Grid Funding Crimson Flags From World Investor Group

Just lately, Jefferies Group, a New York-headquartered, globally-officed funding financial institution that has carried out trillions in clear power offers over the previous few years, reached out to me once more. Previously I’ve mentioned grid storage with their cleantech funding ground, and for a worldwide group of institutional buyers and Jefferies purchasers debated small modular reactors with Kirsty Gogan Alexander, former UK Deputy Head of Civil Nuclear Safety and founder/managing director of a few boutique consultancies which are inclined to concentrate on all issues nuclear.

Intro slide for world buyers session for Jefferies financial institution consumer by Michael Barnard, Chief Strategist, TFIE Technique Inc

The main target of this session was a really well-timed dialogue of the significance of grid investments. The Worldwide Vitality Company simply launched its first huge world grid report, one thing that begs the query, why solely the primary one in 2023?

The IEA additionally assert that it’s the primary of its sort, implying that nobody has carried out that earlier than, whereas in China the World Vitality Interconnection Growth Company (GEIDCO) was launched in 2016. What’s that? Nicely, it’s a 141-member nation grid group dedicated to huge grid extensions headed by Baoan Xin, who’s the Govt Chairman of the State Grid Company of China, and President of China Electrical energy Council. GEIDCO has been releasing annual reviews on world grid considerations and funding for years, so the IEA is a bit of late to the sport.

As such, it’s maybe unsurprising that one of many IEA’s conclusions was that solely China has been investing adequately within the grid as a part of its huge low-carbon electrical energy build-out. And China isn’t solely doing that inside its personal borders. As I famous not too long ago, a serious evaluation and report on sub-Saharan Africa grid potential with a roughly 10,000 km transmission line linking a dozen international locations was headed by Chinese language and African researchers, and utilizing a European grid simulation toolkit. That multi-national inclusivity is a trademark of grid interconnection initiatives, nearly by definition.

As 44 of the 46 sub-Saharan international locations are members of China’s Belt & Highway Initiative (BRI), the potential for this megaproject to maneuver ahead, bringing clear electrical energy and financial development to giant elements of Africa, is far greater than it’d in any other case be. This wasn’t purely tutorial, in different phrases.

“As a observe, researchers at Harvard Enterprise College and John Hopkins collaborated on a research of claimed BRI debt traps, and located that there was no proof to assist that narrative, with solely 11% of debt held by China, with 89% held by western international locations and the IMF. Additional, the 2021 research discovered that China recurrently renegotiated phrases, and lots of of its lows have been zero curiosity. China recurrently forgives last funds on curiosity free loans which have reached their phrases as effectively, and is an emergency lender to international locations globally, bailing them out of fiscal points. Is it altruistic? In fact not, but it surely’s taking part in a for much longer sport that features win-win economics, not zero-sum video games.”

The primary half of the presentation was centered on electrification, the massive why of grids. Previously, I’ve calculated that above 50% of the USA’s main power necessities would go away with the complete use of warmth pumps for industrial, residential, and industrial water and air heating, with electrification of commercial warmth over 200° Celsius and with maximal electrification of transportation. That’s how environment friendly electrification is, and as I’ve famous a number of occasions, I’ve but to seek out an industrial heating answer that doesn’t have an electrification pathway.

For this presentation, I prolonged that by changing the quadrillion Btu power companies and rejected power requirement within the LLNL Sankey diagrams to TWh power models, that are way more smart. Simply based mostly on the Sankey diagram from 2022, the tough TWh generated when Btu have been reverse-engineered to TWh was round 1,700. The top power companies and rejected power mixed was about 9,800 TWh, roughly six occasions extra. Given how briskly renewables could be constructed, it is a very addressable hole within the coming couple of many years.

The second half of the presentation was one other why query, which is why grid funding was so vital to electrification. The necessities for electrical energy as an power service are stringent, requiring the fitting and really giant quantities of electrical energy to be out there at innumerable finish factors, on the proper voltage and forex, and for spikes and troughs to be managed rigorously.

Laurent Segalen, very long time clear power funding banker and co-host of Redefining Vitality, and I have been discussing this the opposite day. His take is that developed international locations projected considerably elevated electrical energy demand 20 years in the past and underwent grid funding on the time, however then LED lights particularly reduce the legs out from underneath the demand cycle. To increase that, our computer systems and TVs are power sippers in comparison with the power gluttons of the previous, one thing that’s true of all of our electrical home equipment. Because of this, western grids had a big unused buffer, and that buffer is now consumed.

That rings true, and is explanatory of the main renewables initiatives stacked up awaiting grid connection approvals and timing within the USA and Europe. The west has been deeply lax on strategic grid planning, letting NIMBYism and parochial politics intervene with grid constructing, and now we’re struggling the implications.

Segalen, by the way in which, is engaged on an initiative to ascertain a Canada-Europe 20 GW HVDC interconnect throughout roughly the identical route as the primary trans-Atlantic communication cable from the 1860s. At about 3,000 kilometers, it’s removed from the longest or deepest HVDC interconnect on the books.

The questions, as at all times, have been very attention-grabbing, however one stood out. An viewers member requested (in paraphrase):

“What metrics ought to an investor think about when evaluating whether or not a grid funding was a good suggestion in a rustic or not?”

I really hadn’t considered the query that manner regardless of Singaporean, UK, Moroccan, Tunisian, Canadian, and so forth., and so forth., and so forth. interconnections and grids over the previous few  years. Nevertheless it’s a superb query, and I really like these.

As I famous when answering verbally, my preliminary reply can be a scorching take, and I might undoubtedly return to the query, in all probability many occasions, in writing. That is my first try.

#1: Transmission Connection Backlogs

If a rustic has a big backlog of grid connections pending already, that’s a key indicator. It in all probability signifies that their regulatory and grid planning course of has not been strategically centered on the fact of electrification. It may imply that their regulatory course of is as complicated and pointless because the US behavior of making use of the complete weight of approvals required for enormous riverine dams just like the Hoover to closed-loop, off-river pumped hydro services. It may imply that the countryside is stuffed with rabid NIMBYs who refuse native allowing of every part.

Nevertheless it additionally means that there’s a sturdy enterprise case and impetus for grid enhancements. That blade has two edges. Care is required in order that funding {dollars} don’t get sliced into little items by it.

#2: A parochial power independence or power autarky stance

If the jurisdiction is caught within the grid’s previous, the place a rustic, state, or province simply needed to go it alone due to suspicion of their neighbors, there’s a threat. If the jurisdiction has ossified across the pure monopoly utility mannequin, one thing that prevented Michael Skelly from pulling HVDC throughout state strains a number of years in the past, there’s a threat.

Let’s evaluate and distinction Ontario in Canada and France. They’re each dominated by nuclear technology on their grid. Within the case of Ontario, it additionally has lots of hydroelectric, and whereas it was one of many first jurisdictions to deliberately shut down coal technology, extra pure fuel is burnt and renewables have been stopped useless since 2018. That province is badly caught in a mindset that neighboring jurisdictions’ electrical energy and distribution grids are final resorts, not main resorts. It constructed and expanded its Niagara area pumped hydro facility to provide its nuclear vegetation one thing to do at night time, which is each good and an indicator of lack of grid extension. It has refused to develop its interconnection with the huge hydro and wind electrical energy assets of neighboring Quebec for many years, which as an alternative has been working to construct lots of transmission to the US northeast. Solely prior to now yr has trendy grid administration gained any traction.

France, alternatively, has a fair bigger share of nuclear technology than Ontario, 75% of internet demand vs about 55%. In an remoted grid, this is able to be a recipe for extraordinary complexity and expense in managing these economically and technically rigid types of technology. However France has huge grid interconnections to all neighboring international locations and lots of of TWh circulation throughout its borders yearly, with annualized internet flows to international locations like Germany being into the double digits — generally optimistic, generally unfavorable.

France’s nuclear is finest considered 13% of Europe’s electrical technology. That’s the way it really operates by way of grid interconnections. Shopping for and promoting electrical energy throughout borders is a continuing and ingrained actuality, not a barely tolerated requirement as in Ontario.

That’s why after I was assessing Europe’s power disaster a yr in the past, I asserted that it might be short-lived and ship lots of good outcomes. The phrase I lean into is strategic power interdependence. Electrical energy is simply one other commodity, like pure fuel, iPhones, and cereal that crosses borders. It isn’t particular. It isn’t distinctive. There’s no purpose to belief neighboring international locations that you simply commerce every part else together with vital commodities with and never belief them with electrical energy.

Europe misplaced monitor of strategic power interdependence, and constructed an power economic system because the late Nineties on giant flows of pure fuel from Russia, a rustic which was clearly devolving away from being a trusted neighbor because the early 2000s. They didn’t adequately hedge in opposition to the more and more rogue state and as such had a little bit of a disaster which made them reassess.

And electrical energy isn’t particularly arduous to hedge. HVDC interconnects between Europe and the UK aren’t a single huge cable, however a number of parallel cables. There’s inner redundancy. And there isn’t one huge interconnect to France throughout the Channel, there are eight or 9 largely in operation or approaching operation to a number of European international locations. I’ve spoken with the pinnacle of the Xlinks venture that will probably be bringing storage-firmed Moroccan wind and photo voltaic power as much as the UK. And as famous, entrepreneurs like Segalen are connecting continents.

If a jurisdiction thinks electrical energy is uniquely native and interconnections are the final possibility, they may not be an excellent jurisdiction to do grid investments in. Good for a lot extra storage and renewable power development than they might in any other case require, as a result of the electrical energy has to come back from someplace, however not for larger grids.

#3: Strategic power interdependence

The flip aspect to level #2 is that transmission initiatives take time to allow and construct. Whereas they’re among the many prime 4 sorts of initiatives to finish on time and on finances per Professor Bent Flyvbjerg’s 16,000+ knowledge base of world megaprojects, time is an element, and the world is in transition. The failure of Europe to account for Russia’s rising instability is an element that transmission buyers ought to think about.

Contemplating the historic and political relationships and the political state of affairs inside linked international locations can keep away from initiatives being accomplished however affected by no advantages as a consequence of huge disruption at one finish or the opposite. Think about additionally the hedging each inside the venture and inside the bigger context for disruptions.

Keep in mind, intercountry and intercontinental HVDC pipelines are linear property lots of or 1000’s of kilometers lengthy. Whereas much less straightforward to sabotage than the Nordstream 1 & 2 pipelines, which have been huge pipes on concrete mountings on the ocean ground versus cables buried beneath it, there are nonetheless geopolitical dangers and sabotage to account for.

#4: Willingness to work with Chinese language suppliers

China has constructed extra transmission prior to now 20 years than the remainder of the world mixed. As I discovered in my first, and insufficient try to quantify world HVDC, China has constructed about 86% of the HVDC initiatives I used to be in a position to determine globally.

“After I say insufficient, by the way in which, it’s as a result of the agency which retains monitor of and publishes month-to-month updates on lots of new and present HVDC, RTE Worldwide, solely retains monitor of HVDC-VSC, not HVDC-LCC. VSC or voltage supply converter is the dominant new construct type of HVDC, whereas LLC or line commutated converter is a legacy know-how. The opposite public supply is Wikipedia, which has each VSC and LLC knowledge, however quite a bit much less future oriented initiatives than the RTE knowledge set. The IEA’s charts assert that RTE is the supply of their HVDC transmission data, however has about twice as a lot GW capability as in RTE’s knowledge set. I spent a few hours immediately with Cornelis Plet, DNV’s vice chairman for energy programs advisory for North America and an HVDC professional electrical engineer with world HVDC expertise, and he has his personal proprietary HVDC knowledge set. I assume there’s one in GEIDCO, however an inquiry to their normal inquiries line resulted in no replies. Frankly, a top quality public knowledge set on world HVDC needs to be out there, and it’s exceptional that Wikipedia is the closest factor to it.”

Till not too long ago, China was working with European suppliers and know-how, however now it has developed its personal HVDC applied sciences each independently and thru information switch, and is promoting them internationally. As I’ve famous prior to now, China has the benefit of each 40% higher buying energy parity over developed international locations, and Wright’s Regulation benefits of simply constructing extra of every part than everybody else mixed. The mix makes China essentially the most scaled and lowest price supplier of huge numbers of fresh applied sciences required for world decarbonization, and HVDC is not any completely different.

Nonetheless, it is a clear place the place politics intrudes. Plet signifies that cybersecurity considerations are raised in Europe, and naturally the US takes a really dim view of Chinese language merchandise nowadays, one thing I think about shortsighted.

Any venture which no less than doesn’t think about Chinese language HVDC parts will not be doing itself any favors, and jurisdictions with out important HVDC expertise which refuse to work with Chinese language merchandise, the USA being a main working example, could have greater venture dangers and certain greater prices, each of which would require administration.

Keep in mind, 141 international locations are a part of the China-created and led GEIDCO, and 155 international locations are within the China-created and run Belt & Highway Initiative. That makes about 155 international locations the place this shouldn’t be a constraint, together with many European ones.

#5: Oil and fuel trade dominance

In lots of areas, it’s vastly simpler to allow and construct a pipeline for fossil fuels than transmission for electrical energy. A lot of that disparity is between regulatory seize by the fossil gas trade as a result of necessity to transmit fossil fuels a good distance traditionally. There are dangers in lots of jurisdictions that HVDC will rightly be thought of a robust competitor to pipelines and molecules for power.

Jurisdictions which might be oil and fuel majors have dangers associated to HVDC that buyers ought to think about. The facility stability of the world and power will probably be shifting radically within the coming many years, with much less and fewer affect by the fossil gas trade, however it’s nonetheless very current.

In contrast, if a jurisdiction doesn’t have a fossil gas trade however is excited by exporting wind- and solar-generated electrons, for instance Morocco, circumstances could be very favorable for transmission initiatives. And jurisdictions which don’t have fossil fuels of their very own and have to import power may result in very favorable circumstances.

These 5 factors are my preliminary cross, with the final two added after the decision. I’m positive I’ll return to them and iterate them over time. For these engaged in initiatives like these, please let me now.