T he grid operators’ unprecedented capital expenditure requirements, as indicated in their long-term network development scenarios, must be supported through multiple funding routes. On the part of the regulators, there are rate revisions that must be considered to ensure borrowings make sense. Multilateral institutions’ funding may start playing a bigger role than before, especially for critical projects of bankability, such as grid reinforcements and interregional transmission links. Meanwhile, the changing nature of the grid expansion projects adds to the dimensions for the regulators and financiers alike – for instance, digitalisation and grid-scale battery storage are becoming vital and integral parts of grid management.

There is a combination of factors at play in aiding utilities’ financing requirements. These include rising debt issuance (based on green bonds), concessional funding, government budgetary support, equity sale, and asset divestment. Added push may come from private players’ engagement through different business models explored by policy and regulatory authorities. This chapter takes a quick review of some of the key pointers and developments in this context.

Global power grid investment reached about $326 billion in 2023 (BNEF, 2024). The investment outlook, based on the utilities’ capital expenditure plans, points to an acceleration in total spending. BNEF estimates point to a 13% jump in grid investments between 2023 and 2024. By 2026, the total investments could be over $400 billion. Notably, these investment estimates include high-voltage transmission and the lower sub-transmission or distribution networks. The latter segment assumes significance for many of the grid-connected renewable energy projects that require distribution grid connectivity.

The investment drivers are a combination of developments surrounding the power system, such as renewable power connectivity requirements, preparation for new demand/ load, reinforcements for weather impact, and backlog in asset renewal and refurbishments, among others. The thrust on grid spending varies across the regions. Using BNEF’s tracked grid investments covering 10 markets account for nearly half of the global grid investments and hold pointers about the possible direction in the investment commitments. This is more so because grid investment in these markets grew by 11% in 2023 and is projected to rise by 13% by the end of 2024. Growth in the rest of the world, in comparison, was 7% between 2022 and 2023.

At 16%, growth in the German grid’s capex was faster than any of the 10 tracked markets for the review period of 2020-2023. It was followed by Italy (12%) and Spain (11%) for the growth achieved in the same period. For the forecasted period of 2023-2026, the UK and Italy stand out for the rapid scale-up as indicated in the grid capex jump of 17% and 13%, respectively. In absolute terms of rise in investment spend, the Chinese grid capex ranks the highest as before, with a $6.1 billion worth of year-on-year increase in planned investment of 2024, compared to 2023. Local conditions/constraints, such as procedural approvals, material supply chain, and the like may still influence the actual grid investments. A few categories stand out in the planned power transmission investments. One of them is HVDC power transmission technology, which has lately emerged as the preferred option for long-distance evacuation projects typical of renewable energy. There are more HVDC projects announced than the visibility afforded by the pipeline under development. A rising number of transmission utilities’ long- term network developments refer to HVDC deployment. In 2023, about 46 new HVDC projects were announced for installation over the decade (DNV, 2024). Of particular note is the role of HVDC in tapping into offshore wind power projects, such as Germany’s long- term plan of 35 new HVDC lines to connect over 70GW of offshore wind power by 2045 (Enerdata, 2024), and the UK’s £60 billion HVDC supply chain framework (together with SSEN Transmission and ScottishPower Energy) to secure the cabling requirements till around 2030 (National Grid, 2024).

In parallel to asset disposal, various other measures are underway to supplement utilities’ financial resourcing. Terna, for instance, issued large volumes of hybrid debt securities whose equity component allows the raising of funds while protecting credit ratios. The Dutch TSO TenneT received government help in recapitalisation. The German government has been considering consolidation of the country’s fragmented power transmission structure to help boost the long-term funding in the business (Scope, 2023).

The government’s role in transmission has also been through grants and related concessional funding. The US federal funding under the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law, in addition to the Department of Energy’s project funding, are notable examples. There are other examples, such as India’s, where government funding is integral to the dedicated transmission corridors planned for renewable power projects. In the European Union, the Connecting Europe Facility (CEF) allocated $4.6 billion during the period 2014-2023 for cross-border transmission projects.

Government grants are generally dovetailed by multilateral funding in power transmission projects. In this investment space, a few multilateral development banks, such as the European Investment Bank (EIB) and KfW, have been the most active recently. European HVDC interconnector lines have been a major focal point in the EIB’s funding areas. In addition, grid upgrade projects are another key area of focus in some of EIB’s recent funding – notable examples of 2024 being $700 million for Iberdrola in Spain (power distribution) (BNEF, 2024), a co-financed project worth €600 million for a German grid upgrade project in April 2024 (SEI, 2024) and Terna’s €400 million grid reinforcement project in Italy (EIB, 2024).

The merchant power transmission model has been implemented in a few markets to help expedite the network development process. Merchant transmission projects (MTP) typically involve private developers who would build the project without the usually regulated revenue guarantees or long-term contracts with utilities or government authorities. The incentives lie in the potential arbitrage opportunity between power markets or regions with differing electricity prices. In this regard, the revenue streams tend to be volatile due to the dynamic market forces. The trade-off, however, is that they are less regulated and can side-step the barriers generally faced by regulated developers in the conventional/regulated settings.

The US power market is an important example of the role of MTPs. Unlike Europe, the US market has been lagging in the implementation of interregional HVDC transmission. Rising renewable energy penetration and grid congestion have made HVDC-based links even more critical for the US power system. Against such a backdrop, it is noteworthy that the MTP developers are driving almost all of the country’s HVDC project pipeline. Among other factors, it is seen that the MTPs of these US projects have circumvented the issue of cost allocation because the lines would be paid for by the individual power generators subscribing to the transmission capacity (S&P Global, 2023).

To be sure, the MTP model is subject to the suitability offered by the local power market norms. The business model presents one option through which policy authorities can engage private players to secure the investments rapidly and get the capacities online at the most feasible prices. For the most part, private participation in power transmission projects has often been through a route of getting competitively bid projects. The structures, in terms of contractual obligations and risk- sharing, vary. However, the goal is to attract private developers and operators to get the required transmission capacities faster than the historical rate of progress.

The model of independent power transmission projects (IPTP) gained currency in emerging market economies as policy/regulatory authorities sought rapid privately led projects for capacity addition. IPTPs are privately financed, developed and operate under independent ownership outside of the government-owned utilities. Some of the notable characteristics of such an arrangement include – public private partnership (PPP) ventures with the private entity securing a contract under design, build, finance and operate (DBFO) structure, long- term concession agreements to govern the terms, tariff-based revenue stream and potential scope for project-based financing.

In the UK, a variant of the IPTP model has been in place since 2009 to enable private investments in the offshore wind power segment. The country’s policy objective of net zero by 2050 relies on a potential capacity addition of 100GW from its offshore wind energy resources. The investments required to evacuate such a quantum of generation capacity are huge, hence the need for competition in the segment for efficiency (UK Government, 2023).

The UK’s regulatory framework provides an offshore transmission licence for a successful bidder of a competitively bid asset. The selected offshore transmission owner, also referred to as OFTO, thus owns, operates and maintains the designated offshore transmission assets. Also, to de-risk project delivery, the regulations allow the generation project promoters to retain the option of delivering the transmission connection as part of the construction process and operate the asset for a period of 18 months. It is during this 18-month window that the regulator carries out the competitive bidding process. The appointed OFTO receives a guaranteed revenue stream of 25 years, subject to the availability of the assets.

By the end of 2023, the OFTO network comprised 26 licensed OFTOs, compared to 22 in the previous year, and supported a total offshore power generation capacity worth 11.8GW (Crown Estate, 2024). As of June 2023, the UK energy regulator Ofgem put out a call for prospective investors to bid for an estimated £7 billion worth of offshore transmission that could be auctioned in bidding rounds of 2024 and 2025. This comprised about 10 OFTO assets (Ofgem, 2023).