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Smart Grids

Infrastructure deep dive
More efforts needed
Shutterstock 551415346

About this report

A smart grid is an electricity network that uses digital and other advanced technologies to monitor and manage the transport of electricity from all generation sources to meet the varying electricity demands of end users. Smart grids coordinate the needs and capabilities of all generators, grid operators, end users and electricity market stakeholders to operate all parts of the system as efficiently as possible, minimising costs and environmental impacts while maximising system reliability, resilience, flexibility and stability. 

Despite some recovery from the economic disruption caused by the Covid-19 pandemic, investment in smart grids need to more than double through to 2030 to get on track with the Net Zero Emissions by 2050 Scenario, especially in emerging market and developing economies. 

Investment

Investment in electricity grids showed a strong increase of 6% in 2021, with advanced economies accelerating investment to support and enable the electrification of buildings, industry and transport and to accommodate variable renewables on the power system. For example: 

  • Since 2015 investment in the United States has outpaced electricity demand growth, as increasing capital is devoted to replacing and upgrading equipment and strengthening structures against weather-related damage. 
  • China is expected to accelerate investment in 2022, with the State Grid Corporation of China budgeting more than CNY 500 billion for the first time ever and focusing on ultra-high-voltage projects, the upgrading of the distribution network and raising levels of digitalisation of its grids.  
  • European distribution system operators and transmission system operators are also foreseeing higher investment needs. The focus is particularly on connecting distributed energy resources and offshore wind farms, the modernisation of ageing infrastructure and the digitalisation of grids. 
  • Capital spending on electricity networks in emerging market and developing economies (EMDEs) stood at around USD 60 billion in 2021, similar to 2020. These are very low levels compared to the USD 100 billion spent in 2015 and 2016. 

Investment spending on electricity grids, 2015-2021

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Investment in electricity grids needs to average around USD 600 billion annually through to 2030 to get on the Net Zero Scenario trajectory. This is almost double the current investment levels, at around USD 300 billion per year. 

Average annual investment spending on electricity grids in the Net Zero Scenario, 2015-2030

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The shortfalls are striking on a regional basis, particularly in EMDEs, which require around USD 220 billion per year through to 2030, whereas investment in electricity transmission and distribution in these countries has been only around USD 80 billion annually since 2015. In advanced economies and China, the annual investment gap in electricity grids is smaller but still significant, at around USD 80 billion and USD 50 billion respectively. 

Activity

With around 80 million km of transmission and distribution lines deployed worldwide today, electricity networks are the backbone of secure and reliable power systems. Over the coming decade, transmission and distribution grids capture a rising share of total power sector investment under the Net Zero Scenario in recognition of their critical role in supporting modern power systems and clean energy transitions. 

However, electricity grids are not receiving this necessary recognition in some regions, as the deployment of variable renewables and the electrification of other sectors are growing faster than the construction of smart grids, leading to strains and pressures in their power systems. For example: 

  • Viet Nam announced at the beginning of 2022 that no new solar or wind projects would be connected for the rest of the year. The rapid build-out of more than 20 GW of variable renewables during the past three years has led to frequent grid overload and high renewables curtailment.  
  • The Netherlands is experiencing the consequences of a rapid rise in electrification without a corresponding increase in smart grid infrastructure. As a consequence, various non-residential consumers are facing limits to accessing electricity at various points on the grid. 
  • Long grid planning and permitting times are leading to insufficient transmission capacity to connect northern to southern Germany, which is leading to higher renewables curtailment and redispatch costs. 
Innovation

The distribution sector accounts for around 75% of all investment in digital infrastructure with the rollout of smart meters and the automation of substations, feeders, lines and transformers via the deployment of sensors and monitoring devices. Digital investment in distribution also includes network digital twins and non-wire alternatives, such as flexibility services and distributed stand-alone storage systems. 

In the transmission business, digital investment is devoted to the digitalisation of power transformers, the automation of substations and the development of flexible alternating-current transmission systems (FACTS) and advanced sensors (e.g. phasor measurement units), allowing for a faster and more flexible operation and improved control, monitoring and optimisation of the power grid.  

Finally, investment in electric vehicle public charging infrastructure continued to grow in 2021, rising by more than 20%. However, it still comprises less than 5% of total distribution investment. 

Investment in digital infrastructure in transmission and distribution electricity grids

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Policy

The IEA identified that around USD 20 billion has been allocated for transmission and distribution system spending directly by governments since the start of the pandemic up to 2023. This, along with regulatory approval for new assets, is expected to mobilise around USD 225 billion from the private sector. 

International collaboration

Large-scale interconnectors remain a principal focus of investment in transmission, with projects under construction or planned in Europe, China, North America, India and Australia. They are a valuable tool to balance supply and demand across regions, access remote energy resources and integrate variable renewables. In the European Union, the REPowerEU plan proposes additional investment of EUR 29 billion to stimulate the development of interconnectors. 

Interconnectors are also important as a tool to boost international power trading and power flexibility, which can allow for efficient resource sharing, particularly for hydropower, solar PV and wind. The Western African Power Pool (WAPP) is a good example, where technical integration of the 14 member countries covered by WAPP is almost complete. Interconnected WAPP countries exchanged 6 TWh in 2020, or 8% of total power generated. Trade is expected to double by 2025. 

Recommendations for policy makers

EMDEs are lagging behind in updating their electricity grids for the energy transition, despite being regions where demand for energy services is expected to grow faster. These archaic and weak grids present high system losses and lead to inefficient consumption of fossil fuels and frequent power outages.  

Regulators should tackle the weak financial situation of some distribution companies, implement adequate investment frameworks (such as performance-based regulation), develop least-cost system plans and correct network tariff designs, while also tackling high operational and commercial losses. International co-operation can also provide additional financial and technical support, including concessional capital, private-sector capital and inflows from international markets. 

To avoid grid congestion and ensure the success of clean energy transitions, grid infrastructure additions (grid expansion or enhanced grid flexibility) need to proceed in step with variable renewable capacity additions. The challenge for regulators is to resolve the asymmetry of lengthy grid permitting times and the imperative for shorter lags in implementing renewables. 

Public acceptance of large infrastructure developments is another hurdle for grid expansion. Some project developers and authorities have reacted by introducing measures to limit the visible impacts of grid infrastructure, for example by insisting on the use of underground cables instead of overhead lines. Nonetheless, project developers need to pay close attention to the needs of local communities and involve them in the process as early as possible. 

Legal and regulatory frameworks should shape a change in mindset, avoiding the risks of underinvestment and bottlenecks by improving integrated planning processes (for supply, demand and flexibility) and establishing adequate remuneration to incentivise smart grid deployment. 

Recommendations for the private sector

Transmission and distribution system operators should continue facilitating the adoption of novel assets, including technical options such as distributed energy resource management systems, edge control devices, advanced voltage and reactive power controls, network digital twins, artificial intelligence and robots and drones for more efficient operation and management, closed-loop operations and non-wire alternatives, such as flexibility services and distributed stand-alone storage systems.  

Power utilities should develop a forward-looking approach to resilience against future potential hazards, such as extreme weather events, wildfires and cybersecurity risks. Resiliency roadmaps should include weather-predictive services, fire spread and flood modelling, deployment of sensors and high-definition cameras and other real-time or near real-time situational awareness. Assessing cybersecurity risk is especially important for new manufacturers, vendors and service providers as they design and implement their devices, systems and services. 

Electricity grid operators should embrace the achievement of the United Nations Sustainable Development Goals by reducing the use of raw materials, adopting alternative sustainable materials in grid components, implementing circular solutions for dismantled grid assets (such as recycling and reusing equipment) and protecting biodiversity. These measures can reduce life cycle environmental footprints and increase safety, especially when critical mineral resources, notably for copper, may become scarce and geographically concentrated.  

Resources
Acknowledgements
  • Jochen Kreusel, Hitachi Energy, reviewer
  • Rodolfo Martínez Campillo and Francisco Laveron, Iberdrola, reviewer
  • Viviana Vitto, Enel, reviewer

Analysis