Gridlocked: why grid investment is critical to enabling Europe’s energy transition
Europe's rapid energy transition is colliding with the limits of its existing power networks. Targeted investment into grid interconnectors, transmission upgrades and battery storage are key to filling this critical infrastructure gap.
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The energy transition is accelerating fast. This is especially true in Europe, where net-zero goals and concerns over energy security, affordability and capacity, the latter amid an AI and data centre boom, are necessitating a massive expansion of renewable energy.
Our analysis of industry projections suggests that energy demand is set to rise by 40% by 2033 – and that renewables are projected to make up 85% of power generation in Europe by 2050, implying a net €4 trillion investment.
Renewables capacity to quadruple to meet growing energy demand
Source: Aurora Energy Research (May 2022 and January 2024), Schroders Greencoat , Goldman Sachs Research, Washington Post, IRENA (2024): Renewable Capacity Statistics, SolarPower Europe (2024), LCP Delta (2023), Schroders Greencoat estimates. Projections are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. 1BNEF New Energy Outlook 2024, Cumulative investment in power plant capacity including, Hydrogen, Nuclear, Small modular nuclear, Bioenergy, Hydro, Other renewables, Utility-scale PV, Small-scale PV, Onshore wind, Offshore wind, Pumped hydro. Projections and forward-looking statements are not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised
Yet key challenges lie ahead relating to grid stability and flexibility. The growing share of renewables represents huge progress towards achieving decarbonisation targets, but at the same time as more renewable energy sources like solar and wind are integrated into the grid, maintaining consistency of supply to meet growing and variable demand becomes a difficult task.
Firstly, there’s the inherently intermittent and variable nature of solar and wind energy. Put simply, the sun doesn’t always shine and the wind doesn’t always blow. This introduces a degree of unpredictability and fluctuation in power supply throughout the day, with sudden dips creating power deficits that must be compensated by other sources, while surges in output can lead to oversupply, straining the system.
Then there is the related issue of declining grid inertia, which refers to the resistance of large spinning generators to sudden changes in frequency. Renewables, such as wind and solar, provide much less inertia because they lack heavy rotating parts. The corresponding loss of stability means grid frequency is harder to control, increasing the risk of blackouts and potentially costly stability measures.
Outturn inertia in the UK is trending down
Source: National Energy System Operator, August 2025.
Crucially, these dynamics also drive heightened pricing volatility, as increasing renewables penetration leads to wider disparities in energy supply at different times of day. For example, the cumulative frequency of negative energy prices has risen materially in recent years, as the chart below reflecting prices in Germany shows.
Cumulative frequency of negative prices in Germany over time
Source: Kyos. Data as at 4th September 2024.
As alluded to above, increasing demand for electricity is also impacting the path of the global energy transition. While this has implications for a number of industries, including those that are going through the process of electrification and decarbonisation, headlines have focused on the potential negative headwinds relating to the growth of artificial intelligence and the related data centre boom, given the increasing importance of this sector to the global economy and markets. According to BloombergNEF, data centres are on track to consume 7% of European power demand by 2035.
Current projections suggest that power shortages will constrain 40% of new AI-focused data centres by 2027, according to data from Gartner. This reflects a fundamental imbalance where the demand for electricity is rapidly outpacing the ability of utility providers to expand their generation and transmission capacity at the required pace.
As a result, this infrastructural stress poses serious concerns for the EU’s climate targets. To ensure supply stability, energy authorities may be forced to prolong the operational lifespan of existing coal-fired power plants, accelerate the construction of new gas-fired generation or procure additional grid stability assets and services.
But with every challenge, there is an investment opportunity. In this context, it’s investing in grid infrastructure to enable a more stable power grid. This article looks at some of the key grid investment avenues: interconnectors, transmission networks, synchronous condensers and battery storage.
Interconnectors and transmission networks
Building out cross-border interconnection capacity represents a key opportunity for private infrastructure investors.
Interconnectors are cross-border or cross-regional transmission links that allow power to flow between different geographies. An example of this is the Viking Link, a 475-mile-long land and sub-sea cable connecting British and Danish energy grids. The connection runs from Bicker Fen converter station in Lincolnshire to one in southern Jutland, Denmark.
These connections are essential for grid optimisation, as they enable cross-border power flow, allowing the system to leverage remote generation where wind or solar resources are abundant or weather correlations lower. This effectively smooths out local intermittency, resolves large price differentials across European borders, and facilitates broader energy cost reduction and renewable power integration.
It also enhances security of supply. When one region experiences an unexpected generation loss, an interconnector can instantly import power from a neighbouring region, effectively preventing blackouts and enhancing system resilience.
For example, in 2021 a sudden and severe frequency excursion in the Polish power system was successfully halted by an emergency capacity injection via European interconnectors. This rapid intervention mitigated the risk of a widespread cascading blackout, underscoring the critical role of cross-border infrastructure in preserving systemic stability and security of supply.
These projects often benefit from reduced regulatory risk, underpinned by inter-governmental backing that stabilises cross-border agreements and facilitates streamlined policy execution.
For example, to bolster energy market integration the EU has set an ambitious interconnection target of at least 15% by 2030, meaning member states must possess sufficient cross-border capacity to allow the transmission of 15% of their domestic electricity output to neighbouring countries.
But planned interconnectors are falling short of what’s needed to optimise the European power system. To bridge this gap, interconnector investment requirements are estimated at €8 billion annually through 2030, increasing to €11 billion per year for the period 2030–2050, according to Allianz Research.
Planned interconnectors falling short of what’s needed to optimise power system
Source: 1ENTOS-E. 2Allianz Research based on ENTSO-E, EMBER, ACER, Eurelectric, European Commission, ERT and Goldman Sachs. Projections and forward-looking statements are not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.
Investment in wider transmission networks, the high-voltage highways of the grid, is equally vital for achieving a stable system. Capital deployment is needed in two strategic areas, both of which are directly linked to the rapid expansion of renewables:
- Connect remote generation: Geographic displacement of generation capacity, driven by reliance on remote assets such as offshore wind farms and solar parks, necessitates significant capital deployment into new, long-haul transmission infrastructure to efficiently link supply to load centres.
- Resolve congestion: Existing transmission infrastructure frequently suffers from congestion bottlenecks, resulting in the economically inefficient curtailment of low-carbon generation. Resolving this constraint requires strategic investment in both conductor capacity upgrades and the development of new high-volume trunk lines.
Synchronous condensers and battery storage solutions
As older thermal power stations are retired, the grid faces a significant deficit in synchronous inertia and reactive power reserves. As a result, synchronous condensers are being strategically deployed.
These units, which operate like large motors spinning without generating continuous power, provide two indispensable services:
- Inertia buffer: By acting as massive flywheels, synchronous condensers inject inertia to slow the rate of change of frequency during disturbances, granting grid operators vital response time.
- Reactive power control: They rapidly manage voltage stability across the network by accurately absorbing or injecting reactive power, essential for accommodating fluctuating remote renewable generation.
Synchronous condensers offer investors and system operators a mature solution to mitigate technical transition risk, ensuring the continued resilience of existing transmission infrastructure by filling the crucial stability void left by fossil fuel plants.
While this addresses foundational inertia, the massive need for operational flexibility to manage real-time supply and demand imbalances is driving a boom in battery storage solutions.
As detailed in our previous article, battery storage solutions function as a critical enabler for deep renewables penetration by establishing system stability and ensuring supply consistency. The primary function is straightforward: batteries help move power through the day – storing surplus electricity during periods of low market price (reflecting oversupply or low demand) and dispatching it back to the grid when supply dips or demand peaks.
This mechanism smooths the erratic supply-demand dynamic, providing a more reliable power flow and preventing the financial wastage associated with curtailed (discarded) clean power.
Historically, grid-level adoption was constrained by the technical limits of short-duration batteries, which restricted revenues primarily to niche frequency response and restoration services. However, ongoing technological evolution and cost reduction is rapidly shifting market dynamics. The increasing economic viability of longer-duration storage (up to four or even eight-hour systems), coupled with improved cycling life, fundamentally broadens the scope of services and revenue streams available to asset owners.
The investment opportunity is driven by a portfolio of revenue streams, primarily anchored in merchant power pricing models. High volatility in wholesale power markets, exacerbated by intermittent renewables, allows battery storage solutions to capture superior margins through buying at low price points and selling high.
Furthermore, battery storage operators earn income through supplementary services, such as frequency response (injecting and absorbing power to stabilise uneven
generation and demand) and capacity market agreements (guaranteeing power during periods of peak demand), which offer regulated, long-term contracted revenues backed by national grid operators that can be a valuable ballast for project financing.
Grid unlocked
Meeting global decarbonisation targets is fundamentally contingent upon modernising the electricity grid. The construction of renewables represents only a partial solution – if the grid lacks the capacity to reliably transmit and manage renewable energy, power production will be curtailed, operational costs will rise, and energy stability will decline.
For private capital and institutional investors, grid infrastructure exhibits powerful defensive and growth-oriented characteristics:
- Regulated and predictable yield: A significant portion of transmission and distribution assets operates within regulated frameworks, delivering highly stable and predictable revenue streams over extended horizons, frequently supported by government-sanctioned tariffs.
- Inflation resilience: Infrastructure is widely viewed as a robust inflation hedge, given that returns are often explicitly indexed to or correlated with inflation metrics, protecting real asset value against macro-economic volatility.
- Sustainability alignment: Investment in the foundational "backbone" of the clean energy system constitutes a pure-play opportunity for meeting sustainability mandates, drawing capital committed to sustainability-driven finance.
The challenges of inertia decline, wholesale market volatility and infrastructure bottlenecks, exacerbated by the rapid uptake of renewables and surging AI demand, has created a massive and immediate capital deployment opportunity. Grid investments are not optional expenditures; they constitute the essential enablers of the energy transition.
The investment required is substantial, providing a key role for private capital. By strategically targeting these core assets, investors can secure predictable inflation-linked returns while simultaneously acting as the central catalyst for the next phase of the transition, effectively turning a technical crisis into a powerful and secure investment opportunity.
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