Bridging the Grid Gap: Closing the Infrastructure Divide for Decarbonization
The global energy transition is at a turning point. While record-breaking investments in renewables and electrification have accelerated decarbonization, a critical bottleneck threatens progress: outdated and underfunded grid infrastructure. Without modernized grids to connect and distribute clean energy, projects face years-long delays, soaring costs, and mounting uncertainty. As governments, utilities, and investors race to close this infrastructure divide, the success of net-zero ambitions hinges on rebalancing capital flows toward the backbone of the energy transition - electricity grids.
One critical reason? The grid infrastructure is struggling to keep pace with the rapid expansion of renewable energy. While significant capital has flowed into clean energy and the electrification of transportation, far less has been allocated to modernizing and expanding electricity grids. This imbalance is now widely seen as a major roadblock to achieving net-zero ambitions.
This article examines the widening gap between investment in renewables and grid infrastructure, its impact on grid connections, and how investors are positioned in the energy transition.
Unbalanced Investments: The Mismatch Between Renewables and Grid Infrastructure
A decade ago, the Levelized Cost of Electricity (LCOE) - the average cost per unit of electricity generated over a project's lifetime - was a major hurdle for low-carbon technologies like wind and solar photovoltaics (PV). Their high costs rendered them inaccessible for large-scale adoption. Today, the narrative has shifted dramatically. Technological advancements, economic progress, and supportive policy measures have propelled wind and solar PV to become the most cost-effective options for new electricity generation (see Graph 1).
Graph 1: Global Levelized Cost of Electricity Benchmarks
This transformation has been a pivotal force, driving the energy transition at an unprecedented pace. According to the World Economic Forum (WEF), the period from 2018 to 2022 saw significant strides in advancing global energy transition initiatives as measured by its Energy Transition Index (ETI); an index that gauges the performance and readiness of various nations in advancing towards a sustainable energy future.
This index, which assesses 120 countries based on their energy system's performance and the enabling environment that supports the transition, involves multiple dimensions, including the security, equity, and sustainability of energy systems, which reflect the integration of renewable energy sources, energy efficiency improvements, and the affordability and accessibility of energy across different population segments. (see Graph 2).
One may notice a clear decline in the ETI momentum over the last two years, coinciding with a more cautious stance among analysts, as evidenced by recent reports:
While geopolitical tensions, economic uncertainty, and tighter monetary policies are widely cited as key obstacles, a critical yet often overlooked challenge is the misalignment of investment priorities - specifically, the disproportionate flow of capital into renewables over grid infrastructure.
Global renewable energy investments surged to a record $659 billion in 2023, more than doubling over the past decade. In contrast, grid infrastructure investment has remained largely stagnant, widening the gap between new clean energy deployments and the grids required to connect them. As a result, the global investment ratio between grid infrastructure and renewables has shifted sharply, dropping from nearly 1:1 in 2015 to just 0.5:1 in 2023 (see Graph 3).
Graph 3: Global Grid Investments Have Been Subdued
Bridging this grid gap in infrastructure investments is crucial for sustaining the momentum of the energy transition. BloombergNEF’s New Energy Outlook 2024 forecasts that $811 billion in annual grid investment will be required by 2030 to integrate expanding clean power capacity, electric vehicles, and other low-carbon technologies (see Graph 4). This staggering figure - nearly three times the amount invested in the sector in 2023 - underscores the urgent need for a strategic shift in investment priorities.
Graph 4: Grid Investment Diverging from Net-Zero Trajectory
Global annual grid investment in 2023 versus BNEF's net zero and economic transition scenarios
Stalled Potential: How the Underinvested Grid Threatens Global Renewable Energy Goals
The transition to a low-carbon economy depends on the rapid deployment of renewable energy. However, a critical bottleneck threatens to derail progress: insufficient investment in grid infrastructure. Across the world, power grids are struggling to keep pace with the surge in renewable energy projects, leading to costly delays in grid connections and threatening the viability of clean energy investments.
A striking example of this challenge can be seen at Stellantis's Ellesmere Port factory, a dedicated electric vehicle manufacturing plant, where solar panels are being installed to reduce emissions and produce surplus electricity that could help decarbonize Great Britain’s power grid. However, like many manufacturers, Stellantis has been informed by the U.K. National Energy System Operator (NESO) of lengthy delays in connecting its onsite renewable energy to the grid, with a connection unlikely until 2035.
This issue is not unique to the U.K. Globally, transmission and distribution operators are overwhelmed by a flood of interconnection requests, leaving thousands of gigawatts (GW) of solar, wind, and battery projects stuck in queues. Without significant grid upgrades, connection costs are rising to unsustainable levels, making many renewable projects financially unviable. The severity of the crisis is reflected in case studies from three key markets: the United States, the United Kingdom, and Spain.
The median time from interconnection request to commercial operation has now stretched to nearly five years, introducing significant uncertainty around project timelines and costs. As a result, dropout rates among developments remain high. By the end of 2023, only 20% of the interconnection requests submitted between 2000 and 2018 had successfully reached completion (see Graph 6).
Graph 5: Annual Interconnection Request in Number & Capacity
The U.K. government has acknowledged the issue, stating:
"We are seeing long connection timescales that continue to delay investment in energy infrastructure and timely electrification of the wider economy … very significant reform is needed to ensure connection to the grid is not a blocker to our clean power goals or wider economic growth."
This extraordinary backlog directly highlights the consequences of underinvestment in grid infrastructure, which has emerged as a major bottleneck for Spain’s renewable energy ambitions.
Graph 8: Renewables Capacity in Connection Queue in Western Europe
In sum, underinvestment in grid infrastructure is a major obstacle to the energy transition, delaying renewable project deployment and amplifying uncertainty for project developers worldwide. Amid these challenges, investors are recalibrating their investment strategies, signaling a delayed yet essential shift in capital allocation.
Shifting Focus: Why Grid Infrastructure is Emerging as the Energy Transition's Hidden Gem
Amid broader market pessimism, grid infrastructure and power equipment have emerged as favored plays among hedge funds. Albert Chu, portfolio manager at Man Group Plc - the world’s largest publicly traded hedge fund manager with nearly $180 billion in assets - calls the sector "one of the biggest mispriced opportunity sets" due to years of structural underinvestment.
Grid infrastructure stands out as a rare way to gain exposure to the energy transition while sidestepping the risks of tariff wars and oversupply concerns that have strained relations between China, the U.S., and Europe. This strategic appeal is drawing increased investor interest, particularly among those seeking more stable returns in the energy transition space.
While the S&P Global Clean Energy Index has faced a steep decline, the NASDAQ OMX Clean Energy Smart Grid Infrastructure Index has shown notable resilience. In 2024, the grid infrastructure index climbed nearly 14%, sharply contrasting with the S&P Global Clean Energy Index’s -27% drop. This divergence reflects a broader shift toward grid infrastructure, reinforcing its role as a critical pillar of the energy transition (see Graph 10).
Graph 10: S&P Global Clean Energy Index & NASDAQ OMX Clean Edge Smart Grid Infrastructure Index
Source: Bloomberg Data
Grid infrastructure has emerged as a resilient and attractive investment within the energy transition, offering strong growth potential amid the broader struggles of the clean energy sector. Its role in enabling renewable integration has significantly driven increased investor interest.
Conclusion: The Overlooked Key to a Successful Energy Transition
The global energy transition is at a critical crossroads, with underinvestment in grid infrastructure threatening the pace of renewable energy deployment. While investment in renewables has surged, inadequate grid capacity has become a bottleneck, delaying deployments and inflating connection costs worldwide.
However, this challenge presents a significant opportunity. Grid infrastructure is an essential yet undervalued pillar of the energy transition, providing investors with exposure to clean energy growth while mitigating geopolitical and supply chain risks tied to renewables. Rebalancing investment priorities toward grid infrastructure is essential to unlocking a sustainable, resilient, and efficient energy system.
About The Author
Colin Tang is the Senior Investment Officer at Corinex, where he leverages his extensive experience in finance to drive the company's investment strategy and portfolio performance. With a proven track record of identifying and capitalizing on investment opportunities, Colin plays a crucial role in supporting Corinex's financial objectives and growth.
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