COLUMN-The surest electricity investment? Cables: Gerard Wynn
By Gerard Wynn
LONDON May 2 (Reuters) - The electricity transmission sector has escaped the kinds of competitive pressures stalking energy supply technologies, offering investors less risky, solid growth, but they require massive expansion and upgrade projects that often face delays.
Cut-throat Chinese competition has crushed margins in renewable energy manufacturing, creating a cycle of falling subsidies and rising overcapacity for wind turbines and solar panels, which has led to layoffs and bankruptcies.
Meanwhile, cheap shale gas has undercut the economics of renewable rivals in the United States, and nuclear power throughout the developed world faces a continuing Fukushima headache.
The electricity transmission sector faces less pressure - the case for power distribution is unavoidable regardless of the energy supply technology. There is clear demand to upgrade, expand and replace ageing infrastructure, coupled with high-value assets and less Asian competition.
In the International Energy Agency's central policy scenario, over two-fifths of global investment in the power sector will go to transmission and distribution through 2035.
While shares in solar and wind manufacturing leaders Vestas and First Solar have dived nearly 95 percent from mid-2008 highs, grid operators have fared better. Britain's National Grid is up 6 percent since mid-2008.
Caution is needed, however, as shown by recent woes at Siemens' power transmission unit following German project delays it blamed on the regulatory approval process.
Britain, the Netherlands, Germany and China have all failed to roll out grids in line with growing output of wind power, but these are only delays to projects that will ultimately be completed.
For example, Britain's grid operator at times has had to pay wind farms in Scotland to switch off as a result of inadequate transmission capacity to cities in England.
But parliamentarians have piled on pressure to resolve the congestion: "It is utterly unacceptable that large costs are incurred ... because the system cannot deliver electricity to where it is needed," they said in a report last September.
"The UK electricity transmission system needs to be updated. It is no longer good enough to patch up the old system."
British energy watchdog Ofgem estimates that the UK needs 32 billion pounds ($51.9 billion) of investment in transmission assets by 2020.
In Germany, Dutch grid operator TenneT has struggled to raise capital to develop grids to connect to burgeoning offshore wind farms, leading to fears for the country's renewable energy targets.
The delays stem both from liability rules for broken power lines, where grid operators are nervous about having to compensate wind farms, and the cost of converting to DC power.
In the case of offshore wind, remoteness from demand sources makes direct current (DC) transmission more cost-effective than AC, but it's still less proven in integrated grids.
The government may enlist the help of development bank KfW, while TenneT says it plans to invest 14 billion euros ($18.5 billion) over the next 10 years in Germany and the Netherlands.
In another similar approach, the EU's Project Bond Initiative is investigating how to cut investment risk in energy transmission projects, to drive capital market finance involving the European Investment Bank.
In China, central authorities have added new scrutiny over the pace of wind project permissioning to ensure that the grid keeps up in Inner Mongolia.
Some expansion simply comprises laying cables to connect new sources of supply, including fossil fuels and renewable energy.
Illustrating the size of individual deals, German utility E.ON last week awarded a 736 million pound ($1.2 billion) cable installation contract to UK construction firm Balfour Beatty to connect its Humber Gateway offshore wind farm to the electricity grid.
On a bigger scale, construction could expand into vast supergrids such as linking wind power production across northwest Europe from Ireland to Norway or the proposed Desertec imitative connecting solar power in North Africa to mainland Europe.
But such initiatives are decades from completion, if at all, and are tied to countries' strategies and ambitions for deploying expensive offshore wind and solar power.
The advantages of a supergrid would be to ease congestion and smooth supply, thus saving on backup generation. The challenge is cost: the European Commission calculated the cost of an offshore supergrid linking the North and Baltic seas at 90 billion euros.
Operators in Denmark and Britain on Monday said they would review a possible link to handle offshore wind, in a potential bilateral deal more achievable in the near term than grander projects.
At the higher technology end, a more modern grid enables more generation of low-carbon, intermittent and decentralised power. Upgrading grids creates various investment opportunities.
To protect grids from swings in voltage, developers must install voltage control systems ("reactive compensation") of the kind UK-based EDF Energy Renewables contracted on Monday from S&C Electric Company for a UK wind farm.
Such automated protection is also required against faults, because more local generation in a distributed network creates higher currents at the lower voltage end of the network.
That requires fast detection techniques to operate alongside circuit breakers - technology development being funded by Britain's Energy Technologies Institute, for example.
Another feature of a decentralised grid is that electricity must flow in many directions rather than, as traditionally, from a central power plant to a city or factory. That requires automated switching devices to divert electricity in one direction or another.
The more intelligent grid entails such automated self-monitoring of a network, independent of a central back office.
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