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October 20, 2023

Why decentralising is key to a resilient energy system

The energy transition isn’t just about building more renewables – investors also need to help make the move to a smarter, more flexible power grid.

decentralised energy
(Photo via Shutterstock)

The UK’s energy mix, long dominated by fossil fuels, is undergoing a rapid transition. In 1991, just 2 per cent of its electricity was generated using renewables. Today, the proportion stands at nearly half, with a record 47.8 per cent of the energy mix derived from low-carbon sources in the first quarter of 2023. It’s an encouraging trajectory, though we’re still a long way from net zero. The government has said it aims to shift all electricity generation to clean sources by 2035.

As part of these efforts, we can expect offshore wind and other low-carbon technologies to be scaled up, alongside the phase-out of coal-fired power stations. However, fossil fuels and renewables aren’t straightforwardly interchangeable, and the energy transition isn’t just about replacing one technology with another.

As Edward Lees, co-head of the Environmental Strategies Group at BNP Paribas Asset Management, puts it: “Getting those big utility-scale renewable projects connected to the grid is a massive issue.” The transition, then, will need to involve a wholesale reimagining of the grid, from a centralised model to something more localised and dynamic.

According to the International Renewable Energy Agency (Irena), the “three Ds” of the energy transition are decarbonisation, decentralisation, and digitisation, which together could be worth an estimated $115tn. That means “greening the grid” is only part of the picture – our future energy systems will also need to be designed for resilience and flexibility. We’ll need back-up in the face of outages, which may become more prevalent amid increasing climate events and cybersecurity breaches.

Decentralisation is key here, giving communities a proactive role to play in maintaining their own energy security. The classic example might be the homeowner who places solar panels on their roof, attracted by falling panel prices and the promise of energy independence.

“You’re not going to have individual households with their own wind tower or geothermal drill hole,” points out Lees. “Even if you have a heat pump, that’s still going to be powered by electricity that comes centrally from the grid. I think that sort of classic decentralisation really comes down to residential solar installations and batteries.”

[See also: Even in a bear market, thematic investing can be a green catalyst]

As domestic solar becomes more popular, we’re likely to see an uptick in local energy networks – “microgrids” that produce and distribute electricity at a community level. These microgrids would be mostly self-sufficient, engaging with the national grid only when their overall power dips too low or when they have a surplus.

According to Lees, a number of companies are leaning into this idea, for instance by investing in the software that’s needed to bundle local assets into networks. One example is US residential solar company Sunnova, which is looking to expand its distributed energy service platform from homes to whole communities.

“You might have 1,000 households that are bundled together in an area,” says Lees. “Some of them might have excess power at a point when others are in deficit, so they share. Software helps you figure out how to do that, and there are huge advantages to doing this because you get smoothing out, you get resilience.”

Under a typical centralised model, utilities are vulnerable – when one fails, a whole area may face blackouts. Within a microgrid, says Lees, “it’s much harder to really stymie a system.” Even if 100 of your 1,000 assets are impacted, you still have another 900 supplying your network. It’s also more efficient than the national grid, in which around 10 per cent of electricity is lost in transit and network costs add almost a quarter onto the average electricity bill.

There are some complicated issues at play here, and companies like Sunnova have faced pushback from the utility industry. However, this is a significant growth area, with the residential solar market consistently ranking as one of BNP Paribas’ Environmental Strategies Group’s most attractive sub-themes. “The whole ecosystem around that is very investable,” says Lees, referring not just to the software companies, but also the manufacturers of solar panels and inverters, and the companies supplying the services to install them.

Perhaps most interesting from an investment perspective are battery manufacturers. Despite their environmental advantages, renewables are notoriously intermittent – the sun doesn’t always shine and the wind doesn’t always blow. In the absence of some kind of storage system, there can be corresponding fluctuations in supply.

As batteries become more long-lasting, though, businesses and individuals should become more comfortable with renewable energy. One promising company in this field is Form Energy, which has developed an iron-air battery with 100-hour storage. Lees says it’s too early to say whether this is a “tech holy grail,” though he thinks that if it can scale effectively, it could be “transformative.”

It’s clear that our electricity networks are fragile. To say as much no longer sounds like catastrophism. Recent events like the fires in Hawaii, with the associated black-outs and loss of life (likely started by utility power lines), show that decentralisation, along with the tech needed to enable it, could foster both resilience and safety as we prepare our energy systems for the future. And investors can play an important role in enabling that.

[See also: The case for sustainable thematic investing]

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