Electricity grids are the veins of our electricity system. Without them functioning properly our electricity system will collapse. ‘Back in the day’, our electricity system was marked by big power plants – mainly gas or coal – that transported electricity via transmission lines to substations, where it was then distributed to consumers via distribution grids. But this has changed.
Electricity is increasingly generated by renewable sources. Renewable electricity is cheaper than fossil-based electricity and makes Europe independent from imports and therefore more resilient and less prone to geopolitical threats. However, renewable electricity changes the way our grid is configured, because of the need to incorporate multiple, distributed sources.
Forecasts expect that by 2030, 70 percent of renewable energy will be injected directly into the increasingly decentralised distribution grid. On the other hand, the way we consume energy changes. Heat pumps, electric vehicles and industrial electrification will increase both electricity consumption and our reliance on it.
In addition, the sun doesn’t always shine, and the wind doesn’t always blow, so the generation of renewables won’t necessarily happen when the electricity is needed, which makes additional flexibility and storage necessary. These massive changes require a rapid response by Europe’s transmission and distribution grids. 2030 is around the corner, so we need to act now.
Unfit for purpose
40 percent of the European distribution grid is over 40 years old and needs to be updated. The transmission capacity across borders must also be increased. The more integrated European electricity markets are, the cheaper the energy bill for consumers as the continent becomes able to pick and choose the most abundant or economical source. Hence, if the grid won’t be updated and extended, it will be expensive for customers and renewable energy will be wasted – a lose-lose situation. In other words, urgent grid investments are essential to decarbonise the European power system and ensuring security of supply.
The European Parliament’s own-initiative report “Electricity grids: the backbone of the EU energy system” picks up on these challenges and what is needed to modernise our electricity grid.
Firstly, the planning of the European cross-border electricity lines needs to be improved. The underlying legislative framework needs to be strengthened. There is still too much of a national focus rather than improving the cross-border angle. A stronger involvement of the European energy regulator, ACER, will bring the European focus to grid planning. Furthermore, distribution grids must play a bigger role in the relevant planning framework and shall also be able to achieve the so-called PCI status (Project of Common Interest).
Who pays?
Secondly, there is the issue of financing. The European Commission estimates that by 2040, EUR 730 billion will need to be invested in distribution grids and EUR 472 billion in transmission grid infrastructure. This is why public EU funding such as through the Connecting Europe Facility for Energy (CEF) must be guaranteed and increased.
The recently published proposal on the EU’s Multiannual Financial Framework (MFF) foresees almost a sextupled amount of funds compared to the current envelope. However, within this new CEF-E, electricity grids will now unsurprisingly compete with a huge number of hydrogen projects or projects related to carbon capture and storage. In addition, the increased investment need for distribution infrastructure will need to be accounted for. While smart electricity projects may already be financed through CEF-E – as long as there is a cross-border dimension – financing needs go way beyond. There are diverging opinions whether CEF-E is the right funding mechanism for distribution projects – both legally and with regards to the application procedure. After all, it doesn’t matter if one applies for 1 million euro or 1 billion euro of funding, the procedures remain the same. Therefore, you might find it cumbersome to apply as a TSO or a big national DSO, for smaller and medium sized DSOs it might simply seem overwhelming to deal with.
Nationally managed EU funds like the Cohesion Fund or the Recovery and Resilience Facility are in theory also available for funding grid infrastructure. In practice, they are underutilised or used for other projects. Therefore, it must be ensured that the Member States will make these funds available for grid modernisation, enhancement and build-out. So why not earmark a certain amount of these funds to be spent in infrastructure – say, for each Euro that funds a renewable generation project, a certain percentage of that amount should be spent in infrastructure. This way, easier access to funds could be granted at national level.
Another approach for a funding instrument could be the creation of a dedicated EU grid facility, which could be fed by a small percentage of Member States’ ETS revenues and then made available to fund grid projects on distribution level. The merit in this idea would be that its structure and application procedure could by design be made less complex, less complicated and therefore more accessible to smaller and medium sized DSOs.
One might argue that distribution grids are rather a national business – why do we need to create a facility for decentralised grids at all rather than leaving it to the Member States? Well, firstly, the generation of renewable electricity is a common European goal, secondly it is mainly fed into the distribution grids and thirdly, as mentioned above, national EU funds already exist, but are underutilised. And apart from that, many policies that are in place to reach our climate and energy targets change how we consume electricity: charging of electric vehicles or the electrification of household heating, including heat pumps, just to mention a few.
However, when it comes to increasing CEF-E, guiding Member States to use more funds for grids, or even creating new instruments, the big question remains: How much opposition will we face from the Member States? The upcoming MFF negotiations will certainly tell us how serious the national governments take electrification and how much willingness there is to come one step closer to a true Energy Union.
What is not to be forgotten in the entire equation of financing is private investment, which consequently should also be increased, no doubt. Therefore both the EU and the Member States must set the right environment by providing market-oriented conditions and limiting the investment risks. Member States can encourage private investments by providing risk mitigation tools or Member States guarantees, the Commission and the European Investment Bank can provide for de-risking and initiatives and tools. And most importantly for investors but for every actor involved is ensuring reliable supply chains. If supply chains are not working properly, delays and uncertainties are inevitable – not a very attractive condition for investments.
A quick word on investments as such. Long awaited but eventually born is the Commission’s guidance on anticipatory investments. Guidance that allows the system operators to make forward looking investments, giving them more certainty, that should be approved by the regulatory authorities. If well implemented, this could really help to make these investments happen in a more efficient manner.
Digital innovation
Thirdly, digital and innovative technologies must always be considered as alternatives to grid expansion. The deployment of so-called grid enhancing and innovative technologies as well as the digitalisation of our grids should be incentivised. These technology options are often a cheaper and faster alternative to building new lines. Not to mention that upgrading an existing line might be done much faster as it could spare the hassle of going through lengthy permitting procedures and all the shenanigans that come with that.
There is even more exciting news. Making use of digital tools and data sharing can enable flexibility through local flexibility markets. Flexible connection agreements are the low hanging fruits. But wouldn’t it be great if everyone could decide in real-time when to sell their flexibility? With all the digital excitement aside, it can certainly not replace grid expansion – however comparing costs and benefits of both options for each case would certainly be worth the effort.
In both cases, adding hardware or digital solutions, there have been many events in the recent past that have shown that there is another dimension to investments, cost benefits or efficiency: the issues of resilience and security have become a huge consideration when it comes to electricity grids and must not be neglected. Grid equipment must be secure; digital and physical grid equipment must be resilient against cyberattacks, sabotage or extreme weather events. The good news is that the EU already has updated its legislative frameworks, such as the cybersecurity and related network codes, and legislation, such as the NIS 2 Directive and the Cybersecurity Act. Implementation is now key, and so is cooperation between regional, national and EU levels.
A lot has been done, but a lot is still to be done. Eyes are now on the Commission and Member States. In this political climate, we are at the crossroads – will the Grids Package bring us one step closer to a true Energy Union or will we fall back into national nostalgia?
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