The drama unfolding in Ukraine signals the end of energy “recklessness” for Europe. The transition to a decarbonised economy has become a top political priority, guaranteeing our future independence.
Of all the developments in this race to net zero, one of the most significant is electrification: moving away from fossil fuels will mean, in many cases, replacing them with electricity. This will result in a very large increase in the share of electricity in the final energy mix[1], which is expected to rise from 20% today to almost 50% in 2050 (source: IEA – NZE scenario).
Obstacles ahead
However, there are serious obstacles to the EU’s political will to electrify its energy mix. Firstly, those linked to production: the solar value chain is dominated by China, there is a lack of skilled labour for installation, administrative delays in obtaining permits, etc. The transmission and distribution of this electricity may also be a major constraint. We need to develop our electricity grids at the same pace as our energy mix, otherwise they will become the bottleneck that makes the electrification of the continent impossible.
However, the electricity networks of developed countries (EU, US, UK) are ageing and unsuitable infrastructures. The architecture of electricity networks was designed in a world where electricity sources were controllable, few in number and close to the end points of consumption. Conversely, in a net-zero economy, a large proportion of resources will be intermittent, there will be multiple sites and production will sometimes be far away (e.g. offshore). In short, an entire model must be rethought.
A financial, political and resource challenge
On the financial level, TotalEnergies estimated last month in its Energy Outlook that future investments in electricity networks were as considerable as those required in the field of renewable energy. We are talking about colossal sums of money, amounting to trillions over the next few decades.
At the political level, the subject of electricity networks, at least until the very recent fears of blackouts, hardly appeared in the discourse. Lack of knowledge of a complex subject, absence of a long-term vision, and political calculation have all contributed to putting this crucial issue on the back burner.
In terms of resources, the electricity networks refer to critical metals and more particularly to copper. Since Edison’s first power station in 1882, this metal, which is difficult to substitute, has been used for its conductivity. Due to the development of renewable energy and electric vehicles, the demand for copper will increase significantly. Some are already warning of the risk of an upcoming supply shortage, as Nexans CEO Christopher Guérin warned that “the copper shortage is written… in two years it will be the battle of the nations for copper. (Sep 2022). This risk seems to be largely underestimated!
Europe’s energy independence policy and its progress towards a low-carbon economy depend on electrification, of which the electricity networks are the backbone. If their modernisation does not become a priority and significant financial resources are not allocated, the risk that they will become a major brake on the continent’s energy transition will only increase, leaving Europe in a state of energy insecurity.
As is often the case with climate issues, the private sector is one step ahead of politics. The state of the grids is already creating considerable opportunities for many industries, especially those that provide ‘cures’ for their fragility. Our Quaero Capital Funds (Lux) – Accessible Clean Energy and Quaero Capital Funds (Lux) – Infrastructure Securities strategies are already positioned in these areas via several vehicles, including:
- Transmission and distribution network operators, whose role is more strategic than ever and who will benefit from accommodating policies
- Industrial companies that are exposed to operators’ investments, such as cable manufacturers
- Storage technologies (batteries, hydrogen, etc.) which will be essential in smart grids
- Finally, as investments in networks make it likely that the price of electricity will remain high for a long time to come, anything related to energy efficiency will offer significant returns on investment.
[1] Not to be confused with primary energy, which refers to unprocessed energy products (in 2021, primary energy consumption in the world was distributed as follows: oil 31%, natural gas 24%, coal 27%, nuclear 4%, hydroelectric 7%, renewable 7% – source: BP Statistical Review of World Energy).