Grid Investment Red Flags From Global Investor Group

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Recently, Jefferies Group, a New York-headquartered, globally-officed investment bank that has done trillions in clean energy deals over the past few years, reached out to me again. In the past I’ve discussed grid storage with their cleantech investment floor, and for a global group of institutional investors and Jefferies clients debated small modular reactors with Kirsty Gogan Alexander, former UK Deputy Head of Civil Nuclear Security and founder/managing director of a couple of boutique consultancies which tend to focus on all things nuclear.

Intro slide for global investors session for Jefferies bank client by Michael Barnard, Chief Strategist, TFIE Strategy Inc

The focus of this session was a very well-timed discussion of the importance of grid investments. The International Energy Agency just released its first big global grid report, something that begs the question, why only the first one in 2023?

The IEA also asserts that it’s the first of its kind, implying that no one has done that before, while in China the Global Energy Interconnection Development Corporation (GEIDCO) was launched in 2016. What’s that? Well, it’s a 141-member country grid organization devoted to big grid extensions headed by Baoan Xin, who is the Executive Chairman of the State Grid Corporation of China, and President of China Electricity Council. GEIDCO has been releasing annual reports on global grid concerns and investment for years, so the IEA is a little late to the game.

As such, it’s perhaps unsurprising that one of the IEA’s conclusions was that only China has been investing adequately in the grid as part of its massive low-carbon electricity build-out. And China isn’t only doing that within its own borders. As I noted recently, a major analysis and report on sub-Saharan Africa grid potential with a roughly 10,000 km transmission line linking a dozen countries was headed by Chinese and African researchers, and using a European grid simulation toolkit. That multi-national inclusivity is a hallmark of grid interconnection initiatives, almost by definition.

As 44 of the 46 sub-Saharan countries are members of China’s Belt & Road Initiative (BRI), the potential for this megaproject to move forward, bringing clean electricity and economic growth to large parts of Africa, is much higher than it might otherwise be. This wasn’t purely academic, in other words.

As a note, researchers at Harvard Business School and John Hopkins collaborated on a study of claimed BRI debt traps, and found that there was no evidence to support that narrative, with only 11% of debt held by China, with 89% held by western countries and the IMF. Further, the 2021 study found that China regularly renegotiated terms, and many of its lows were zero interest. China regularly forgives final payments on interest free loans that have reached their terms as well, and is an emergency lender to countries globally, bailing them out of fiscal issues. Is it altruistic? Of course not, but it’s playing a much longer game that includes win-win economics, not zero-sum games.

The first half of the presentation was focused on electrification, the big why of grids. In the past, I’ve calculated that above 50% of the USA’s primary energy requirements would go away with the full use of heat pumps for commercial, residential, and industrial water and air heating, with electrification of industrial heat over 200° Celsius and with maximal electrification of transportation. That’s how efficient electrification is, and as I’ve noted multiple times, I’ve yet to find an industrial heating solution that does not have an electrification pathway.

For this presentation, I extended that by converting the quadrillion Btu energy services and rejected energy requirement in the LLNL Sankey diagrams to TWh energy units, which are much more sensible. Just based on the Sankey diagram from 2022, the rough TWh generated when Btu were reverse-engineered to TWh was around 1,700. The end energy services and rejected energy combined was about 9,800 TWh, roughly six times more. Given how fast renewables can be built, this is a very addressable gap in the coming couple of decades.

The second half of the presentation was another why question, which is why grid investment was so important to electrification. The requirements for electricity as an energy service are stringent, requiring the right and very large amounts of electricity to be available at innumerable end points, at the right voltage and currency, and for spikes and troughs to be managed carefully.

Laurent Segalen, long time clean energy investment banker and co-host of Redefining Energy, and I were discussing this the other day. His take is that developed countries projected significantly increased electricity demand 20 years ago and underwent grid investment at the time, but then LED lights especially cut the legs out from under the demand cycle. To extend that, our computers and TVs are energy sippers compared to the energy gluttons of the past, something that is true of all of our electrical appliances. As a result, western grids had a significant unused buffer, and that buffer is now consumed.

That rings true, and is explanatory of the major renewables projects stacked up awaiting grid connection approvals and timing in the USA and Europe. The west has been deeply lax on strategic grid planning, letting NIMBYism and parochial politics interfere with grid building, and now we are suffering the consequences.

Segalen, by the way, is working on an initiative to establish a Canada-Europe 20 GW HVDC interconnect across roughly the same route as the first trans-Atlantic communication cable from the 1860s. At about 3,000 kilometers, it’s far from the longest or deepest HVDC interconnect on the books.

The questions, as always, were very interesting, but one stood out. An audience member asked (in paraphrase):

“What metrics should an investor consider when evaluating whether a grid investment was a good idea in a country or not?”

I actually hadn’t thought of the question that way despite looking at Singaporean, UK, Moroccan, Tunisian, Canadian, etc., etc., etc. interconnections and grids over the past few  years. But it’s an excellent question, and I love those.

As I noted when answering verbally, my initial answer would be a hot take, and I would undoubtedly return to the question, probably many times, in writing. This is my first attempt.

#1: Transmission Connection Backlogs

If a country has a significant backlog of grid connections pending already, that’s a key indicator. It probably means that their regulatory and grid planning process has not been strategically focused on the reality of electrification. It could mean that their regulatory process is as complex and unnecessary as the US habit of applying the full weight of approvals required for massive riverine dams like the Hoover to closed-loop, off-river pumped hydro facilities. It could mean that the countryside is full of rabid NIMBYs who refuse local permitting of everything.

But it also means that there is a strong business case and impetus for grid improvements. That blade has two edges. Care is required so that investment dollars don’t get sliced into little pieces by it.

#2: A parochial energy independence or energy autarky stance

If the jurisdiction is stuck in the grid’s past, where a country, state, or province just had to go it alone because of suspicion of their neighbors, there’s a risk. If the jurisdiction has ossified around the natural monopoly utility model, something that prevented Michael Skelly from pulling HVDC across state lines a few years ago, there’s a risk.

Let’s compare and contrast Ontario in Canada and France. They are both dominated by nuclear generation on their grid. In the case of Ontario, it also has a lot of hydroelectric, and while it was one of the first jurisdictions to intentionally shut down coal generation, more natural gas is burnt and renewables were stopped dead since 2018. That province is badly stuck in a mindset that neighboring jurisdictions’ electricity and distribution grids are last resorts, not primary resorts. It built and expanded its Niagara region pumped hydro facility to give its nuclear plants something to do at night, which is both good and an indicator of lack of grid extension. It has refused to expand its interconnection with the massive hydro and wind electricity resources of neighboring Quebec for decades, which instead has been working to build a lot of transmission to the US northeast. Only in the past year has modern grid management gained any traction.

France, on the other hand, has an even larger percentage of nuclear generation than Ontario, 75% of net demand vs about 55%. In an isolated grid, this would be a recipe for extraordinary complexity and expense in managing these economically and technically inflexible forms of generation. But France has massive grid interconnections to all neighboring countries and hundreds of TWh flow across its borders annually, with annualized net flows to countries like Germany being into the double digits — sometimes positive, sometimes negative.

France’s nuclear is best thought of as 13% of Europe’s electrical generation. That’s how it actually operates via grid interconnections. Buying and selling electricity across borders is a constant and ingrained reality, not a barely tolerated requirement as in Ontario.

That’s why when I was assessing Europe’s energy crisis a year ago, I asserted that it would be short-lived and deliver a lot of good results. The phrase I lean into is strategic energy interdependence. Electricity is just another commodity, like natural gas, iPhones, and cereal that crosses borders. It isn’t special. It isn’t unique. There’s no reason to trust neighboring countries that you trade everything else including important commodities with and not trust them with electricity.

Europe lost track of strategic energy interdependence, and built an energy economy since the late 1990s on large flows of natural gas from Russia, a country which was clearly devolving away from being a trusted neighbor since the early 2000s. They didn’t adequately hedge against the increasingly rogue state and as such had a bit of a crisis which made them reassess.

And electricity isn’t especially hard to hedge. HVDC interconnects between Europe and the UK aren’t a single massive cable, but multiple parallel cables. There’s internal redundancy. And there isn’t one big interconnect to France across the Channel, there are eight or nine mostly in operation or approaching operation to multiple European countries. I’ve spoken with the head of the Xlinks project that will be bringing storage-firmed Moroccan wind and solar energy up to the UK. And as noted, entrepreneurs like Segalen are looking at connecting continents.

If a jurisdiction thinks electricity is uniquely local and interconnections are the very last option, they might not be a good jurisdiction to do grid investments in. Good for far more storage and renewable energy construction than they would otherwise require, because the electricity has to come from somewhere, but not for bigger grids.

#3: Strategic energy interdependence

The flip side to point #2 is that transmission projects take time to permit and build. While they are among the top 4 types of projects to complete on time and on budget per Professor Bent Flyvbjerg’s 16,000+ data base of global megaprojects, time is a factor, and the world is in transition. The failure of Europe to account for Russia’s increasing instability is a factor that transmission investors should consider.

Considering the historical and political relationships and the political situation inside of linked countries can avoid projects being completed but suffering from no benefits due to massive disruption at one end or the other. Consider also the hedging both within the project and within the larger context for disruptions.

Remember, intercountry and intercontinental HVDC pipelines are linear assets hundreds or thousands of kilometers long. While less easy to sabotage than the Nordstream 1 & 2 pipelines, which were big pipes on concrete mountings on the sea floor as opposed to cables buried underneath it, there are still geopolitical risks and sabotage to account for.

#4: Willingness to work with Chinese suppliers

China has built more transmission in the past 20 years than the rest of the world combined. As I found in my first, and inadequate attempt to quantify global HVDC, China has built about 86% of the HVDC projects I was able to identify globally.

When I say inadequate, by the way, it’s because the firm which keeps track of and publishes monthly updates on a lot of new and existing HVDC, RTE International, only keeps track of HVDC-VSC, not HVDC-LCC. VSC or voltage source converter is the dominant new build form of HVDC, while LLC or line commutated converter is a legacy technology. The other public source is Wikipedia, which has both VSC and LLC data, but a lot less future oriented projects than the RTE data set. The IEA’s charts assert that RTE is the source of their HVDC transmission information, but has about twice as much GW capacity as in RTE’s data set. I spent a couple of hours today with Cornelis Plet, DNV’s vice president for power systems advisory for North America and an HVDC expert electrical engineer with global HVDC experience, and he has his own proprietary HVDC data set. I assume there’s one in GEIDCO, but an inquiry to their general inquiries line resulted in no replies. Frankly, a high quality public data set on global HVDC should be available, and it’s remarkable that Wikipedia is the closest thing to it.

Until recently, China was working with European suppliers and technology, but now it has developed its own HVDC technologies both independently and through knowledge transfer, and is selling them internationally. As I’ve noted in the past, China has the advantage of both 40% better purchasing power parity over developed countries, and Wright’s Law advantages of just building more of everything than everyone else combined. The combination makes China the most scaled and lowest cost provider of massive numbers of clean technologies required for global decarbonization, and HVDC is no different.

However, this is a clear place where politics intrudes. Plet indicates that cybersecurity concerns are raised in Europe, and of course the United States takes a very dim view of Chinese products these days, something I consider shortsighted.

Any project which at least doesn’t consider Chinese HVDC components is not doing itself any favors, and jurisdictions without significant HVDC experience which refuse to work with Chinese products, the USA being a primary case in point, will have higher project risks and likely higher costs, both of which will require management.

Remember, 141 countries are part of the China-created and led GEIDCO, and 155 countries are in the China-created and run Belt & Road Initiative. That makes about 155 countries where this shouldn’t be a constraint, including many European ones.

#5: Oil and gas industry dominance

In many regions, it’s vastly easier to permit and build a pipeline for fossil fuels than transmission for electricity. Much of that disparity is between regulatory capture by the fossil fuel industry due to the necessity to transmit fossil fuels a long way historically. There are risks in many jurisdictions that HVDC will rightly be considered a strong competitor to pipelines and molecules for energy.

Jurisdictions that are oil and gas majors have risks related to HVDC that investors should consider. The power balance of the world and energy will be shifting radically in the coming decades, with less and less influence by the fossil fuel industry, but it is still very present.

By contrast, if a jurisdiction does not have a fossil fuel industry but is interested in exporting wind- and solar-generated electrons, for example Morocco, conditions can be very favorable for transmission projects. And jurisdictions which don’t have fossil fuels of their own and need to import energy can also lead to very favorable conditions.

These five points are my initial pass, with the last two added after the call. I’m sure I’ll return to them and iterate them over time. For those engaged in projects like these, please let me now.