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In this week’s Power Playbook: Yusuf Latief discusses the €250 billion investment gap for transmission system operators in Europe, spotted by Boston Consulting Group, and how it signals time for a change, not only from their funding model, but also from Brussels.
The investment needed to get the grid fit for purpose drops the jaw, but is not necessarily a secret.
However, Boston Consulting Group (BCG), earlier this week released a report on the matter, adding a new element into the equation.
Because, as headlines continue to read of record investment from utilities – I myself having reported as such – capex is apparently outstripping cash flow.
This is according to BCG’s report, which has found that, despite a projected tripling in investments from 15 TSOs for the European grid, a whopping gap of €250 billion ($293.3 billion) remains between expected operating cash flows and required capex through 2030.
BCG estimates that 2024 capital expenditures alone are approximately 50% higher than the year before and TSOs are mobilising all available funding levers—including debt, equity, and asset sales—to keep pace with demand.
However, with this explosive growth in investment, TSOs face a looming capital shortfall.
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So, what’s caused this?
Well, according to their report, it’s a three-fold problem:
- The financial model: Although TSOs are remunerated based on spending levels, many have stretched balance sheets and have already raised equity. According to BCG, delivering large-scale infrastructure without jeopardising credit ratings or incurring equity dilution remains a central challenge.
- Energy costs: According to BCG, while policymakers aim to keep energy costs low for consumers, private investors require competitive, risk-adjusted returns. This leads to a persistent tug-of-war between cost containment and capital attraction.
- Behaviour: Finally, BCG says that TSOs are expected by policymakers to behave like growth companies—fast, scalable, and flexible—while many investors continue to value them as low-risk, dividend-paying entities. This mismatch is at the heart of diverging expectations around risk and return.
Change from Brussels
Something clearly needs to change.
But perhaps it doesn’t have to be a direct change to how TSOs operate. Perhaps, change should come also from the side of Brussels.
On the side of policymakers, the report makes several recommendations.
Firstly, they say, there is the question of ‘who pays’ – a fundamental policy issue.
Specifically, they question what share of costs should be borne by ratepayers versus by taxpayers for the power grid.
Secondly, investor returns should be aligned with rising risks and growing policy mandates to keep capital flowing, while keeping affordability impacts reasonable.
Additionally, says BCG, the adequacy of existing regulatory constructs should be investigated for this ‘build the assets’ phase of the transition.
Finally, TSOs should engaged early and consistently to align goals and investment plans, de-risk planning, and shape regulatory frameworks that reward shared objectives being achieved.
BCG’s recommendations for policymakers is sound, and while change from the side of policy would be great, it won’t be a panacea.
However, one other idea to change things, from an out of the box perspective, is out on the table by a new think tank, SupergridEurope, dedicated to all things supergrid.
A week prior to the release of BCG’s report, Supergrid Europe was launched in Brussels, seeking to advocate for coordinated EU grid policies, including reforms of governance, grid planning and market mechanisms, to deliver a modern, interconnected grid.
What makes this fascinating is the savings potential of interconnection, which is no joke.
It is so much, that it was referenced yesterday during an Ember-hosted webinar by SupergridEurope executive director Christian Kjaer, who cited how interconnection is already saving €34 billion ($39.7 billion) annually in consumer costs.
Said Kjaer: “It’s a mega project to build the European grid fit for process. It must be modular, but it requires a plan…that again, requires that we change the governance structure we have, and also the institutional structures we have.
“We need to create incentives. We need to deal with the supply chain of building, infrastructure, cables…We need to apply innovation. We have lots of innovation that can be applied tomorrow. We’re not creating the right incentives for it.”
Grids package and innovative grid technologies
Kjaer cited how the heads of EU states have already called for a ratified Energy Union, and how energy ministers agreed unanimously that there should be a fully integrated, interconnected and synchronised European power movement.
“They also said that this can only be achieved if electricity grid infrastructure is deployed and used as effectively and efficiently as possible. And I think this is a guiding principle for the grids package coming out.”
Just less than a week after its launch, SupergridEurope responded to the European Commission’s evaluation of the EU Innovation Fund (EUIF), decrying the lack of funding for innovative grid technologies.
Said Kjaer in a statement: ““Grid limitations are already starting to show, as billions of Euro are lost due to bottlenecks and congestion.
“Since its establishment in 2018, the EU Innovation Fund has not provided funding for a single demonstration or manufacturing project involving those innovative grid technologies needed to ensure affordable low carbon energy is available to all Europeans.”
SupergridEurope in their reaction recommended the Commission rectify this shortcoming, for example by introducing sector specific calls for innovative electricity transmission technologies and adjusting the evaluation criteria that better reflects the nature of enabling technologies such as innovative grid technology.
Just three weeks ago, I wrote on the benefits and potential cost reduction offered by innovative grid technologies, and indeed, the more deployed on the transmission grid the better.
SupergridEurope’s formation should be looked at as a boon, although it does not necessarily directly reflect a change for TSO financial models.
There is, however, something to be said about what can be done from the side of Brussels in this regard, and the think tank’s formation might just be the seed needed to get things moving.
On the side of TSOs, to go back to BCG’s report, several recommendations are made: to reassess ownership models, explore alternative financing, refine the portfolio, improve capital efficiency, and sharpen investor messaging.
BCG’s report provides a reality check and a warning, which makes thinking outside and solution from outside the box, such as with the formation of SupergridEurope, all the more important.
It may not have direct implications for the financial model of TSOs but the thought of planning and operations becoming a more shared effort – which does result in cost savings and which has been called for by BCG too – is a good one.
But what do you think?
Tired of financial frameworks not meeting the mark? Have an opinion as to how grid operators can bolster cash flows?
Reach out and let me know your thoughts so that we can feature them on the Power Playbook.
Cheers,
Yusuf Latief
Content Producer
Smart Energy International
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