Podcast: How to rewire an economy

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[00:00:07.930] - David Brett

Welcome to The Investor Download, the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett. Countries around the world are racing to meet ambitious targets to reduce greenhouse gas emissions to net zero, to avoid unchecked global warming.

[00:00:34.650] - News clip

And good evening from here in Maui, where we have just learned that this is now the deadliest wildfire in modern U. S. History. Firefighters on the Greek island of Rhodes say they expect wildfires to get worse today as temperatures rise.

[00:00:48.770] - News clip

Scientists say this heat that has been our top story for three weeks would have been virtually impossible without human driven climate change. New research.

[00:00:59.330] - David Brett

A huge part of the challenge in meeting those climate targets is decarbonizing our energy grids. Grids, currently fueled by gas powered turbines, will need to be switched to renewable sources, meaning substantial investment is needed. The International Energy Agency forecasts $800 billion worth of grid investment per annum globally post 2030. The investment is huge, and so too is the infrastructure build required, which places a massive amount of pressure on the company's tasked with executing policymakers' vision.

[00:01:35.780] - John Pettigrew

I think there's a real sense of purpose at National Grid. So, in fact, when we recruit people these days, what people ask about National Grid is about the future, about what's the role that we're playing in the energy transition and what we're doing to mitigate climate change.

[00:01:53.500] - David Brett

That's John Pettigrew, CEO of National Grid, one of the world's largest publicly listed utilities. It plans to invest up to 40 billion pounds over five years in upgrading grid assets it owns in the UK and US, vital to meeting a dramatic increase in electricity demand in the coming decade. UK electricity demand alone is forecast to grow by roughly 50% by 2035, driven by the decarbonization of heat and transport. To meet their spending ambitions, companies like National Grid will need both public and private investment, which is where investors like fund manager Ashley Thomas come in.

[00:02:36.130] - Ashley Thomas

Given the scale of the investment required, technologies that can potentially use the existing grid more efficiently is a win win for all stakeholders.

[00:02:49.170] - David Brett

But building the energy grid of the future is an easy feat. And the challenge being faced in the UK is being replicated around the globe. So what does it take to build the energy grid of the future? That's coming up in the next part of the show.

[00:03:09.800] - Announcer

On Apple podcasts, Spotify, or wherever you get your podcasts, you're listening to the Investor Download.

[00:03:16.900] - John Pettigrew

Most of our networks were built in the 1960s, where we were basically transporting energy from the north of the country where the coal mines were, to the south of the country, where most of the population is.

[00:03:26.740] - News clip

Your electricity supply starts with 200 power stations run by the Central Electricity Generating Board and the two Scottish boards. They are responsible for high voltage transmission through the lines of the National Super Grid electricity distribution boards covering every area of the country provide the power links to your homes and workplaces.

[00:03:50.250] - David Brett

But in a world looking to decarbonise away from fossil fuels and through the electrification of our energy grids, in the near future, the UKs will no longer be fit for purpose. Our grids will need to adapt to take energy from cleaner sources, such as remote offshore wind farms, as well as a multitude of smaller, decentralised solar or battery storage projects, including smaller scale distribution level installations in homes and businesses. So in London, and well out of the sight of residents, a revolution is taking place.

[00:04:26.320] - Ashley Thomas

Yeah. I went to see the second phase of the London Power Tunnels project.

[00:04:31.250] - David Brett

Due for completion in 2026, the 2 billion pound London Power Tunnels Project is a major upgrade of London's electricity network.

[00:04:40.730] - Ashley Thomas

For me, it was quite remarkable. The entrance of the site that I went to, the head house, and the tunnel shaft was in the old Kent Road. And I saw an old Victorian era gas holder that had been there for over 100 years and had only been decommissioned in the past 20 years.

[00:05:01.580] - David Brett

The gas holder is an iconic landmark in London. It rises above one of the most famous cricket grounds in the world, the Oval, the scene of some of cricket's most famous moments.

[00:05:14.720] - News clip

Here's the applause for Bradman as he comes in.

[00:05:17.720] - News clip

Bradman bowled Hollies naught.

[00:05:22.500] - News clip

It's all over England have regained the Ashes. Australia are all out for 348 on a golden evening at the Oval. 604 and final test wicket for Stuart Broad. All of the Oval, all of England, rise to one of its finest.

[00:05:41.580] - Ashley Thomas

And actually, when I look at the London power tunnels, it has the potential and should have the ability to be there and last, similarly, for another century.

[00:05:52.440] - David Brett

The vital work will help keep Londoners connected to safe, clean and reliable electricity supplies. And in an attempt to future proof the energy network, national Grid and its contractors are working hard up to 50 metres below London's busy streets. To get there, workers have to take a rickety lift.

[00:06:14.580] - News clip

Right, okay.

[00:06:16.150] - David Brett

With a see through floor down a makeshift shaft. It looks like something you might advise someone against getting into if they were in a disaster movie. Although in this case, it's completely safe. Once below ground, workers are creating 40 miles of networking tunnels dedicated exclusively to the electricity grid.

[00:06:38.700] - Ashley Thomas

Rather than replace the existing cable networks, which are a few metres, few metres below the ground and would create a lot of disruption, a network of tunnels housing a new, higher voltage power cable network has been placed under London.

[00:07:02.170] - David Brett

At three metres in diameter, the tunnels don't look too dissimilar to the ones you might find on the London Underground or New York subway, except with lashings of high voltage cables hugging the sides of the tunnels like tentacles stretching as far as the eye can see.

[00:07:17.690] - John Pettigrew

It's not an exaggeration to say from an infrastructure perspective, it is the biggest buildout of the networks since Victorian times.

[00:07:26.210] - David Brett

National grid have set themselves an ambitious target, given how old London's infrastructure is. Navigating sewers tube lines, centuries old buildings and not to mention cricket grounds. But housing new electricity cables in deep underground tunnels has several benefits. There's less disruption during construction to traffic, residents and businesses. Likewise, future repairs and maintenance will cause minimal disturbance and the tunnels can accommodate additional cables to meet future demand. But it requires a huge amount of planning.

[00:08:01.080] - John Pettigrew

We're developing the network for the future and therefore each of these projects is multi year, but quite often they're in local communities and therefore we have to make sure that we engage with local communities and we construct it in a way that doesn't impact too much on their lives. So a huge amount of planning, which means that when we get to the construction phase, then if we've done it right, then we should deliver them on time and hopefully below budget.

[00:08:27.430] - David Brett

While the tunnels may be one of London's largest capital investment programmes, at present, they are just a single element of a much more ambitious root and branch overhaul of the entire UK electricity grid. That's coming up next.

[00:08:42.580] - Announcer

Get in touch with us by email at schroderspodcasts@schroders.com or visit our website schroders.com/theinvestordownload.

[00:08:54.840] - David Brett

Not only will the grid need to keep pace with the growth in electricity demand, it will also need to connect to a host of new renewable energy sources coming online in the next decade. That means a whole array of new equipment will be required, from interconnectors to battery storage capacity, which will help manage the intermittent nature of renewable energy. The power of the future needs to be cleaner and more secure. That means the grid needs to be able to connect to renewable sources, preferably those owned and controlled by the UK.

[00:09:27.540] - John Pettigrew

And what we're having to do is to rewire Britain so that actually all the energy is coming in from the North Sea, through offshore wind and from the Celtic Sea. So it means we have to reconfigure the whole system, but on top of that, the network is expanding into the sea. So my 17 largest projects are all related to connecting 50 gigawatts of offshore wind by 2030.

[00:09:51.000] - David Brett

50 gigawatts of offshore wind capacity by 2030 is a policy target set by the UK government, part of its commitment to fully decarbonized power sector by 2035.

[00:10:03.100] - News clip

The British Prime Minister will pledge to reduce the UK's carbon emissions further and faster than any major economy today. Boris Johnson is to set a new target to cut two thirds of emissions within the next ten years, compared with 1990 levels. The plan is to set the country on the path to being carbon neutral by 2050.

[00:10:25.210] - David Brett

To put that into perspective, on the network today, the peak demand in the winter in the UK is about 60 gigawatts. When it increases by 50% by 2035, it's going to be around 90 gigawatts.

[00:10:38.900] - John Pettigrew

So not only are we having to rebuild the network onshore, but we're having to think about the network offshore as well, which in the North Sea will be the most sophisticated transmission system in the world.

[00:10:50.880] - David Brett

Pettigrew says that capacity isn't a problem with around 320 gigawatts of generation in a queue waiting to connect to the network in the next decade. However, so called zombie projects are getting in the way.

[00:11:04.830] - John Pettigrew

Typically, about 60% of people say they're going to build something out and connect don't. So one of the things we've been talking to the regulator about is just changing the process. We got all these projects in the queue that actually will never happen, but they get in the way of the ones that are going to happen. So we don't have a capacity issue. What we have is a sequencing issue. So one of the things we did do is say, look, if you're in the queue and you don't really intend to develop it, you can get out of the queue free of charge, no consequences. And we've had about eight gigawatts, actually, of generation that's got out of the queue. But we've also started to look at changing our planning processes so that we don't assume that everybody says they're going to connect, is going to connect, and actually that's freed up about 40 gigawatts. So we've got some significant sort of freeing up a capacity which will again accelerate the speed of the energy transition.

[00:11:49.480] - David Brett

Which is also where investors can play a role.

[00:11:51.960] - Ashley Thomas

As an investor, we try and help from our side. Obviously, we can only have sort of limited influence, but we will go through the tech register, the technical register of people seeking connections, and certainly if there's thermal plants on there for new connection requests, if they're listed companies, we will engage with them to sort of see does it make sense? Typically, they'll be looking for at least a 15 year asset lifetime. Is it really feasible, given decarbonization targets, for companies to be seeking to connect unabated gas plant projects?

[00:12:33.780] - David Brett

But it's not just connecting to the grid, which is an issue. To meet the UK's ambitious target to fully decarbonize the power sector by 2035, changes need to be made to speed up the planning and implementation process, which, no pun intended, is creating a disconnect between meeting climate goals, securing investment and building infrastructure.

[00:12:55.660] - John Pettigrew

National Grid a month or so ago, trying to be helpful actually, set out where we see that there needs to be changes in sort of government policy and regulation to actually at least have a fighting chance of meeting these targets. So, to give you one example, we talked about planning reform in the UK. So today, to build a single transmission line, so we're building one down in Somerset to connect the Hinckley Sea nuclear power station, the planning process took seven years and the construction phase takes two to three years. So to build a single transmission line takes about ten years. So unless we can find a way of streamlining the planning process and we need to do it in a way that is very sympathetic to local communities that are going to host that infrastructure. But unless we can reduce that timescale, then it's going to be incredibly difficult to hit a 2030 timescale when it takes ten years to build a single transmission line.

[00:13:51.370] - David Brett

It's not all doom and gloom, though. In the first quarter of 2023, the UK had more electricity produced from wind than it did from gas. And at the beginning of January, there was a day where 87% of all the electricity in the UK came from zero carbon sources. So while companies like National Grid continue to battle against the elements in trying to achieve the government's ambitious targets, they're also looking at other ways they might be able to make use of other renewable sources to help decarbonise the grid. And Pettigrew points us in the direction of the US, where it recently had a ribbon cutting ceremony on a facility in New York.

[00:14:32.040] - John Pettigrew

So we've just opened up a new facility just on the you can see it the Manhattan skyline, where we're collecting wastewater from New York City. We're putting it through a digester, producing renewable natural gas and then injecting it directly into our distribution system. So the opportunity is there. I mean, most of the renewable natural gas comes from landfill and waste today. In fact, in the US, I think we've had 250 sites open in the last decade, so it's growing quite significantly. Today, we're keeping the lights on, we're keeping the gas flowing, but we're also building the infrastructure for tomorrow, which will actually enable the energy transition. It's fundamental, it's the biggest change in the energy sector that we've seen in a generation plus.

[00:15:29.380] - David Brett

Well, that was the show. We very much hope you enjoyed it. If you want to find out more, please head to Schroders.com/Insights and we're endeavouring to record as many of these shows in the studio, on video. And if you want to watch them in their full, unabridged version, then go to Schroder's YouTube channel. If you want to get in touch with us, it's schroderspodcast@schroders.com. And remember, you can listen, subscribe and review the Investor download wherever you get your podcast. New shows drop every Thursday at 05:00 p.m. UK time. But above all, keep safe and go well. Cheers.

[00:16:05.760] - Announcer

The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.