Electricity grids: Key policy actions

Grid investments under REPowerEU are estimated at €583.8 billion by 2030, with around  €400 billion of that allocated to distribution grids. Yet currently distribution system operators (DSOs) in EU27+UK countries spend €25 billion yearly, far below the €34-39 billion needed by 2030.

There are several reasons behind this investment gap, but a clear one is the lack of incentives to implement grid investments. Historically and still now, grid operators are state-owned companies noticing limited competition. In countries such as Poland, Distribution System Operators are still integrated with incumbent fossil fuel electricity producers due to the incomplete market unbundling. This introduces a clear conflict of interest, with private renewable energy producers potentially receiving unequal treatment in terms of grid connection procedures and related investments. This could be one explanation behind the 51 GW of grid connection declines in Poland in 2022 alone, an increase of 253 percent compared to 2021. 

Grid investments are often financed by strictly regulated grid charges, subject to political pressure due to the impact on household cost of living. These tariffs are renegotiated on a quarterly or annual basis, providing no certainty regarding long-term investment budgets. As a result, grid operators might face difficulties in financing costly multiannual projects such as grid expansion or smart meter rollout. On the other hand, the tariff regulation and lack of competition do not incentivize investment decision optimization or an increase of the quality of service. 

Recommendation: Regulators should introduce clear incentives for grid investments, through the review of the status of electricity market unbundling in Member States and the alignment of end-user tariffs with long-term grid investment plans.

Targeted funding should also be provided for grid operators, supported by one-stop shops and incentives related to the timely delivery of investments. A fund specifically related to grid investments could be introduced, such as the Connecting Europe Facility or US Grid Resilience and Innovation Partnerships (GRIP) Program. This would make it easier to access and monitor, and therefore more effective than broad programs such as the Modernisation Fund that cover a very wide range of competing projects.

Grids, unlike other elements of the energy system, are subject to limited oversight consisting of public consultations (on a highly technical subject) and an opinion from regulatory authorities. This makes it difficult to assess whether grid developments are in line with power system targets or monitor progress.

This is particularly important in view of the recent conclusions of the European Scientific Advisory Board on Climate Change. They found that the TYNDP process does not sufficiently address the transformation changes necessary to achieve the EU’s climate neutrality and climate resilience targets by 2050. As this process is driven by Europe’s Transmission System Operators, it implies that planning of the national transmission grid equally does not reflect the needed transformation of the energy sector.  

Recommendation: Grid operators should be required to publish data on key indicators. 

This includes data on grid connection queues, available grid capacity, performance of grid infrastructure, investment levels, average lead times and others. Much of this information is already available from power system operators but is not reported. 

This will: (1) enable assessment of alignment and progress monitoring; (2) provide reliable information critical for investors and electricity consumers; and (3) could promote social acceptance as stakeholder groups increasingly understand the importance of grid expansion for the energy transition.

Around the world, huge capacities of renewables are waiting to connect to the grid. While we lack a comprehensive picture on the situation in Europe, data from select countries shows the EU is no exception. For example, Spain and Italy have nearly 200 GW of wind and solar energy waiting to connect, and France has nearly 50 GW.

Recommendation: Regulatory authorities should implement immediate reforms to alleviate grid connection queues

​​Authorities should shift from a “first come, first served” approach to a “first ready, first served” cluster approach, similar to that implemented by the US Federal Energy Regulatory Commission (FERC). This allows projects to be grouped by location and time of queue entry to be assessed as a single cluster, instead of running separate studies for each project. Projects are also required to demonstrate readiness through financial deposits and proof of site control at key check points, eliminating unviable projects. In the UK, developers are allowed to terminate their connection contracts without incurring liabilities, freeing capacity in the queue without deterring future investors.

A clean, expanded power system is at the heart of a carbon-neutral economy, and its planning framework is critical to a successful delivery. However, a comprehensive system-level planning framework is absent. Even in the electricity sector, the planning of highly interconnected elements is artificially segmented between power generation (ERAA); transmission grids (TYNDP and national grid development plans); flexibility (separate assessment proposed under the revised EMD); and electrolysers (national hydrogen strategies), among other elements. Notable drawbacks of this approach:

• This creates a particular challenge for planning the power grid which facilitates benefits across the entire power system;
• National energy and climate ambitions risk being derailed as the planning of key infrastructures lags behind;
• It renders it impossible for planners to identify solutions that represent the highest system efficiency, thereby keeping costs down;
• New solutions such as digitalisation, different forms of flexibility and storage, electrolysers and hydrogen production are typically not integrated into existing assessments;
• Risk of misalignment between plans of interrelated elements. For instance, even planning at different electrical voltage levels (transmission and distribution) in the same country is often not aligned.

Ultimately, the current planning framework for the power system is insufficient to inform and coordinate the investments required to deliver on the Green Deal or net-zero commitments. 

Recommendation: The European Commission should initiate a power system planning reform to integrate and streamline the process

This would be similar in principle to the clean energy package which sought to consolidate most of the energy and climate planning of reporting requirements under a single framework. The ultimate objective would be creating an integrated, streamlined, system-level planning framework for the power sector that prioritises system efficiency. The timely development of grids, flexibility, storage and other solutions will be assessed alongside the evolution of the power generation mix. Such an assessment would also provide a stronger knowledge basis for identifying key anticipatory investments.

Recommendation: The new planning framework should establish an independent central coordinator

There is growing recognition that the complex task of power system planning is best served by a central and independent coordinator. This has been stated by Terna, Italy’s electricity TSO, and is reflected in Germany’s drive to merge its four TSOs which it believes could accelerate the modernisation of power lines. Reform to establish an independent system operator is underway in the UK, where the Future System Operator will be responsible to achieve three objectives: (1) net-zero; (2) security of supply; and (3) efficiency and economy.

In the EU, similar reform could be accomplished by ascribing the role to national regulators and ACER, the latter providing an essential platform to ensure EU coordination and exchange of best practices. Given the urgency of action, this would be preferable to establishing a new institution. 

This central and independent body could be tasked with establishing the methodology for integrated power system planning, and provide oversight to the process, ensuring that plans are sufficiently aligned with EU ambitions.