Gridlock: the impact of UK power grid constraints on real assets

The UK’s power industry is in the middle of a seismic shift in how energy is produced and utilised.

The UK’s energy grid is currently not sophisticated enough to efficiently connect the rapid growth of renewable energy sources to our areas of high demand. As a result, power is becoming a scarce resource in certain locations, with the situation set to worsen over the near term.

Plans to upgrade grid infrastructure to match the pace of renewable deployment involve more than £50 billion of capex spend[1] over the long term, which we believe could provide investment opportunities for long-term investors.

In the meantime, we believe grid constraints are emerging as a key risk consideration for real assets – both for real estate and infrastructure investments.

Domestic electricity use set to rise

According to the UK’s Sixth Carbon Budget, the country’s domestic energy consumption in coal and solid fuel is set to decrease by around 34% over the 30 years to 2050, with electricity becoming the main source of energy, accounting for approximately 51% of the country’s consumption, triple that of 2019.

UK power networks will need investment to cope with this forecast increase in demand. In our view, the grid will need to be upgraded to efficiently manage the geographical mismatch between net generation and net demand created by the shift towards renewables.

The UK’s power system was designed around moving energy short distances from large power plants, located on the outskirts of all major cities, into areas of high demand. Renewable assets, by contrast, are relatively smaller generators, dispersed around the country in areas found to have a good supply of the necessary natural resource (e.g. comparatively sunnier or windier locations). Significant additional connectivity is therefore needed to link these new generators to areas of electricity demand.

The scale of the challenge

The National Grid’s long-term plan[2] focuses on improving connectivity and resolving the bottlenecks that are among the key obstacles to renewable deployment and delivering on the government’s net-zero ambitions. The onshore works will require approximately £21.7bn of investment to remove the bottlenecks and improve the net power flows from the north to the south of the country[3]. The offshore build-out plans will need between £25bn and £32bn of investment in order to deliver the targeted 50 gigawatts of offshore wind capacity by 2030[4]. 

Given the scale of the capex requirements, in the long term, future network buildout will likely present an opportunity for patient infrastructure investors to gain exposure to long-term assets vital to UK’s decarbonisation plans, and which also feature long-term cash flow visibility under a stable regulatory regime.

In the meantime, existing grid inefficiencies are causing capacity risk for businesses, affecting development viability and a business's ability to move to net zero.

For clean energy developers and investors, grid bottlenecks can delay renewable project commissioning dates, increasing project risk and costs. Once operational, grid constraints can increase curtailment risk[5] for wind and solar farms, pressuring cash flows and investor returns.

Within a real estate context, occupiers in localities lacking power capacity could be faced with hefty constraint costs to increase their power supply. This can challenge development viability and leasing optionality in power-constrained geographies.

Prepare for energy constraints

We expect power availability and grid connectivity to be an increasingly influential driver of a location’s attractiveness for real estate assets.

Constraint costs will only increase while the grid infrastructure remains the same. Focus on identification of grid availability constraints in potential greenfield sites can help real estate investors tackle these issues early on in the development process.  Meanwhile, current inefficiencies, high energy prices and long grid buildout timelines are a strong near-term incentive to improve energy efficiency within existing buildings and accelerate on-site renewable generation where appropriate.

Businesses should pay close attention to their power consumption versus supply, as well as any geographical constraints in their area. Preparation is key.

[1] National Grid ESO (2022), Pathway to 2030

[2] Ibid

[3] Ibid

[4] Ibid.

[5] Curtailment is the reduction of output of a renewable resource below what it could have otherwise produced.