Digital technologies can help resolve immediate challenges and reduce investment costs

The success of the clean energy transition requires a fundamental transformation of power systems, including much higher levels of digitalisation at scale across all grid domains, from generation to transmission and distribution to end-use. The digitalisation of grids can support utilities to address demand growth, decarbonisation challenges and improve resilience. For example, digital solutions can enable utilities to locate and fix faults more effectively and provide quicker restoration times, lowering the cost and disruption caused by outages. Digital technologies can also help improve maintenance and extend the lifetime of grid assets, which could defer an estimated USD 1.8 trillion of grid investment globally to 2050.

Globally, current investment in grids is far short of the level needed to be on track for net zero globally; annual investment in grids will need to more than double from around USD 330 billion per year to USD 750 billion by 2030, with around 75% of the investments allocated to the distribution grids to expand, strengthen, and digitalise technologies. There is great potential for raising ambitions; however, many challenges to ramp up investment remain.

This report guides energy policy makers on the functionalities digital technologies can provide for more efficient and resilient electricity grids. In addition, it outlines possible ways to enable and drive investments and create a supportive regulatory and policy environment. 

Electricity is central to clean energy transitions, but numerous challenges need to be tackled

Electricity demand is set to outpace energy consumption over the next 25 years. In emerging markets and developing economies1, demand could increase by over 2 600 TWh by as early as 2030, equivalent to five times the current electricity demand of Germany.

Due to underinvestment, electricity systems globally face myriad challenges, including inefficiencies, losses, congestion and outages. Climate change is causing further damage to assets and affecting reliability. Electrification of end-uses, and changes in demand coupled with increasing shares of variable renewables are creating additional pressures for advanced economies, emerging markets, and developing economies.

The imperative to strengthen and modernise grids is increasingly acute in emerging markets and developing economies, where electricity consumption is set to grow at around three times the rate of advanced economies. One of the growing sources of electricity demand is cooling. Many electricity utilities were already in a difficult financial situation heading into the Covid-19 pandemic, with operational losses climbing substantially since then. Moreover, 2022 saw a reversal of recent progress in improving access to electricity, with an additional 20 million people living without access, bringing the total affected number of people to nearly 775 million.

Unreliable grids are posing severe risks to economies and people

One of the immediate benefits of power system digitalisation is improvements in reliability. The cost of unreliable grids is high. Due to electricity outages, firms in emerging markets and developing economies operate below capacity each year and must pay for backup electricity generation. IEA estimates that without an improvement in the security of electricity supply enabled by digital technologies, these losses could amount to almost USD 1.3 trillion through to 2030. This lost revenue could be vital to improving utilities' finances and boosting economic development. In Sub-Saharan Africa in 2021, the amount of electricity produced by backup generators by the end-users exceeded that of all renewable energy produced, with expenditure on backup generation exceeding the revenue of all combined national grids in the region. In some countries, unreliable grids have far-reaching effects on the economy, leading to gross domestic product (GDP) losses of up to 6%.

Beyond monetary implications, interruptions affect all critical infrastructures and can affect water and food supply, access to medical assistance, financial services, telecommunications and mobility. Thereby posing risks to health, wellbeing and safety and constraining daily activities and productivity.

In addition, globally, technical losses in grids result in around one gigaton of carbon dioxide (Gt CO2) emissions annually, while non-technical losses are the source of lost revenue of 80-100 billion per year but also create severe safety risks for people. 

Power system digitalisation is crucial for efficiency and decarbonisation

Smart grid implementation provides added value across a range of areas. The IEA estimates that digitally enabled demand response could reduce the curtailment of variable renewable energy systems by more than 25% by 2030, increasing system efficiency and reducing costs for customers. Decarbonisation can be further supported through enhanced supply and demand forecasting, enabling integrated energy planning and providing better visibility and greater electricity demand flexibility.

Many countries, including Brazil, India and South Africa, are seeing a rapid increase in the uptake of distributed solar photovoltaic (PV) systems. For example, in Brazil, distributed solar PV installed capacity rose by almost 7 GW in 2022, an increase of more than 50% in one year alone. While higher shares significantly benefit energy security and decarbonisation, managing such growth is crucial to maintain system reliability, control system costs, and ensure that utility business models keep pace with these changes.

Digitally enabled technologies are also crucial for expanding decentralised, clean energy access to communities in remote locations or low-income areas not currently serviced by electricity grids. Digital solutions can enable more efficient mini-grids and larger standalone community assets. In addition, technologies such as smart inverters can help automatically monitor and manage electricity delivery and reduce service interruptions during peak demand while increasing the productive use of electricity during lower demand.

Digital technologies can also enable better management of growing demand combined with the electrification of end-uses to help avoid unnecessary investment in grid expansion. In addition, these technologies limit infrastructure investment needs by providing real-time monitoring and control, especially in distribution systems.

For example, space cooling is one of the fastest-growing sources of electricity demand. In some countries, cooling demand in buildings already accounts for as much as 30% of peak electricity loads. Moreover, rapidly increasing ownership and use of air conditioners will likely cause it to rise even faster. From around 2 billion units today, the number of air conditioners globally could double by 20302, of which 590 million may be added in emerging markets and developing economies. As demand grows, the more granular locational and temporal visibility of digital electricity distribution systems, combined with super-efficient appliances, can support grid stability, ensure electricity affordability and avoid localised outages.

Targeted actions can help scale up investments in smart grid implementation

To unlock these digital opportunities, adequate planning, investment and policy action are needed. For example, to bridge the investment gap and drive investments towards modernising grids, policymakers could consider actions to leverage the full range of potential investors and develop models that adequately value broader benefits.

Many potential investors exist for smart grid projects, from state-owned enterprises to private investors and multilateral organisations. Governments could support the design of projects to leverage each type of investor best, considering their preferences for the right combination of debt, equity or grant financing to mobilise capital while still ensuring appropriate risk allocation.

Policy makers could consider opportunities to aggregate small projects to increase the potential pool of investors or realise economies of scale when focusing on procurement. To attract continued inward investment and build confidence, governments can signal to the market to form a future pipeline of projects. This requires future vision, planning and implementation. Substantial potential capital is available for grid projects. Still, it is necessary to build the business case for grid reinforcement, minimise transaction costs, reduce project risk profiles, and open up new value chains. International co-operation can promote standardisation to reduce barriers and increase digital grid investments.

Beyond these points, a critical aspect is creating incentives for utilities to invest and supporting the development of plans, capacity, and tools to stimulate investments and accelerate implementation. 

Five policy action areas to support smart grid implementation and continuous improvement

Beyond targeted actions to facilitate investments, this report identifies five key steps for governments to accelerate the implementation of digital technologies. 

Create a coherent vision and modernise planning

A crucial first step is for governments to envision how digital grid technologies can help meet country priorities – including grid upgrades, energy access and decarbonisation. This vision can then be translated into updated policy and regulatory frameworks, which recognise the value of investments to harness digital capabilities and system efficiency. This requires engaging all stakeholders from the digital and energy spaces.

Governments can also drive investment by helping utilities adopt integrated planning. As electricity grids become increasingly complex, a whole-systems approach to planning is key to embedding digital deployment into energy and broader economic plans. Too often, planning does not include a systemic approach. It is also important to consider distributed resources and the demand side in planning and aligning investment decisions across system operators, network companies and other actors in vertically integrated and unbundled markets.

Co-ordinate implementation

Governments can help ensure coherence between energy, electricity, economy, digital and other departments, digital and energy regulators, and the digital and electricity industry. Governments can also help align national innovation systems for digital transformation with energy policy objectives. For example, large-scale demonstrations can help test digital solutions on energy infrastructure, which generally require a certain scale to validate business cases. Governments can also play an active role, including a convening one, in enhancing data access and sharing – all crucial for digital innovations to validate their business models.

Government stewardship of power system planning could also ensure that more comprehensive socio-economic benefits of digitalisation are widely and equitably shared, not least to improve access and provide the skills needed for new employment in smart grids.

Facilitate rules and regulations that adequately value digital solutions

In their regulatory capacity, governments could consider dedicated policies and regulations to incentivise and de-risk digitalisation investments. This includes considering a shift towards performance-based regulatory oversight by providing incentives and penalties to meet clean energy transition objectives and measures to support innovation.

Governments can also help incorporate the value of electricity across all policies and the importance of supply-demand balance and flexibility. Providing guidance and support for more nuanced evaluations of costs and benefits and future-proofing policies and constraints can pave the way for digitalisation to interact with electricity grids in a way that promotes systems efficiency.

Integrate resiliency and security across all electricity policy domains

In the context of mounting climate impacts, there is an opportunity to build resilience while expanding and developing power systems. Governments increasingly strive to integrate resiliency and security across all electricity policy domains, including through long-term planning and strategic frameworks such as Nationally Determined Contributions (NDCs), energy transition plans, or Low Emissions Development Strategies (LEDS) which highlight the value of physical and digital resilience. They could also ensure cyber resilience is mainstreamed across rules and regulations – which can greatly promote digitalisation investment.

Governments also have a key role in helping manage systemic risks and strengthen the ties between digital and physical infrastructure resiliency and security.

Track, evaluate and disseminate digitalisation progress

Governments can create a data-driven culture in the public sector, which includes monitoring and evaluating digitalisation progress. Targeting, implementing and enforcing government policies can all be enhanced by continuously monitoring the implementation of energy transition and digital strategies. Digital tools can play a key role in this respect, provided governments reinforce their institutional capacity to manage and monitor project implementation.

Policy makers could consider actions to promote information sharing underpinned by robust data frameworks, monitoring and evaluation. Strengthening international collaboration and knowledge sharing is vital to developing common practices and standards and identifying areas where innovation can be leveraged jointly, accelerating progress at a lower cost. Collaborative approaches are warranted for demonstration projects to provide valuable lessons on how to manage digital technologies at a larger scale and create evidence of the value created by digital solutions and technologies, which can, in turn, help de-risk future investments.

The IEA monitors electricity system digitalisation progress and provides continued guidance

Produced under the Digital Demand Driven Electricity Networks (3DEN) initiative, this publication is the first of a set of three IEA 2023 reports on grids and digitalisation as part of a growing portfolio of analysis and policy guidance.

It will be followed by an IEA Special Report on Power Grids, that will provide a global stock-take and perspectives, which in turn will be followed by a further 3DEN report “Grids of the Future” that will focus on the role of digital technologies in accelerating and integrating distributed and renewable energy technologies and the policy actions needed today. This report will look through the lens of the IEA Net Zero Emissions Scenario and examine the shifts in electricity landscapes and the functionalities needed to address these changes while maintaining security, affordability, and sustainability. This will then be used as a mirror to reflect on electricity grids today to explore what actions will be necessary to facilitate the increased demand due to cross-sectoral electrification, higher shares of variable renewable energy penetration, and how digitalisation can be leveraged as a tool to manage the intermittency of supply, provide system balancing, and ultimately increase whole system efficiency. In addition, the IEA is producing a range of knowledge products and is creating opportunities for peer-to-peer experience exchange and learning. 

  1. In this report, emerging markets and developing economies (EMDE) is not including the People’s Republic of China.

  2. Based on the IEA Net Zero Emissions by 2050 Scenario.