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Smart Grids

More efforts needed
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In this report

After declining for the fourth consecutive year in 2020, constrained by the Covid-19 pandemic, investments in electricity grids are expected to grow by 10% in 2021 with rising infrastructure spending in Europe, China and the United States. Ambitious expansion and recovery plans are being included in policies to achieve more resilient and digital grids, as part of the drive to achieve carbon-free electricity generation.

But the level of grid investment in the Net Zero Emissions by 2050 Scenario triples by 2030, especially for smart grids and digital investments, which should account for around 40% of total investments in this decade.

Investment spending in electricity networks, 2016-2020 and 2026-2030 in the Net Zero Scenario

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Investment spending in electricity networks by region, 2016-2021

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Tracking progress

A smart grid is an electricity network that uses digital and other advanced technologies to monitor and manage the transport of electricity from all generation sources to meet the varying electricity demands of end users. Smart grids coordinate the needs and capabilities of all generators, grid operators, end users and electricity market stakeholders to operate all parts of the system as efficiently as possible, minimising costs and environmental impacts while maximising system reliability, resilience and stability. 

Smart energy systems incorporate a series of other energy integration technologies such as energy storage and demand response systems. However, despite being directly connected to smart grids, they are independent from them and therefore deserve separate technology tracking. For more information on these technologies, please refer to the demand response and storage sections. 

Electricity grid investments are expected to reach ~USD 290 billion in 2021, recovering from 2020 and even surpassing the 2019 level of ~USD 270 billion. Sustaining the falling trend of the previous four years, most of the 2020 decline stemmed from lower investments in China and several emerging markets and developing economies (EMDEs), which more than outweighed increases in the United States and Europe. However, the considerable expansion plans expected for 2021 are likely to reverse this trend. 

In China, most of the drop in 2020 was in the electricity distribution sector, as targets for rural power grid expansion had been met and focus shifted to transmission, which represents a smaller share of grid investments. However, with 2060 net zero goals on the horizon as well as an ambitious 14th Five-Year Plan for renewables, state-owned utilities’ impressive expansion plans are expected to trigger investments.  

The pandemic further weakened the financial situation of some distribution companies in EMDEs, which had already been undermined by governments’ limited fiscal capacities and higher financing costs, particularly state-owned utilities that had taken on greater debt in recent years. Investments in electricity networks in these countries fell 15% in 2020, to ~60% of the 2016 level.

Spending cuts also affected smart grids and digital devices, especially those benchmarked against other regions. For instance, overall EMDE investments in smart meters totalled less than USD 2 billion per year over the past five years, while advanced economies spent over USD 10 billion annually. 

In Europe, grid expansion plans for 2021-2030 provide the foundation for increased investment, supported by economic recovery schemes. While the European Commission’s 2030 climate ambition plan released in September 2020 foresees annual grid investments of ~USD 70 billion during 2021-2030 (more than double 2011-2020 spending), investments are set to be even higher owing to its July 2021 Fit for 55 plan, which aims for emissions in 2030 to be 55% lower than in 1990 (compared with the previous plan’s 40% reduction). 

In the United States, the proposed American Jobs Plan contains measures to build a more resilient electricity transmission system as part of the drive to achieve carbon-free electricity generation by 2035. The scheme includes creation of a targeted investment tax credit and efforts to better leverage existing rights of way along roads and railways for high-voltage lines.  

These kinds of measures underline the broader importance of policies and regulations to mobilise network investments by incentivising connections to the grid, especially for new wind and solar projects; simplifying procedures to make public land available for electricity infrastructure; speeding up response times; and rethinking authorisation procedures for minor categories of projects.

The digital revolution in the economy is also impacting the electricity sector. More and more governments, utilities and manufacturers are embracing digital technologies, from deploying hardware assets such as smart meters, digital substations and smart EV charging infrastructure to using software solutions such as artificial intelligence, digital twins, dynamic line rating and blockchain technology. 

After the Government of India successfully advanced smart grid deployment and mobilised investments of ~USD 300 million through its National Smart Grid Mission (launched in 2015), in 2021 it introduced a Revamped Distribution Sector Scheme at a cost of more than USD 40 billion and gross budgetary support of more than USD 10 billion.  

As part of stimulus measures for economic recovery from the Covid-19 crisis, the scheme aims to improve power supply quality and reliability for consumers through a financially sustainable and operationally efficient distribution sector. It provides financial support to upgrade distribution infrastructure with innovative solutions such as pre-paid smart metering and artificial intelligence, machine learning and blockchain technology to help distribution companies reduce distribution losses and improve demand forecasting to better integrate renewable energy. 

European and US utilities with ambitious strategic plans to become digital companies lead the way in spending, innovation and deployment for smart electricity networks. For instance, the European utilities Enel and Iberdrola recently established new platforms and hubs. Enel launched Network Digital Twin, a digital platform that creates up-to-date and accurate virtual replicas of physical power networks and their components and system dynamics, allowing for better network operation and design, integration of distributed energy resources and workforce management. Meanwhile, Iberdrola created the Global Smart Grids Innovation Hub, a global innovation and knowledge centre that aims to be a world reference for smart grids. The centre acts as a platform to stimulate innovation, combining the company's technological capacities with those of its collaborators: suppliers, universities, technology centres and startups. 

In 2020, the State Grid Corporation of China also announced plans to invest ~CNY 25 billion (USD 3.5 billion) in digital infrastructure to support tech-based projects as part of efforts to revitalise the economy. In 2021, together with China’s National Development and Reform Commission, it announced a pilot project to develop a green-energy trading platform based on blockchain technology.  

Electricity network manufacturers such as Siemens, General Electric and Hitachi ABB Power Grids have made digital technologies the core of their business. For instance, in 2021 Hitachi ABB Power Grids launched its SVC Light Enhanced Solution, which combines two grid stabilisation technologies – STATCOM and supercapacitor-based energy storage – to provide both active and reactive power to transmission systems. Using grid-forming controls, this digital technology remedies increasing inertia shortages and rising demand for power quality, allowing greater renewable energy integration as well as power grid stabilisation.

It will be essential to expand, modernise and digitalise electricity networks to pool all available flexibility resources to support the Net Zero Emissions by 2050 Scenario’s rapid low-carbon electricity supply transition. 

In this scenario, the need for hour-to-hour flexibility in 2050 is four times higher, with batteries and demand response systems providing around 50%. But these solutions will not be able to provide flexibility services without smart grid technologies, for which funding must increase sharply: annual electricity network investments need to nearly triple to an average of almost USD 800 billion by the late 2020s, and investments in digital assets must increase eightfold, at more than twice the speed of total investments in transmission and distribution.  

These investments – in assets and software to support smart metering, network automation, EV charging and other applications – should combine connectivity, interoperability and cyber-security, leveraging the internet of things to enhance electricity system management while making utilities’ decision-making more informed and efficient. 

Not only the level but the speed of investment mobilisation must increase, as spending on transmission and distribution networks must occur in parallel with investments in electrification and renewables so that new demand and generation capacity can come online without bottlenecks. Funding for technologies and systems that increase demand flexibility are also needed, as discussed in the demand response section.

Around the globe, the extreme weather events of 2021 highlighted the energy security risks that climate change is introducing, and the importance of investing in more resilient electricity grids. Due to winter storms in Texas, cyclones in Fiji and Indonesia, and floods in Germany and China, millions of businesses and homes were without power for days and even weeks.  

But electricity systems are also struggling to cope with severe strains caused by heatwaves and low rainfall. A range of countries, including the United States, Canada and Iraq, were severely affected by unusually high temperatures in 2021. At the same time, lower than average rainfall and prolonged dry weather are raising concerns about hydropower output in various parts of the world, including Brazil, China, India and North America. 

These challenges highlight the urgent need for strong, well-planned policies and investments to improve electricity system security. Electricity systems must be made more resilient to the effects of climate change – and more efficient and flexible as they incorporate larger amounts of solar and wind power, which will be critical to reach net zero emissions in time to prevent even worse climate change impacts.

In the last 20 years, especially in advanced economies, the traditional mindset of electricity networks regulators has been to avoid the risk of over-investing in well-meshed electricity systems in which a small number of large utility-scale generators supply electricity for slow-growing consumer demand. This is not the situation anymore, however, as variable, decentralised and small renewable generators are rapidly penetrating the system and demand growth expectations are rising quickly owing to electrification of the industry, buildings and transport sectors.  

Considerably higher investments are therefore needed in electricity grids, as they are the backbone of this profound transition, being the principal enablers of flexibility and supply security. Legal and regulatory frameworks should shape a change in mindset, avoiding the risks of under-investment and bottlenecks by improving integrated planning processes (for supply, demand and flexibility) and establishing adequate remuneration to incentivise smart grid deployment. 

Governments, regulators and utilities should facilitate the adoption of novel assets for distribution system operators, including technical options such as advanced voltage and reactive power controls, closed-loop operations and non-wire alternatives such as flexibility services and distributed stand-alone storage systems. They should also explore advanced tools for cost-benefit analysis of investments in managing distributed energy resources. 

Governments, regulators and utilities should define the roles and operational boundaries of all relevant stakeholders and foster new business models, including those that involve aggregators, virtual power plants and circular solutions, to create a more efficient and sustainable grid. 

Governments can collaborate with equipment manufacturers, network owners and operators, utilities and third parties to create “sandbox” environments in which new distributed energy business models can be operated in real-world conditions to identify the least-cost integration options to scale up operations. Lessons learnt and policy messages of existing sandbox projects from several countries are highlighted in a series of smart grids case studies from ISGAN.

Circular solutions such as recycling and reusing equipment, and substituting recycled materials for new ones, can reduce lifecycle environmental footprints and increase safety, especially when critical minerals, notably copper, can become scarce and geographically concentrated. Equally, innovative and circular solutions should be applied to processes and wastes to improve operational efficiency in grid maintenance while fostering socio-environmental sustainability. 

Network stakeholders at all levels should develop joint platforms for technology appraisal and standard-setting (for physical and digital assets), and for exploring potential grid governance conflicts at various levels, particularly in the link between distribution and national network owners. 

Although market structures vary, it is necessary to revise roles and responsibilities at all levels of grid governance as data and physical systems become more granular and distributed, and as more participants become involved. 

As new services and technology platforms develop, the need for devices to communicate and operate seamlessly across all levels of the grid increases. Central to smart grids is the capability for technologies to be deployed in one part of the energy system and interact with elements in different sectors and geographies, and to be used by various stakeholders all along the electricity value chain. 

Technical roadmaps that lay out the necessary evolution of standards and interoperability of both digital and traditional electricity infrastructure will be required as the energy system continues to evolve. For instance, in 2021 the European Distribution System Operators for Smart Grids proposed a set of comprehensive indicators to monitor the smartness of grids at the distribution level. 

Resources
Acknowledgements

External reviewers: Jochen Kreusel (Hitachi ABB Power Grids); Rodolfo Martínez Campillo (Iberdrola); Viviana Vitto (Enel). 

Analysis