Gridlock: Why Investment in Transmission Is Critical to Reach Net Zero

Key Sections

The Missing Link A Clogged Queue of Projects Regional Hodge Podge Finding Solutions No Transition Without Transmission

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June 27, 2024

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In their current state, the world’s power grids cannot handle the massive buildout of renewable power needed to reach net zero and meet growing demand for electricity. More than 40% of grids in advanced economies are more than 20 years old, or in the second half of their lifespans, with some grid infrastructure dating back 50 years or more.¹
Transforming global power grids will require nearly a two-fold increase in transmission investment by 2030—to more than $600 billion annually. And the buildout of data centers to support AI growth will only exacerbate the need. Utilities generally don't have the budget for that level of investment and thus stand to benefit if capital from other sources is directed to grid expansions and upgrades.
Private investors are expected to play a critical role in funding energy transmission and storage initiatives, considering the scope needed and with many governments and corporations facing significant balance sheet pressures that constrain their ability to issue debt or raise equity in the public markets.
In addition to capital, policy intervention is needed. While developers are eager to proceed with cost-effective renewable power projects, they often struggle to connect to the grid, waiting years and, in some countries, paying substantial fees to enhance existing grids.
Corporations also are playing a critical role, as they are investing more in renewable energy than any other source. This is one reason why solar and wind are adding new energy supply faster than gas-fired power generation or nuclear.²

The Missing Link

It’s encouraging to everyone hoping for a low-carbon future that wind and solar power generation have become cost-effective, numerous governments are supporting wider adoption of renewable energy, and that investors are helping to finance it.

Yet a key question remains unanswered: As more power is generated from renewable energy sources, how will that energy be transported to the places where consumers can use it?

The reality is the world cannot reach net zero by 2050—or ever—without serious investment in energy grids. There is no transition without transmission.

Investing in transmission will be a massive undertaking that governments and regulated utilities around the world are beginning to tackle. Grids in advanced countries generally are decades old, with many needing replacements, and they often already operate at capacity. They are not equipped to absorb large amounts of energy from new sources and are struggling to accommodate load growth. Global electricity demand is expected to rise 3.4% annually through 2026, up from 2.2% in 2023, driven by growth in emerging economies, ongoing electrification of homes and vehicles, a recovery in industry, and data center expansion.³ And this is before accounting for AI, which will drive demand growth even higher.

In addition, there is a limit to how much renewable energy can be generated where it is needed. Solar arrays and wind turbines are concentrated in sunny and windy areas, and transmission infrastructure is needed to move this power over long distances to cities and factories for consumption (see Figure 1). Also, unlike natural gas, coal or nuclear, renewable power is not considered a “baseload” energy source, meaning that renewables are not available at all times of day and cannot provide an immediate power supply during unexpected outages. To meet fluctuating energy demand, other solutions must be employed, such as “firming and shaping” in wholesale power markets, or other sustainable solutions like longer duration storage, to allow for the delivery of renewables to the grid.

Figure 1: How Electricity Grids Work

Source: Ember.

Yet any realistic path to net zero will require extensive growth in wind and solar power, battery storage to address intermittency, and grid expansions and enhancements to transmit the electricity. Across five possible paths to net zero analyzed by Princeton University,⁴ wind and solar power generation in the U.S. need to be three to four times greater than 2020 levels over just 10 years. In one scenario that relies heavily on electrification, transmission capacity would need to more than triple over 2020 levels, requiring more than $2.2 trillion in investment by 2050 in the U.S. alone. The total would increase to about $3.5 trillion in a more aggressive scenario of 100% renewable power by 2050, with no new nuclear power plants and total elimination of fossil fuels.

Similarly ambitious levels of investment are needed globally.

To achieve climate goals, the world’s electricity use needs to grow 20% faster in the next decade than it did in the previous one.⁵ To meet this growing demand using sustainable energy sources, it is expected that wind and solar power will account for more than 80% of the total increase in power capacity over the next two decades, compared with less than 40% over the past two.⁶

To handle that increase in electricity, the world needs to add or refurbish more than 80 million kilometers of grids by 2040, the equivalent of the entire existing global transmission grid.⁷ Investment in transmission needs to nearly double globally by 2030 to more than $600 billion annually.⁸

The incredible scale of what is needed to expand and update grids calls for significant coordination of planning and resources. In the U.S., for example, there needs to be greater cooperation and long-term planning across state and federal energy policymakers. Further, regulated utilities have been addressing as best they can both the growing demand for energy and the growing demand from renewable developers to connect to a grid. Yet such transmission operators could do much more with the right policy and permitting framework, and with greater access to capital. They generally lack the budget to make major investments in grid expansion or upgrades.

We see a generational opportunity for private investment to fill the funding gap, particularly from asset managers with an established history of operating transmission lines and navigating regulatory hurdles. Policy and private investment, in our view, will combine to promote diverse solutions, such as short and long duration storage, distributed generation, hydrogen and nuclear power, and software to dynamically manage grid frequencies, to name a few.

A Clogged Queue of Projects

Developers have championed plans for renewable energy projects in response to growing demand for electricity and public policies subsidizing such projects in certain countries. However, this has contributed to a growing bottleneck of projects waiting for approval to connect to a grid. This issue is not exclusive to the U.S. (see Figure 2).

Figure 2: Project Queues Are Moving Slowly Around the World

Source: IEA as of 2023.

In Britain, where already more than 50% of its electricity is zero emission, energy developers typically wait about four years to connect a project to the grid.⁹ A company applying today might not connect to a grid until 2030 or later. Limited grid capacity is a major issue in Britain, as in other countries, and a contributing factor to the delays in grid connection. Assessments of grid capacity incorporate worst-case scenarios of energy demand, however unlikely, and thus add to the difficulty in getting connections approved.

In the Netherlands, following grid congestion from wind and solar projects, some regions will not connect new energy projects requiring more capacity until grid upgrades are completed in 2029.¹⁰

The U.S. likely has the longest queue in the world. The line of projects awaiting approval has expanded rapidly in recent years (see Figure 3), with nearly 12,000 projects awaiting approval at the end of 2023, up 15% from the end of 2022 and representing 1,570 gigawatts (GW) of generator capacity and 1,030 GW of storage.¹¹ Transmission system operators in the U.S. are so overwhelmed that, in 2023, developers typically waited five years before getting projects built.¹² In 2007, the wait was closer to two years.

Figure 3: More and More Projects Are Joining Connection Queues in the U.S.

Source: Berkeley Lab as of April 2024. 2022 decrease in number was driven by pauses in PJM & CAISO.

To address the backlog, the U.S. Federal Energy Regulatory Commission (FERC) in July 2023 issued an order to move from a first-come, first-served approach to grid connection to a first-ready, first-served approach. The order seeks to prioritize projects that have secured financing to proceed and discourage applications that are more speculative.

In addition, transmission system operators around the world are considering measures to debottleneck the connection application process and accelerate approvals.

PJM, the largest regional electric transmission system operator in the U.S., announced in 2022 a plan to overhaul its process of reviewing developer applications. The system operator said it would prioritize about half of the 2,500 applications in its queue at the time, make improvements to its review process, such as prioritizing projects ready to proceed rather than first to apply, and consider new applications under the revised review process in 2024—creating a two-year delay for projects in the queue at the time. The more than 1,200 projects it planned to consider were mostly renewable energy and in all represented 100 GW of capacity—over half the capacity of PJM’s grid at the time.¹³

In the U.K., the Energy System Operator (ESO) has been rolling out grid queue reforms to accelerate connection, including an amnesty that ended in April 2023 that allowed developers to surrender their place in the queue without receiving a financial penalty. In February 2023, the ESO said it had a queue of about 260 GW of projects waiting to connect to Great Britain’s transmission system, or roughly three times more than what was needed to be on a compliant path to net zero by 2030, and it hoped the amnesty would lower the queue.¹⁴ However, only about 8 GW of projects applied for amnesty, lower than hoped.¹⁵

Getting approved is not the end of the story. If projects are approved, developers may be required to invest millions of dollars to contribute to a grid’s capacity to accommodate their production, since existing grids are often at capacity with dated equipment in need of upgrades.

With such extreme delays and significant costs, many developers are scuttling projects. Fewer than a fifth of projects in the queue from 2000 to 2018 were built by the end of 2023.¹⁶ The majority of transmission and distribution capacity globally continues to be over a decade old (see Figure 4).

Figure 4: Most Transmission and Distribution Capacity Is Over a Decade Old

Source: IEA analysis based on Global Electricity TSO Profiles and Benchmarking Report 2023.

Regional Hodge Podge

Aging powerlines and transformers working at capacity are only part of the bottleneck. In the U.S., for instance, companies do not apply to a single authority to gain access to a grid, because there is no single grid. The U.S. has many grids overseen by nearly 70 authorities—and owned and operated by many different transmission regulated utilities—that ensure that the regional transmission systems are balanced to maintain safe and reliable operation.¹⁷

In addition, transmission projects may need to connect renewable energy sources with end users in different states. This means cost and operational accountability must be agreed to by different regional authorities and may need state and federal cooperation—a difficult ask, to say the least.

Other countries also require multiple permissions. In Germany, for example, a project to connect wind power from the North Sea to industrial users in southern Germany has required developers to obtain 13,500 building permits.¹⁸

Meanwhile, studies show that energy demand is increasing for several reasons not directly related to the shift to renewable energy. Ideally, investment in transmission should reflect needs both within regions and across them, while also reflecting the natural growth of energy demand from economic and population growth and shifting business and consumer preferences, in addition to the move to electrification powered by renewable energy.

For example, in a scenario in which there is only moderate growth in both load and clean energy in the U.S. by 2035, within-region transmission deployment would need to increase 20%.¹⁹ Deployment need increases to 64% in a scenario with high clean energy growth, and increases to 128%, or more than double current capacity, in a future of both high load and clean energy growth.

Transmission needs across regions are similarly dramatic. In similar scenarios as above, interregional transfer capacity must grow by 25% in the U.S. to meet future moderate load and clean energy growth by 2035, by 114% to meet moderate load and high clean energy growth, and by 412%—or more than five times current capacity—to meet high load and clean energy growth.

Finding Solutions

There are bright spots in the transmission story, as well as sensible proposals to address the issue of constrained transmission infrastructure.

China and India, and several other emerging economies, have invested heavily in their grids in recent years to extend electrification to all their regions, and so they are not as restricted by aging infrastructure.

In one positive example among developed economies, about 20 years ago policymakers in Texas began an ambitious plan to harness renewable energy from windy West Texas and build transmission to move that power to populated centers in East Texas. In 2005, the Texas legislature instructed the Public Utility Commission of Texas (PUCT) to designate competitive renewable energy zones (CREZs) and develop a transmission plan to deliver renewable power from those zones to customers.

The PUCT’s plan—made with consultation from the Electric Reliability Council of Texas—has since been completed and offers insights into successful regional planning and execution.

The project now includes five CREZs totaling 32,000 square miles, 23 GW of new wind energy and 3,600 miles of new transmission lines, representing 23% of all high-voltage lines added in the U.S. in the 12 years ending in November 2020.²⁰ Texas now leads the nation in wind power.

To be sure, Texas’ grid still failed in 2021 due to a radical winter storm, but that does not belie the significant progress of the CREZs. In fact, the progress in Texas illustrates how proactive and coordinated planning across regions and a balanced cost-sharing framework can be part of the solution for alleviating transmission constraints.

It is clear from such examples that, similar to interstate highways built after WWII, interstate transmission lines will require coordination of state and federal authorities across state lines, as well as investment from utilities.

FERC, in addition to the requirement of grid operators to prioritize “ready” renewable projects, also approved penalties for grid operators that fail to complete interconnection studies on time, stricter financial requirements for applicants to screen out speculative proposals, and changes that could facilitate battery integration into grids.

Developers have expressed support, though they say much more needs to be done to address the backlog of renewable projects waiting to connect to a grid.

In addition, FERC in May issued an order instructing grid operators to engage in more long-term planning beyond individual projects, including development of new regional transmission lines. However, critics have said the agency needs to provide clearer guidance on how cost sharing would occur for projects across state lines.²¹

Also in May, the Department of Energy announced 10 proposed National Interest Electric Transmission Corridors, which are designated geographical areas where transmission lines and other transmission projects could be expedited. Transmission projects in these areas will benefit from a streamlined siting and permitting process, be prioritized and available for incumbent utilities to execute, and be eligible for public-private partnership funding and direct federal loans.²²

Similarly in Europe, the European Commission in November 2023 announced plans to facilitate investment in energy grids. The plan seeks to advance the improvement of long-term planning of grids to accommodate renewables, stimulate faster project permitting, and other goals. In a statement, the commission said, “With 40% of our distribution grids more than 40 years old and cross-border transmission capacity due to double by 2030, €584 billion in investments are necessary.”²³

The EU is also taking steps to facilitate interconnection between national grids to accommodate renewable energy and bolster the ability of neighboring countries to rely on each other in times of stress. The union has set a target that each grid should have interconnection equivalent to 15% of its system total by 2030.²⁴

The Office of Gas and Electricity Markets, which regulates energy in Great Britain, licenses independent network operators (IDNO) to develop and operate electricity distribution, thus operating as a third party to extend grid access. Energy developers may find it more efficient to work with an IDNO to ultimately connect their power to consumers.

In addition, in March 2024 the U.K.’s ESO announced a plan to invest £58 billion to expand and upgrade its transmission system to meet growing demand for energy and facilitate the transition to a low-carbon economy.²⁵ The plan centers on adding an additional 21 GW to the grid from offshore wind farms in the North Sea off the coast of Scotland—another example of the investment and planning needed to connect distant renewable energy generation to where consumers live.

Clearly, many steps and much private investment will be needed to transition the world to a net-zero economy, as well as meet growing demand for power.

No Transition Without Transmission—And Private Capital

We believe a greater appreciation for the necessity of power transmission as a critical catalyst to more renewable power adoption would drive more investor capital to a much-needed investment opportunity.

Many traditional utility operators are inviting institutional investors to invest alongside them in highly contracted or regulated assets. Also, while corporates are investing heavily in renewable power, they are still limited by balance sheet pressures and high borrowing costs tied to elevated interest rates. Thus, we see a generational opportunity to fund growth in the global transmission system, as well as the broader global transition to net zero.

Private investors who invest with discipline and understand how to navigate regulatory regimes have an opportunity to invest in high-quality critical infrastructure, where these tailwinds are generating opportunities to grow the regulated asset base with accretive returns and strong downside mitigation. Further, such private investors with boots on the ground in local markets are well-positioned to partner with utilities and other relevant stakeholders to execute custom solutions.

Another investment opportunity is in assisting energy-intensive companies such as data center operators in securing enough power to meet their future needs. Private investors with the capability to execute power purchase agreements stand to benefit from this trend, and this also underlines the need and potential for investment in both onsite, “behind the meter” renewable power and transmission connection.

Indeed, we already see strong demand for investing in regulated utilities, which reflects recognition among some investors that renewable energy needs to connect to businesses and consumers, electrification needs are rising from the proliferation of electric vehicles and data centers, and existing grids are in need of modernization. Such tailwinds, we believe, should drive more than $50 billion in deployment over the next three years. This needs to rise substantially by 2030 (see Figure 5).

Figure 5: Grid Investment Needs to Grow Substantially by 2030

Source: IEA analysis with calculations from Guidehouse (2022). NZE—The IEA’s Net-Zero by 2050 Scenario.

Governments can facilitate clean energy investment with financial incentives, such as the U.S. Inflation Reduction Act, and with sound policy. In a study of eight of the G20 countries, the nonprofit Climate Group in a December 2023 report recommended that governments work with utilities to provide and improve options for corporate renewable energy sourcing, address permitting and siting issues that are limiting opportunities for installation of new renewable energy infrastructure, and promote direct investments in onsite and offsite renewable electricity projects, among other recommendations.

We are seeing the beginnings of these solutions in several countries, and it is clear to us that outsize investment in transmission is necessary to both meet growing demand for electricity and transition the global economy to net zero. In other words: Investors have an opportunity to ease the gridlock in the power sector—and unlock the power of the grid.

^Endnotes:

^{1. International Energy Agency, “}^{Electricity Grids and Secure Energy Transitions}^{,” October 2023.}
^{2. Nat Bullard, “}^{Annual Presentation}^{,” January 31, 2004. For energy growth data, Bullard cites Ember, Shell and the International Energy Agency.}
^{3. International Energy Agency, “}^{Electricity 2024}^{,” January 2024.}
^{4. Princeton University, “}^{Net-Zero America}^{,” October 29, 2021.}
^{5. IEA, October 2023.}
^{6. IEA, October 2023.}
^{7. IEA, October 2023.}
^{8. IEA, October 2023.}
^{9. The Economist, “}^{Adding capacity to the electricity grid is not a simple task}^{,” April 5, 2023.}
^{10. IEA, October 2023.}
^{11. Lawrence Berkeley National Laboratory, “}^{Queued Up: Characteristics of Power Plants Seeking Transmission Interconnection}^{,” April 2024.}
^{12. Lawrence Berkeley National Laboratory, April 2024.}
^{13. PJM, “}^{Q&A With PJM Planning VP Seiler: Focus on New Interconnection Process}^{,” February 24, 2022.}
^{14. ESO, “}^{ESO leads the way with major initiative to accelerate connections to the electricity transmission grid}^{,” February 27, 2023.}
^{15. ESO, “}^{Our five-point plan}^.”
^{16. Lawrence Berkeley National Laboratory, April 2024. Estimate of built projects taken from a subset of queues for which data were available.}
^{17. U.S. Energy Information Administration, “}^{U.S. electric system is made up of interconnections and balancing authorities}^{,” July 20, 2016.}
^{18. The Economist, “}^{Adding capacity to the electricity grid is not a simple task}^{,” April 5, 2023.}
^{19. U.S. Department of Energy, “}^{National Transmission Needs Study}^{,” October 2023.}
^{20. Baker Institute, “}^{Texas CREZ Lines: How Stakeholders Shape Major Energy Infrastructure Projects}^{,” November 17, 2020.}
^{21. E&E News by Politico, “}^{FERC strains to get big transmission plan moving}^{,” August 07, 2023.}
^{22. U.S. Department of Energy, “}^{National Interest Electric Transmission Corridor Designation Process}^{” May 2024.}
^{23. European Commission, “}^{Commission sets out actions to accelerate the roll-out of electricity grids}^{,” November 28, 2023.}
^{24. European Union, “}^{Electricity interconnection targets}^.”
^{25. ESO, “}^{Beyond 2030}^{,” March 2024.}

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