Managing the step-up in European distribution network investments 

In this week’s Power Playbook: European network investment needs take the stage. In the UK, it is anticipated to double by 2050 and analysis in the EU indicates it will grow to €1.4 trillion ($1.5 trillion) by 2040.

The last few weeks have been crucial for understanding the investment needs of European distribution networks.

We’ve long known the numbers needed for decarbonised power grids, but new analyses in the UK and the EU are showing that these numbers are only going to increase. This is an intimidating prospect considering the large volume of cash flow that was needed in the first place.

Let’s start with the EU.

According to reportage from Brussels correspondent Jonathan Spencer Jones, analysis from the European Commission shows that planned investment needs in the EU’s energy infrastructure are expected to grow to over €1.4 trillion from 2024 to 2040.

The vast majority of this is due to be directed towards electricity infrastructure, with electricity distribution accounting for the lion’s share, at €730 billion ($764.7 billion).

Over in the UK, analysis from the country’s National Infrastructure Commission (NIC) found that, with power demand expected to double in the country by 2050, so too would additional investment in the distribution networks need to double.

More from the Power Playbook:
Europe’s e-mobility market: Flexibility monetisation and a regulatory action plan
E.ON, EDF and Endesa earnings show impact of policy and pricing on bottom line

Europe’s options

The numbers are nothing to scoff at and what they raise is an important question – we know what we need to raise, but how do we raise it?

As I covered in December last year, Europe seems to have the capital available to finance its net zero ambitions.

It is in its allocation that the problem arises, brought on by the age-old issue of investors not having a risk appetite, an ineffective capital allocation model, and the fragmented nature of the European capital market.

However, the Commission in their analysis does point out public funding options available. They say that public funding, especially EU financial support, is considered to play a pivotal role in de-risking large, capital-intensive projects.

The type of financing can be in the form of grants, EU-backed loans and guarantees or equity. Mechanisms similar to the Connecting Europe Facility for energy for cross-border investments and the modernisation and innovation funds also are expected to play an important role.

EU financial support also can play a role in cases where the returns on infrastructure investments are regulated by national regulatory authorities, for example involving TSOs and DSOs.

Beyond such measures, there is increasing discussion of the role of anticipatory investments, i.e. those that stem from a process aimed at identifying and executing investments that proactively address expected developments.

Some examples of potential DSO project categories for anticipatory investments, as covered in Enlit’s Energy Briefs, include preparing for future capacity increases, investing with higher capacity assets, adding additional assets to the grid and reinforcing the resilience of power networks.

A shift away from the traditional approach towards utility investments, making way for such investments requires the adaptation of regulatory frameworks. Since DSOs seem keen, it will be something to keep an eye on.

The UK’s RIIO

In the UK, there is the RIIO (Revenue = Incentives + Innovation + Outputs) Framework, managed by Ofgem, the Office of Gas and Electricity Markets through mechanisms like the Strategic Innovation Fund (SIF) and the Network Innovation Allowance (NIA).

To get more insights into RIIO and the NIC’s report, I spoke to Mark Sprawson, Commercial Director of VisNet, which helped contribute to the report’s analysis.

Sprawson, a firm advocate of RIIO, calls it “arguably the most progressive kind of regulatory framework we’ve seen globally.”

But it is not without its challenges.

Said Sprawson: “One challenge that any regulatory framework has is the time scale over which it operates. When it comes to the RIIO framework and the regulatory period windows, we have ED2 (Electricity Distribution 2), which we’re in now, it’s a five-year window, and then we’ll move to another five year window for ED3.

“What any regulator, be it Ofgem or anyone else around the world, needs to consider is, how do they ensure that they drive the right behaviours and right incentives to deliver for the long-term goal around achieving net zero. Because that’s what we’re all striving for, right?

“There needs to be some acknowledgement of ensuring that returns on investment are fair and equitable and drive the right behaviours, but also that there’s a fair mechanism between actually investing in network infrastructure and investing in those digital solutions, new technologies, that show that you don’t need to do some of this other investment piece.”

A ‘suite of solutions’

According to Sprawson, when it comes to realistically thinking about whether the investment can be generated, it comes down to two questions: “What are you investing in and when?

“The answer isn’t to overlay cables with bigger cables – the societal disruption and the cost will be prohibitive. Instead, it needs to be a suite of solutions, thinking about how to use technology better to understand where the latest capacity in the system is and where are the pinch points. And how do we therefore optimise those investment decisions based on that analysis?”

Sprawson says this needs to come down to a three-step process. First is using modelling techniques already present across the networks, interpolating between them for data that would be 70 to 80% accurate. “That’ll give an indication of where the pain will be felt in terms of growth.”

Second is using that detailed modelling to see where tech can be deployed alongside smart meters, “allowing for monitoring on a sub-second level of what’s going on in the network and understanding the risk that is posed to customers.

“The third step is then determining the intervention, which could be through a flexibility market, if it’s a short-term issue, versus if it’s a long-term trend that shows there’s some real growth in need of an intervention with an actual upgrade of the network in that area.”

Minimising investment needs

This idea of minimising investment needs through flexibility is not necessarily new.

Indeed, using smart tech assets connected to the grid flexibility has long been a talking point on how to balance the supply demand curve and bring down the spend needed.

Just take the report launched last week by Eurelectric, which finds that smart and bidirectional charging alone, if used through flexibility, could benefit DSOs with a projected €4 billion ($4.3 billion) in savings annually.

But the numbers are not yet at a level where we can rely on flexibility completely.

LCP Delta and smartEN in their latest Market Monitor for Demand Side Flexibility, although listing the UK and France as leaders in the flexibility space, warned of a growing need to maximise the participation and value of demand side flexibility (DSF) assets across different value streams.

I.e. in Europe, it’s not happening fast enough.

This is all to say: more is needed. More cash flow into the grid, more access to demand-side flexibility and more initiative to smartly think about optimising investments.

But what do you think? How best can we generate and stimulate investments for the crucial projects needed to decarbonise the grid?

Reach out and let me know so I can feature your inisghts in the Power Playbook.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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