Author: Neeraj Kaul
As part of our engagement via this newsletter and in light of challenges traditional utilities are facing regarding profitability, I feel it appropriate and timely perhaps to steer discussion around drivers for investment in the T&D sector globally. The discussion will hopefully get us on the same page regarding importance that utilities place on finding innovative ways to reduce their cost, which’s what PowerTender helps achieve. So to lay the foundation of our discourse, we shall reflect on where the investment is happening globally, who is investing and how this investment cycle in power products will shape up in future. And since PowerTender has a global appeal, it becomes imperative that we capture global factors shaping our industry. And so we will cover some high level trends driving investments in T&D globally, followed by specific assessment of investment in European Union in this issue. In subsequent issues of this newsletter we shall endeavour to cover other active regions of the world as well.
The Global Paradigm
As per the latest World Energy Outlook (WEU) 2017 report, penetration of renewables into the generation mix continues its acceleration globally. China, India & US will lead the solar PV installations, whereas, Europe will be the frontrunner in onshore and offshore wind. From a ~50% share of renewables (126GW) annually between 2010-16, the share will go up to 70% (230GW) annually in the period between 2017-40. Decarbonization will make renewables contribute to nearly 40% of primary energy (Mtoe) globally vs the current figure of around ~14%. Only last month, European Parliament approved a renewable target of 35% by 2030, which is an increase from the figure of 27% proposed by the European Energy Council and Commission.
Only last month, European Parliament approved a renewable target of 35% by 2030, which is an increase from the figure of 27% proposed by the European Energy Council and Commission
Demand of Electricity worldwide, which currently stands at around 24,000 Twh will increase by ~60% to 38,000 Twh in year 2040; driven mainly by increased demand from developing world as well as electrification of transport sector and increased heating & cooling demands from unstable weather patterns globally.
So what does all this mean to the investment in the transmission and distribution (T&D) segment which has gained a centre stage as utilities revise their strategic growth plans. Following are some of the factors that get considered as some of the these investment decisions get made:
1. A substantial level of T&D assets worldwide have aged beyond their design life, requiring huge investments to replace or upgrade the same. By an IEA estimate, nearly half of the grid infra in place globally in 2009 will have reached 40 years of age by 2025. The urgency to replace the aging infrastructure is more so in developed economies, where much higher standards of customer service reliability and continuity is expected.
2. New T&D investments are required to cater to increase in projected demand and to address challenges with local grid congestion.
3. With increasing amount of renewables getting installed close to consumer premises (residential/ commercials), a whole new paradigm of asset adequacy needs to be considered with power flows expected to be bi-directional due to infeed from these distributed RES (Renewable Energy Sources). Voltage and reactive power control, fault detection and recovery, meeting harmonic standards and in many cases requiring ruggedized power delivery equipment ( transformers etc.) opens a whole new paradigm to distribution system design and operation. Utilities are looking at innovative ways to accomplish these expected changes in distribution system so as to reduce replacement/upgrade costs. A lot, of course, would depend on how well the existing distribution networks have been designed and maintained.
4. Also important consideration is given to investments required towards cross region / cross country interconnectors. These interconnectors are important to carry high amount of remote renewable power to load centres and for proper utilization and balancing of renewable resources spread across different geographies to account for variations in environmental conditions through a given day and across various seasons.
5. Besides the above, forward looking utilities have already put in motion investment plans around a) energy storage, b) demand response c) modernization and digitization of networks and d) IOT based maintenance programs to retain and increase customer base and to provide improved services as expected in the digitized world.
Investments in European Union
In this issue of the Newsletter we shall look at T&D investments in European Union (EU) and in subsequent issues we will cover other regions/countries. Following table is a summary of the average annual investments in European Union in billions of Euro.
This data gives us a broad trend around investments in T&D and depending on multiple scenarios considered in reports from various agencies / institutes, estimates vary a lot. Never-the-less, this does help us derive key takeaways and facilitates a discussion around these investment figures.
1. Nearly 80% of all investments are in the distribution system pertaining to replacement/upgrade and extension of grid at distribution level.
2. Compared to current levels (2011-20), future years (2021-50) would require, on an average, between 50% to nearly 100% increase in investment depending on which scenario is under consideration; high RES requires highest level of investment.
3. As regards the investment in interconnectors, the annual investment is expected to substantially rise in the period 2021-50 vs the current levels. It’s important to point out that these investments in grid at national level and across national boundaries (within EU) are those that have pan European significance. These projects are picked up carefully by ENTSO-E (European Network of Transmission System Operators of Electricity) that produce a Ten Year Network Development Plan (TYNDP) of projects and investments that are required. The latest budget to cover period till 2030 is set at 160 billion Euros, out of which 80 billion is already allocated to projects that are endorsed in national or intergovernmental agreements within EU member counties. Following map is a view of what these Interconnectors look like and their current status.
These interconnectors include HVDC overhead & subsea projects, HVAC overhead, underground & sub-sea cable projects and associated sub-stations of varying voltage levels. Its estimated that 40,000 kms route length of EHV power lines on land and sea will need to be built by 2030. Nearly 53% of the total distance will be built using EHV underground and subsea cables. All of this translates into nearly 46,377 km of cable length out of which 42,214 km will be HVDC & rest HVAC cables. (Ref. Joint ENTSO-E & EUROCABLE paper dated Jan’18).
All of this translates into nearly 46,377 km of cable length out of which 42,214 km will be HVDC & rest HVAC cables
While on the topic of cables, it’s worth mentioning that higher demand for cables also come from its increased use in distribution system during the course of upgradation work where public resistance to overhead lines is strong (German experience) and also in high density urban areas.
So how are utilities in Europe coping with investments required for future growth and security of supply! Well it’s not an easy situation to be in. Traditional (old) utilities while faced with economic downturn that proceeded events in 20o8 (lower demand), had to, in addition, bear the burden of carrying excess generation assets, with a combined effect that resulted in stranded assets of both coal and gas plants. Situation was made worse with competition from RES forcing shutdown and even mothballing of certain generation assets. (Refer to article in economist in Oct 15 2013 issue,” How to loose half a trillion Euros”)
In this scenario, aggregate earnings of top 20 European utilities has continued to go down to around 35% lower than the 2012 levels; mainly due to reduced profitability of merchant segment. Networks & certain generation segments (renewable, co-gen, some thermal) that fell under regulated pricing regime have been able to sustain earnings. In spite of these challenges, traditional utilities have gradually started increasing their investments capabilities; i.e. capital expenditure as a share of earnings in recent years. Utilities are restructuring within to reduce costs through simplification, restructuring, investment in new digital technologies (that are less capital intensive), divestments, and generally in preparation for offering virtual power plant (VPP) services (distributed gen, storage, Demand response, ancillary services etc.). M&As in the sector are also options that traditional utilities are exercising to change their generation mix.
Power of Connections
PowerTender helps bring to the table multiple sourcing options to help our customers win in these challenging times and beyond. Distribution grid strengthening and augmentation will pick up pace and what I feel is important is for customer to know that we are here to serve. And as new interconnectors get active, PowerTender teams will endeavor to connect the buyers and sellers in most expeditious way for a win – win for both. And yes we are here to support both the traditional equipment as well as the renewable portfolio for our customer.
Events & Customer Visits
Visit to Modern Insulator Factory in India
PowerTender meeting with Vice President (Marketing) Mr. Shailendra Jhalani (center) and Mr. Gaurav Sharma; Manager – Marketing (Left) at the Modern Insulator factory in Rajasthan (Western part of India).
Modern Insulators Limited is a well-known global supplier of high voltage porcelain insulators for all applications. Set-up in 1985 in collaboration with Siemens AG, MIL has been recognized by Indian Government for its exports world over.
Elecrama : Exhibition cum Conference (Mar 10-14)
Touted as the largest exhibition of Electrical Products in the world, Elecrama gets underway in India in the Northern Capital Region (near Delhi) from March 10-14. PowerTender is participating in this exhibition with a booth presence and will present at two town hall sessions addressing to gathering from all over the world.