Insights beyond wires a4

How Investors Can Turn the Great Grid Upgrade into the Next Multi-Decade Investment Opportunity

Introduction RAJAN SHAH Partner 1GT As outlined in Part 1 of this paper, grid operators in VICTORIA BORODINA Europe and North America and their regulators are Investment Professional having to grapple with several mutually reinforcing 1GT

and converging challenges such as ageing infrastructure, accelerating demand growth, and the need to integrate a burgeoning fleet of decentralised, intermittent renewable energy sources.

Against this backdrop, grid operators are increasingly turning We organise the following discussion around four core to a set of technologies that promise faster, more capital- capabilities that operators of modern, digitised grids efficient relief. Rather than replacing existing infrastructure need to bolster: flexibility, capacity, stability, and visibility. wholesale, these solutions focus on: The table in Figure 1 below maps the structural challenges outlined in Part 1 directly to these capabilities. What will „ Providing greater flexibility to smooth volatility, become clear through Part 2 is that while there is no silver „ Extracting more value from existing assets to defer bullet technology that could resolve all the challenges expensive replacement programmes, simultaneously, taken together, these tools offer grid „ Ensuring a more decentralised system remains operators pragmatic pathways to increase effective capacity, stable, and enhance resilience, and maintain system stability in an „ Improving operators’ real-time visibility and control of operating environment that is becoming more complex, system behaviour. more volatile, and less forgiving of failure. In Part 2, we explore what can be thought of as a ‘New Energy Toolkit’ for the modern grid.

FIGURE 1 Mapping Problems Discussed in Part 1 to Capabilities Discussed in Part 2 PART 1 PROBLEM WHAT THE PROBLEM MEANS FOR THE GRID PART 2 CAPABILITY

Ageing infrastructure & long „ Critical assets are operating beyond design life „ Capacity (unlocking latent capacity replacement cycles from existing asset) „ Asset replacement programmes are protracted and expensive Extreme weather & climate- „ Weather events amplify asset stress, cause outages, „ Stability (under stress) driven shocks and accelerate deterioration „ Visibility (early detection of issues „ Resilience requirements exceed original grid design standards before they cascade) Rising electricity demand „ Unprecedented load growth intensifies congestion and pushes „ Capacity peak demand sharply upward „ Flexibility (to reduce peak stress) Proliferation of inverter- „ Low physical inertia reduces system operating buffers „ Stability (frequency modulation and based renewables voltage control in low inertia contexts) „ Curtailment and stability constraints delay interconnections „ Bidirectional flows challenge legacy planning and „ Visibility distribution systems „ Flexibility Low real-time „ Unnecessarily wide margins of safety given limited real-time „ Visibility situational awareness knowledge of asset stress, power flows, or emerging faults

2 MORGAN STANLE Y INVESTMENT MANAGEMENT | BE YOND WIRED PART 2