The cost of connecting the dots


A price tag of up to €425bn ($512bn) has been put on getting Europe’s grid ready for renewables, writes Jonathan Spencer Jones.

Investments in Europe’s power distribution grids need to be ramped up by at least 50% compared with those in the last decade, according to the two industry associations, Eurelectric and E.DSO.

They say the estimated investment requirement in this area is €375-425 billion ($451-512 billion) until 2030 in the EU27 and UK.

The warning, delivered in a new study, presents an additional challenge to the sector in the energy transition, but an essential one to face given the central role of distribution.

The majority of new renewables is being connected at distribution level. It is this market to which prosumers are being integrated and, increasingly, it is being required to enable flexibility and demand management not only locally, but also for the system as a whole.

The study Connecting the dots: Distribution grid investment to power the energy transition, which was prepared with Deloitte, is based on empirical data from ten distribution system operators and assessments of ten countries in Europe – Denmark, France, Germany, Hungary, Ireland, Italy, Poland, Portugal, Spain and Sweden.

The 2030 scenario constructed is aligned to the EU’s 2030 and 2050 decarbonisation targets. It envisages the rollout of 40-50 million heat pumps in the residential sector, 50-70 million electric vehicles with up to 56 million charging points and additional demand of 335TWh, with the demand growth averaging 1.8% annually. With this, 470GW of new centralised renewables and 40GW of self-consumption is envisaged for an approximately 70% penetration of renewables connected to the distribution grids by 2030.

For energy efficiency and conservation, at least half of electric vehicle charging needs to be enabled in off-peak hours.

Smart meters and a holistic data management model also are considered key to increasing distribution grid observability, optimising grid investments and enabling flexibility services. So far, however, less than a handful of EU countries have reached a high level of penetration, i.e. greater than 70%, and in most the penetration is less than 50%.

Distribution investment drivers

The study categorises the investment needs into eight key drivers. The two most important in monetary terms, accounting for almost half the investment requirements, are grid modernisation and new renewable generation.

The power distribution grids are ageing. Approximately one third of the EU’s grids are over 40 years old – and three-quarters are over 20 years old – and by 2030 the share is likely to surpass 50%.

The risk of technological obsolescence is increasing but the modernisation needs vary depending on the power grid expansion timeline at the national level; e.g. countries that had an economic expansion in the 1992, such as Denmark, may present a maximum of replacement needs around 2030.

The next largest driver, requiring one-fifth of the investment, is the electrification of buildings and industry, which will add 40TWh of final electricity demand and require new powerlines, reinforcements and additional transformer capacity.

The balance of the investments is split almost equally between the remaining drivers, electrification of mobility, digitalisation and automation, smart meters, resilience and the smallest in percentage terms at 2% – if not in importance to the transition – grid connected energy storage.

These investments, amounting to the €375-425 billion, represent an annual investment effort that’s some 50-70% higher than historical data, the report says. This percentage is less than the estimated 100% increase required across the entire energy sector.

Moreover, the impact on electricity costs is anticipated to be marginal, growing at an annual rate of about 1.5% compared with the 2% target inflation rate across the EU.

The investments also should provide widespread societal benefits in terms of sustainability, the economy, competitiveness and progress towards customer centricity; and are expected to outweigh the economic impacts. For example, the EU could save over €175 billion ($211 billion) in fossil fuel imports annually and reduce the average electricity costs by €28-37 billion ($34-45 billion) in the long term.

Additionally, the study shows some 90% of investments, or €30-35 billion ($36-42 billion) of annual revenue, could be captured by EU manufacturers and service providers. Overall, the investments in distribution grids could sustain up to 600,000 jobs per year in the EU and UK.

Policy and regulation

Given the scale of the challenge facing DSOs with the increased investment requirements and the shrinking timescale, regulatory support is going to be essential both at the national and European levels, the report indicates.

National planning frameworks need to be aligned to the energy transition, DSOs should be enabled to access EU and post-COVID recovery funds and local communities need to be properly involved in the execution of plans.

The role of DSOs needs further development through region-wide regulatory frameworks on cybersecurity and data management and a forward looking remuneration approach is necessary to enable cost effective remuneration and incentive models.

Flexibility development is needed through the definition of roles, infrastructure, economic signals and information exchange procedures. Efficient tariff structures also should be defined to optimise the long-term investments and facilitate power system economic sustainability.