A Sustainable Investment in Journalism

A sustainable business requires diverse revenue streams. ESG Investor now operates a subscription service as of Tuesday 14th May. To find out more please get in touch with our subscription team on subscriptions@esginvestor.net

Commentary

Think Big, Build Small

Eduardo Monteiro, Co-CIO of Victory Hill Capital Partners, outlines the key components to achieving energy security during the transition.

When the UK national grid system was created in 1926, the goal was to create a network to link power stations that were already located near demand centres. 

In its original form, the grid was composed of 6,400 kilometres of cables – mostly overhead – linking the 122 most efficiently located power stations. 

The new system was a marvel. During the blitz when London’s Battersea Power Station could not operate, power plants in South Wales could provide electricity to meet the nation’s demands. 

But when the environmental and health impacts of chimney stacks became apparent, efforts to reduce pollution in UK cities and the advent of larger power plants led to the widespread closure of inner-city power stations. 

Now, most power production now occurs outside of cities, with the majority of power plants located far from demand centres. 

Why does this matter? One reason is that transporting electricity over long distances is extraordinarily inefficient. As much as 20% of electricity produced by power plants located away from the point of consumption is lost in resistance on transmission lines. 

While the UK’s grid can now comfortably provide 25 terawatt-hours of energy to consumers, with far more energy than required being produced to account for losses in transit. 

Going the distance 

The desire to create utility scale power stations that are located far from demand centres seems to have translated into the UK’s renewable energy policy. 

Much of the UK’s green energy is produced at offshore wind farms in the North of the country, while most of the demand for electricity is in the south of England. 

What’s more, the UK plans to build far more offshore wind farms, accelerating the pace of deployment by 25%, targeting 50GW of power produced from offshore wind farms by 2030.  

For context, currently the UK produces 14 gigawatts (GW) of offshore wind power. Offshore Energies UK, an industry body representing the sector, has estimated that to meet this target the UK would need to install more than one new turbine every day for the rest of the decade. 

This preference for offshore wind comes despite energy companies telling the government bluntly that onshore wind could produce an equivalent amount of energy at much lower prices, far sooner. 

This poses a key question, if speed is of the essence, then why are policy makers backing hard to build, inefficient and costly offshore wind projects? These projects could waste as much as 10GW of energy because of where they are located. 

The factors dictating where renewable energy can be produced are far less restrictive than that of other forms of energy production. Renewables are safe and non-polluting, and sources such as rooftop solar can be modular and small scale. Unlike power from fossil fuels or nuclear, there is no reason that green energy cannot be produced close to where it is consumed.  

Small is beautiful 

Institutional investors will inevitably start looking at compressed yields on large offshore renewable energy projects and will rightly rethink where they choose to invest when it comes to sustainable infrastructure. 

When this rethink happens, fund managers, trustees and investment advisors will need to change the perception that microgrids are too small to invest in, but instead find investment solutions that aggregate these projects. 

Microgrids can often command higher yields, and when aggregated, they can produce large amounts of renewable energy for the overall grid in an efficient and cost-effective manner.   

While microgrids are not a panacea for solving all our climate challenges, they have the twin benefits of reducing energy demand by efficiently delivering electricity with minimal loss in transmission and building in resilience into the energy system at a fraction of the cost of building offshore wind and nuclear power – the current preferred solutions in the government’s plans. 

Energy storage solutions for microgrids in the near term are moving ahead of similar solutions for utility scale renewable energy, meaning issues over intermittency and power regulation could be overcome with the right support. 

Another way to think about this issue is that this could help with the challenge of over or undersupply of electricity – a key problem facing renewable and nuclear energy production plugged into the grid.  

Unlike fossil fuel power plants that produce power at constant levels which can be regulated by reducing the amount of fuel burnt, renewable plants only produce power equivalent to their environmental inputs.  

If wind blows excessively, wind farms produce more electricity than demand and vis-a-versa. This creates instability in the price of electricity and can cause power surges. 

As renewables continue to account for a growing portion of the energy mix, microgrids offer an opportunity to bring the UK’s energy infrastructure in line with its net-zero ambitions.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap