“Greening” the grid: Generate more electricity using clean power

Renewable energy generation from wind and solar technologies lies at the heart of the energy transition. Shifting the power sector away from fossil fuels and towards renewables will not only reduce a major source of emissions, but also enable the electrification of other sectors to reach their full abatement potential. The distributed nature of renewables may also improve energy resilience for remote communities and expand energy access in developing markets.

Globally, we project a significant buildout of wind and solar infrastructure over the next three decades. To reach global ambitions of net-zero greenhouse gas emissions, the International Energy Agency estimates that at least 70% of electricity must come from solar and wind generation by 2050.¹ As seen in Exhibit 1, the power sector generated 34% of global emissions as of 2019. Wind and solar supplies just 2% of global energy demand² and 10% of total electricity generation.³ The International Energy Agency’s forecast suggests that global annual additions of solar and wind must accelerate to reach 630 gigawatts (GW) and 390 GW, respectively, by 2030—about four times the capacity installed in 2020.⁴ By comparison, the United States consumed about 438 GW on average in 2020.⁵

However, renewable capacity growth is limited by the challenges of transmission, distribution and grid stability management. Locations where the wind blows strongest and the sun shines brightest may not be close to centers of energy consumption. Renewable assets require extensive permitting approvals and add complexity to the grid as operators must work to balance supply and demand load. Interconnection queues are severely backed up, resulting in calls for regulatory reform. As renewables come online, transmission lines need to be built out, modernized, and optimized to accommodate bi-directional power flows, while small modular projects called distributed energy resources (DERs) can help postpone the urgency to build more transmission infrastructure.

The components and parts of renewable infrastructure could also become an obstacle to clean power growth due to raw material supply constraints and geopolitical challenges. Scaling wind and solar will increase demand for critical minerals, requiring increased mining and recycling of needed materials. Many energy transition minerals are also geographically concentrated in conflict areas, and geopolitical tensions can pose risks for renewable developers if the supply chain fails to diversify.

Cost, Policy and Corporate Demand Drivers

Nevertheless, we see the buildout of renewable energy capacity and related grid infrastructure as a growing opportunity. Annual investment must double from current levels, reaching $1 trillion of annual spending on physical power generation assets and $820 billion on the power grid,⁶ representing about a quarter of the annual net-zero investment needs from 2021 to 2050.⁷

Cost competitiveness, policy incentives, and corporate procurement are among the largest drivers of renewable energy opportunities. Over the past decade, the cost of electricity from utility-scale solar has fallen by 85%; and the costs of onshore and offshore wind have dropped 56% and 48%, respectively.⁸ Even without subsidies and incentives, renewable generation is currently cheaper than fossil fuels in most parts of the world when compared using the Levelized Cost of Energy, which measures the costs of a power plant including initial capital and ongoing operating expenses.⁹ As investors have grown more comfortable with the risks associated with renewable energy projects, they have also brought down the cost of capital for construction-ready and operating renewable assets.¹⁰ Technological improvements, and the declining “soft costs” of project development and operations, are expected to contribute to further cost reductions.

Renewable adoption is supported by government incentives and regulatory mandates. In the U.S., state-level renewable energy requirements have driven almost half the growth of clean generation since the early 2000s.¹¹ At the federal level, the Inflation Reduction Act extends and modifies existing production and investment tax credits for renewable energy generation through 2032—providing long-term certainty for the market—and adding sweeteners for projects with domestically manufactured components, located in communities affected by the energy transition, or serving low-income communities.¹² It is estimated that these renewable tax credits total between $73 and $177 billion¹³, while the Infrastructure Bill allocates $65 billion for transmission infrastructure.¹⁴ With its “Fit for 55” package, Europe seeks to reduce EU emissions by at least 55% by 2030, almost doubling the current share of renewable power to more than 40%.¹⁵

While electric utilities are expected to be the largest owners and operators of renewable assets, direct corporate energy procurement has increased significantly over the past decade, with corporations entering into long-term power purchase agreements directly with clean energy projects. Over 340 corporations have pledged to procure 100% of their operational energy needs from renewable sources by 2050.¹⁶

Investment Activity Across the Renewable Value Chain

We have surveyed managers investing across the renewable value chain. For investors interested in direct exposure to renewable projects, we believe investing in development-stage renewable assets—particularly in niche markets such as commercial and industrial solar—offers a compelling risk-return profile over utility-scale operating assets. In addition, companies offering operational efficiency solutions to accelerate the adoption of renewables are particularly attractive investments for venture and growth-stage investors, in our opinion. We prefer managers with domain expertise in energy markets and strong networks with incumbents, notably utilities, to provide deeper market insights, customer introductions, and potential exit opportunities.

Renewable Power Generation

Renewable power generation projects such as wind and solar represent proven technologies that are mature and commercially deployable. Opportunities exist across asset classes—investors can gain exposure to the buildout of new projects or existing renewable assets via equity or debt participation in projects, development companies, or electric utility companies. We expect investments made earlier in the development of assets to generate more compelling returns due to the higher risk profile, with possible attractive exit opportunities to investors seeking exposure to stabilized operating assets with steady yields. However, infrastructure investors must be well-versed in interconnection queues and developers. In our view, developing smaller-scale DER assets also provides niche opportunities for infrastructure investors to possibly generate higher returns with investment-grade energy purchasers such as commercial and industrial counterparties.

In the public markets, investors can gain exposure to companies that manufacture essential components and parts for renewable assets such as photovoltaic cells, solar modules, inverters, and wind turbines, resulting in a universe that is heavily concentrated in utilities, industrials, and technology. In general, these markets can be heavily commoditized and dominated by low-cost and low-margin manufacturers, making them a less appealing part of the market.

Operational Efficiency

While wind and solar are proven technologies, their ability to scale will rely on innovative business models and enabling technologies, which we believe are attractive areas for private equity investors. The complexity of the grid system provides opportunities for software and hardware-enabled software solutions to improve the efficiency of existing infrastructure and reduce soft, non-physical costs for new assets to come online. Opportunities exist across the value chain, including project development, operations and management, and grid modernization:

1. Project Design, Engineering, and Development: Companies that target pain points for renewable project development and seek to lower soft costs.

• Software programs can assist with site evaluation, design and engineering. Some examples include software for rooftop solar design and sales, and digital platforms that support project lifecycles for utility-scale solar.

• Solar financing solutions and novel business models can improve access to renewable power. For example, low-income and underserved communities can benefit from innovations that lower the upfront costs of DER installations and facilitate the installation of energy efficiency upgrades.

2. Operations and Management: Companies that lower operational costs and improve renewable asset efficiency by using predictive data and asset management software.

• Hardware-enabled software and digital programs can assist with site inspection and predictive maintenance. For example, some companies use drones to inspect, monitor, and maintain utility-scale solar plants.

3. Grid Modernization: Companies that seek to improve utilization rates of existing transmission lines and management of increasingly decentralized, complex grid systems.

• Network enhancement technologies such as dynamic line ratings and flexible transmission systems support the physical transfer of power. For example, transmission monitoring systems can improve the utilization, resiliency and flexibility of high-voltage power lines.

• Grid optimization companies help with load prediction and line monitoring.

• Smart grids provide a network in front of and behind the meter that integrates sensors, smart inverters, and management systems. Smart grids provide real-time data to prevent faults, incorporate better demand-side management, and help monetize DER capacity to the grid.

Clean Power is a Critical Lever for the Energy Transition

Scaling renewable energy generation over the next few decades is a critical lever to reduce greenhouse gas emissions and credibly enable the prospect of electrifying many fossil-fuel-dependent industries. Technology and capital will be needed to support capacity growth as proven solutions like wind and solar generation can only be optimized in conjunction with modernized power grids.

This article is part of the Plugging into the Energy Transition series. Click here to download the complete report.

1 IEA, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” last modified October 2021, https://www.iea.org/reports/net-zero-by-2050

2 Andy Lubershane, “Growth Opportunities in the next thirty years of climate tech,” Energy Impact Partners, 2021, http://www.energyimpactpartners.com/wp-content/uploads/2022/02/EIP-Growth-Opportunities-in-Climate-Tech.pdf

3 IEA, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” last modified October 2021, https://www.iea.org/reports/net-zero-by-2050

4 Ibid

5 Zach Stein, “Gigawatt (GW),” Carbon Collective, last modified June 20, 2023, https://www.carboncollective.co/sustainable-investing/gigawatt-gw

6 Mekala Krishnan et al., “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, January 2022, https://www.mckinsey.com/capabilities/sustainability/our-insights/the-net-zero-transition-what-it-would-cost-what-it-could-bring

7 Ibid

8 Michael Taylor et al., “Renewable Power Generation: Costs in 2020,” International Renewable Energy Agency (IRENA), 2021, https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2021/Jun/IRENA_Power_Generation_Costs_2020.pdf?rev=c9e8dfcd1b2048e2b4d30fef671a5b84

9 Marlene Motyka, “Renewable transition: Separating perception from reality,” Deloitte Insights, 2021, https://www2.deloitte.com/content/dam/insights/articles/US164461_ERI-Renewable-integration-as-penetration-grows/DI_ERI-Renewable-integration-as-penetration-grows.pdf

10 Michele Della Vigna et al., “Carbonomics: The dual action of Capital Markets transforms the Net Zero cost curve,” Goldman Sachs Research,November 2021, https://www.goldmansachs.com/insights/pages/gs-research/dual-action-of-capital-markets-transforms-net-zero-cost-curve/the-dual-action-of-capital-markets-transforms-the-net-zero-cost- curve.pdf

11 U.S. Energy Information Administration, “Renewable energy explained: Portfolio standards,” last modified November 2022, https://www.eia.gov/energyexplained/renewable-sources/portfolio-standards.php

12 Trevor Houser et al., “Relay Race, not Arms Race: Clean Energy Manufacturing Implications of the IRA for the US and EU,” The Rhodium Group, February 2023, https://rhg.com/research/clean-energy-manufacturing-ira-us-eu/

13 Ibid

14 pwc, “How energy and utilities can access infrastructure spending for clean energy and modernization efforts,” Accessed June 2023, https://www.pwc.com/us/en/services/consulting/cybersecurity-risk-regulatory/library/infrastructure-investment-jobs-act/modernizing/energy-utilities-infrastructure-bill.html

15 European Council, “Fit for 55,” accessed May 2023, https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/

16 The Climate Group, “We are committed to 100% renewable power, accessed May 2023, https://www.theclimategroup.org/about_re100