The green investing space continues to expand at break-neck speed. Clean energy, specifically, has attracted significant investment. In 2022, green energy investments topped $1 trillion – topping oil and gas production investments for the first time. Experts estimate that 54% of all new energy generating capacity in the US in 2023 will come from solar.
The only problem? We’ve got nowhere to go with all that energy.
The US finds itself at a crossroads regarding climate change, policy, and investing. On the one hand, both the government and investors have demonstrated a willingness to throw money at the climate crisis. The infrastructure used to transmit energy produced by those investments, however, has fallen into disrepair. If we’re going to realize the promise of green investing, we have to build in a way that facilitates its use.
Though power lines dot the horizon with frequency today, the modern electric grid began all the way back in the 1880s. Over the century that followed, the grid grew up in sometimes messy ways. Debates over monopolies, piecemeal grid development, and concerns about energy costs shaped policies and practices that persist today.
Unfortunately, we seem to have left the American electric grid in a state of perpetual adolescence. The last major set of updates took place in the 1970s. More than 70% of the electric grid today is at least 25 years old. As the Atlantic reports:
Transmission lines are the circulatory system of America’s power grid. Lately, that grid has been very sick. The U.S. experienced 64 percent more power outages in the last decade than it did during the decade prior, according to a new study from Climate Central, a nonprofit research group. That’s in part because the grid is getting old. Most of the country’s roughly 437,000 miles of transmission lines were built in the 1950s or 1960s and designed to last 50 years; those lines are now reaching the end of their life in a hotter, stormier, and more extreme climate than they were built for.
A lot has changed since then. Renewable energy costs far less than it used to thanks to advancements in technology. Government and public interest in transitioning to a clean energy economy have turned palpable and urgent. Our crumbling electric grid cannot accommodate that demand.
Even if the electric grid’s integrity was stronger, it was never designed to facilitate the clean energy revolution nor ever-expanding demand for power. Its initial planning and construction catered to regional electricity titans, with grid investments made to support their operations.
The patchwork construction of the grid makes it exceptionally difficult to effectively and efficiently leverage green technology. Regions well-suited for solar or wind energy production will likely benefit from the ongoing green investing surge, but the areas most in need might get left in the cold. Iowa State University electrical engineering professor James McCalley explained to CNBC:
Multi-regional transmission designs enable the highest reduction in cost per unit of emissions reduction. […] Many mid-U.S. states have excellent wind resources, and the southwest U.S. has excellent solar resources, but the population is insufficient to use them. […] Population density rises as you get closer to the coasts. Transmission lets you build rich resources and use them at the heaviest load centers.
We’re not just talking about the energy consumed when you flip a light switch. At the end of the day, grid inefficiencies and lack of connection directly impact all corners of the green economy. How do we encourage electric vehicle adoption in a world where the grid can’t charge them all? Can we really address energy costs when infrastructure shortcomings make distribution more expensive? In what world do we ask large corporations to transition into greener energy consumption if they can’t get enough to make it work?
The need to improve the US electric grid is not new, but it is urgent. Both the scope of the work to be done and the required pace of development have reached perilous heights. Princeton professor and macro-scale energy systems engineer Dr. Jesse D. Jenkins put it:
Building new wind and solar at this clip also means building new power lines more than twice as fast as we have over the past decade. If we’re going to plug in millions of new electric vehicles and heat pumps and tap into the best areas to generate wind and solar power, we’re simply going to need a bigger grid—up to 75,000 miles of new high-voltage lines by 2035, enough to run the distance from Los Angeles to New York City and back 15 times, or circle the Earth three times.
It’s not impossible. From the 1970s through the 1990s, as electricity demand grew steadily, we built new transmission capacity at nearly the pace required now. If we can do that again, we unlock a massive backlog of some 1,280,000 megawatts of green energy projects stuck waiting for grid connections. If only half of those projects get completed, it would be all the new capacity we need to have by 2030.
Jenkins further explained that the risk is not just that the grid cannot support renewable energy transmission. It also makes it harder to get market buy-in for a full national transition to clean energy. In a world where demand is high but renewable supply falls short, natural gas and oil will gladly fill the gap. The fact that the grid has decayed to the point of ruin won’t matter. As these power sources already enjoy compatibility with the existing grid, their ability to maintain dominance in terms of market saturation and lobbying remain substantial.
Absent improvements to the grid, demand for energy feels more sustainable than the green technology that would cleanly solve it.
Government efforts to improve the US electric grid got a boost in late 2022, with the Biden administration announcing more than $13 billion in funding for grid improvements. Part of their initiatives specifically addresses permitting and project approval delays – previously a major roadblock in grid modernization. Paired with existing tax incentives and subsidies, the government has made a compelling case for a green energy transition.
Following the failure of the so-called “Green New Deal” in 2019, much of the funding for green initiatives came from the 2021 Infrastructure Investment and Jobs Act and the 2022 Inflation Reduction Act. Last week, a coalition of Democrats re-introduced the Green New Deal legislation with some modifications.
Though the group promoting the most recent iteration of the Green New Deal recently released a guide for those interested in green funding access, money alone cannot solve the problem. Anyone who has ever navigated government systems for securing funding knows that the glacial pace of distribution complicates and delays the impact of such spending.
And even if that funding was readily accessible, it still won’t be enough. The price tag on a greener grid grows higher every year. In 2019, estimates placed the cost of a grid update at $4.5 trillion. By 2021, that number surged to $7 trillion. Despite the money funneled into the green economy over the last several years, estimates now indicate the need for $4 trillion dedicated annually through 2030 to get the job done.
In the meantime, municipalities, universities, and large corporations grow ever more tired of waiting. The resulting development of “energy islands” serves as both a symptom of a problem and a potential excuse for delaying national grid improvements.
Whether talking about the US or the world, spending by the government, non-profits, and multilateral financial institutions fall well below what we need in the fight against climate change. Energy infrastructure might get more attention and dollars from such entities, but it will take private investors to truly move the needle.
Private investment in electricity is nothing new. Indeed, private companies and investors in the US control more than 80% of existing power plants and transmission infrastructure.
Investors already see the possibilities, according to a recent CIO article:
[G]lobal institutional investors with at least $500 million in assets are increasingly looking to infrastructure investments.
Infrastructure was the most commonly picked asset by investors in Nuveen’s third annual EQuilibrium Global Institutional Investor survey who plan to increase their alternatives allocations (chosen by 58% of investors). Those surveyed also indicated they are using infrastructure for a host of solutions. Private infrastructure was the most-selected for inflation-risk mitigation, and infrastructure debt was the top choice for allocations to alternative credit. In addition, infrastructure was picked most often as the asset class investors are prioritizing for their climate risk strategy.
Don’t underestimate the scope of the opportunity. If anything, the need for private investment to improve the US electric grid should demonstrate the sprawling, diverse nature of the green economy. Worried that the latest and greatest energy production technology might fail? No problem. You can still capture upside in the green investing trend by allocating part of your portfolio to the transmission infrastructure required for those green technology companies to scale.
Part of the appeal of investing in a greener grid comes from its multi-purpose function in an investment portfolio. Development Research Institute senior fellow and I Squared Capital managing director Dr. Sadek Wahba points out:
Green energy is an attractive investment prospect. Infrastructure as a category produces stable, competitive long-term returns. Investment in the power grid offers the additional advantages of technology exposure and participation in an expanding industry. With private sector support, and the necessary policy measures, it should be possible to create the robust, resilient, modern power grid the nation requires.
In addition to these benefits, investing in a greener grid may offer portfolios a hedge in the current global inflationary environment. As equities worldwide slid in 2022, infrastructure outperformed. Smart money predicts that trend will persist in 2023. As a report from CBRE Investment Management highlights:
With each passing earnings season, the pincers of higher inflation (on costs) and slowing consumer demand (on revenues) squeeze the margins of general equities. By contrast, infrastructure earnings are built upon a bedrock of contracted, regulated, and potentially inflation-protected returns. For example, a utility or transport company can earn from an asset for decades, while customer tariffs can rise with inflation. On top of this bedrock, infrastructure earnings should be growing due to a combination of countercyclical and secular investments.
To this end, investing in a greener grid isn’t just environmentally friendly. It’s another example of how green investing is savvy investing.
No one can argue that the US electric grid needs an update. Government leaders can only contribute so much. It will take private investors to bridge the gap between an inefficient and unreliable grid powered by fossil fuels and a greener, cleaner system.
Smart money already sees the opportunity and has poured into such projects. But investors should still exercise caution. As McKinsey pointed out last year, the rapid evolution of the US energy space mandates a shift in investment evaluation. Working with a financial advisor will help you make smart choices for your own green investment portfolio.
Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
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