The Boring Bit on the Monopoly Board Is Now Hot

The transition to clean energy is turning the previously dull world of grid infrastructure into one of the hottest investments.

When a little-known U.K. energy distribution company came up for a rare sale this week, buyers clamored to get involved, resulting in a 7.8 billion pound ($10.9 billion) deal, the largest utility transaction in the U.K. in at least a decade.

Infamous for being the boring bit on the Monopoly board, utility companies are gaining a higher profile as the transition to renewable energy gathers speed. Estimated global annual investment in distribution grids, the part of the energy system increasingly used by solar and wind, is forecast to triple to $401 billion by 2050.

The Boring Bit on the Monopoly Board Is Now Hot

“The growth of distributed generation along with the electrification of heating and transport is flipping the switch on the industry, placing a greater emphasis on distribution grids,” said Sanjeet Sanghera, an analyst at BloombergNEF.

Power and gas travel through large cables and pipelines at a high volume or voltage before reaching substations where it enters local distribution networks to be carried to homes and businesses. These local grids are where millions of electric vehicles, smart systems and small-scale renewables will be connected.

Western Power Distribution, which was bought by National Grid Plc on Thursday, is one of 15 distribution companies in the U.K. Ten work in electricity and five in natural gas. Warren Buffett’s Berkshire Hathaway Energy Co. is one of a handful of national and international owners of the firms.

Analysts, including Martin Young at Investec Bank Plc, highlighted the premium paid for WPD which speaks to the investor interest in grid assets. National Grid is likely to receive a good price for the sale of its gas distribution business too which will help ease the impact.

Still, preparing the grid for the energy transition isn’t going to be easy, according to Randolph Brazier, director of innovation and electricity systems at the Energy Networks Association. Grids will need to change from one-way systems, delivering power to homes, to multi-way networks, taking electrons back to the transmission grid.

“The challenge is that the distribution networks are just not designed for that,” he said. “They need to become better at operating their systems and more flexible.”

Energy networks are regulated businesses in Britain, meaning that the return on equity is limited. In 2018, grid companies were accused of overcharging customers to deliver high profits to investors. As a result, watchdog Ofgem cut the rate of regulated returns to record low levels for transmission networks and is expected to follow suit with distribution grid companies.

But the global push to decarbonize is forecast to increase global power demand by almost two thirds by mid-century, according to BNEF. As wind and solar grow in Europe, 67% of the total electricity generated is expected to be injected into distribution grids, the estimates show.

National Grid will be able to play a bigger role in the energy transition through this week’s acquisition, Chief Executive Officer John Pettigrew said in an interview on Thursday.

“We believe that the growth that we’re likely to see in our distribution is going to be stronger and more certain and longer than other elements of the energy sector,” Pettigrew said.

©2021 Bloomberg L.P.

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