13 September 2019
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Renewable energy has become cheap and abundant. Now, we need advanced grid infrastructure to use more of it.
Indiana is the second biggest coal-consuming state in the US. It is also among America's top 10 producers. However, having mined coal since the 1830s, Indiana is ditching fossil fuel in favour of solar and wind because, says its major utility, the move will save consumers billions of dollars.
Indiana is not alone. In other US states, and in countries around the world, the cost of producing renewable electricity has fallen sharply, enabling solar and wind power to dethrone fossil fuels.
However, cheap and clean energy is of no use unless it's delivered to where it's needed, day and night without fail. This is where the power grid comes into play.
Power grids match the amount of electricity being generated with the load, or the amount being consumed. But today's grid infrastructure, already under stress from extreme weather events such as hurricanes or wildfires, is ill-equipped to deal with the rush of renewables.
The intermittent nature of solar or wind means these power sources are also ill-suited for large-scale energy distribution, so there's a need to develop advanced transmission infrastructure.
To investigate possible solutions, members of the Pictet-Clean Energy Advisory Board (AB) and the strategy's investment team recently visited the National Renewable Energy Laboratory (NREL) in Denver and the Electric Power Research Institute in Palo Alto, two organisations renowned for their pioneering renewables research.
Breaking the grid-lock
The current power grid is based on a one-way system in which electricity flows from power plants to homes and businesses. It relies on alternating current (AC) for both long distance transmission and local distribution.
Using a transformer, AC can be easily converted to different voltages. But its major shortcoming is that it loses power in transit. For a given voltage, an AC system has roughly twice the loss of a direct current (DC) system, which can transmit energy more cheaply and efficiently over very long distances.
AC's constraints become more obvious when it comes to distributing renewable energy because solar, wind and hydroelectric power is usually generated far away from where the energy is used.
Because of this, AC grids' renewable capacity is limited to just 15 per cent of their total power mix, our AB members estimate.
Raising the percentage could destabilise the grid and lead to regular blackouts.
In its modern form, ultra high-voltage direct current (UHVDC), is even more powerful, capable of using voltages as high as 1,100kV, compared with conventional DC's 1.5kV.
UHVDC can also link unconnected AC transmission systems across different areas . This means a UHVDC based macro grid lets operators tap into different clean energy sources hundreds or thousands of miles away throughout the day, and to effectively switch between sources depending on demand and weather.
Almost a decade after becoming the first country to adopt UHVDC, China debuted the world's longest and most-powerful UHVDC line in early 2019. The new link stretches over 2,000 miles - more than the distance between London and Moscow. It delivers 66 billion kilowatt/hour of electricity from the country's far northwest - home to abundant solar and wind power - to the heavily populated east, meeting demand of 50 million households.
HVDC is also gaining traction elsewhere, Europe is also planning to upgrade the grid infrastructure with an ambitious aim of turning itself into a "copper plate", in which a strong pan-European transmission network will make it easier to distribute power beyond borders.
Germany, for example, is developing a HVDC grid link to transport renewable energy from the windy north to high-consumption regions of the south.
The 800km Sudlink project should help Germany achieve its national target of generating 65 per cent of its energy needs from renewable sources by 2030, compared with the current 38 per cent.
Critics say UHVDC's high upfront costs are a significant obstacle to its adoption.
Yet the long run benefits could be huge. According to our AB members, the infrastructure projects in Europe usually pay for themselves in three to five years thanks to efficiency savings.
Wyoming's wind
Crucially, the US, the world's biggest energy consumer, has also become a DC convert.
The $3bn TransWest Express Project aims to install a UHVDC transmission line to bring wind power from Wyoming 730 miles to California, which is hungry for clean energy to meet its carbon reduction targets.
NREL estimates that the line will save $1bn per year for Californian consumers.
Research by the Earth System Research Laboratory found that power grids like these that make better use of abundant wind power potential could cut carbon emissions by as much as 80 per cent compared with 1990 levels.
Investing in the world's transition to clean energy system
Thanks to new and innovative grid technologies, renewable energy has the potential to pick up speed. This represents a bright future for investors, who should benefit from a long-term transition to a low-carbon world.
The Pictet-Clean Energy portfolio invests in companies that are playing an important role in this clean energy transition.
The high voltage DC industry presents a wealth of investment opportunities as the market is poised to grow at a compound annual rate of almost 9 per cent to reach $16.3bn by 2026.
Technologies that support the HVDC system should also experience growth.
Silicon chips are needed to convert power between different AC and DC voltages and in different frequencies, which helps minimise power loss and maintain the stable flow of electricity.
Demand for industrial semiconductor is expected to double between 2016 to 2022 to $81bn, registering 10 percent-plus growth every year.
Stephen Freedman, senior product specialist at Pictet Asset Management
