at the horizon and that is our electric grid infrastructure.
A few companies are dominating the grid infrastructure technology
When a new energy project is completed need the operator applies for a grid connection which means that the energy producing unit enters a grid connection queue. The longer the asset sits in the queue the lower the project margins become, because the operator is paying interest expenses on the loan obtained to build the project and the longer the queue time the longer it takes to generate revenue. The grid connection queue is becoming a bigger and bigger problem in countries such as the UK, Spain, Italy, and the US. Bloomberg New Energy Finance unit estimates that the world needs $21trn in grid infrastructure investments by 2050 to meet the net-zero emission goal.
In 2022, grid connection requests in the US grew 40% with a study showing that nearly 2,000 gigawatts of solar, storage and wind projects are waiting to be connected. Energy regulators in many countries are beginning to wake up to these new challenges and are making changes to regulation such that grid operators can more quickly upgrade and expand the grid. But regulators and grid operators must move fast as the changes are happening much faster than predicted just a couple of years ago. In 2023, 20% of all new cars sold globally are expected to be electric (both battery only and hybrids) with the adoption expected to climb to around 55% globally by 2030. But with the recent figures and uptake these forecasts could prove too pessimistic.
The electric grid infrastructure industry is not well-known to many investors and has lived a sleepy life for many decades as electricity systems were developing at a slow pace. But the speed-up in electrification combined with more intermittent electricity sources will pose a challenge to our electric infrastructure. One thing is rapidly building out electricity generating units, but another is to get these new units plugged into the electric grid. It requires a significant expansion of the grid in the form of new transformers, smart systems for handling and queuing charging of electric vehicles and other devices going forward. The grid is a word encompassing everything that happens from the power generation to the residential home or business, and it is everything from high-voltage transmission lines, transformer stations, smart grid metering software etc. The companies listed below are not an exhaustive list of companies involved in the electric grid, but it highlights some of the biggest players in the industry.
For interested readers that want to learn more and go deep into the grid challenges the list below highlights several analyses of the problem.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
