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Grid specialist companies on investors' radar

A detailed report on the state of the world's electric grids has revealed that investment in the critical transmission networks has lagged the growth in renewable energy generation, and poses a severe bottleneck risk for the global energy transition.

The International Energy Agency (IEA) report published this week revealed that a growing volume of renewable energy generation is being stalled as developers wait for projects to be connected to national electricity grids.

Since the report’s release on Monday, share prices of companies engaged in building electric grids, or with products and services tied to grid modernisation, have outperformed firms that are focused on renewable energy generation.

This suggests that some investors anticipate waves of broad interest in electric grids may emerge following the IEA report and that companies with specific expertise or product lines that can help alleviate the building connectivity bottlenecks could benefit from that growing investor attention.

A key problem highlighted by the IEA is that the power from new solar and wind farms is becoming available at a faster pace than can be channelled by utilities onto current grid networks, which often require significant upgrades and new equipment to handle large loads of electricity generated by renewable power.

Roughly 80 million kilometres of global electric grids need to be added or refurbished by 2040 in order to integrate the planned increases in electricity generation from renewable sources and allow for the phase-out of fossil fuels, according to the report.

“At least 3,000 gigawatts [GW] of renewable power projects, of which 1,500 GW are in advanced stages, are waiting in grid connection queues — equivalent to five times the amount of solar PV and wind capacity added in 2022,” the IEA says.

Of course, the grid congestion issues highlighted by the IEA report have been known by industry trackers for some time, so the existence of struggles within such a critical conduit of global power markets is not new.

However, the IEA’s estimate of the scale of the connectivity backlogs is new and offers fresh evidence of the urgent task facing power producers in every market.

What’s more, given the high levels of government and corporate engagement in the energy transition, it is likely that the IEA’s new findings will gain attention among influential decision-makers who are tasked with aiding energy transition efforts.

That such a large backlog of new clean power must wait to be connected to consumers has cast fresh focus on the critical role that electric grids will play in enabling the global energy transition.

More specifically, the grid congestion issue has highlighted the potential opportunities available for companies that can help solve some of the current backlog issues, and help grid operators scale up the volumes of renewable power that will be integrated into existing grids over the coming years.

The share prices of certain firms that hold these particular skill or product sets have seen signs of heightened buying interest this week since the IEA report was published, indicating that some investors may be already placing bets that grid specialist firms may be primed for growth going forward.

Among the stocks that have gained this week are MYR Group , a US-based holding company specialising in electrical construction services, and Mastec Inc, which has a dedicated division offering energy transition solutions.

Both US-listed stocks gained roughly 6% over the first two trading sessions this week, LSEG data shows.

Quanta Services, which upgrades and repairs transmission networks, and Fluor Corp, a construction services firm with a power and infrastructure division, also rallied on US markets.

Further afield, Ireland-based power management company Eaton Corporation has also gained ground in recent sessions, and year-to-date is up more than 34%. Germany’s E.ON, which has a major energy networks division, is up roughly 17% this year, LSEG data shows.

All these companies, alongside several others around the world, which are building out divisions dedicated to maintaining or upgrading electrical grid networks, should benefit from increased interest from utilities and grid operating firms as they undertake the necessary grid expansions in the years ahead.

Firms that develop smart meters and other grid management tools are also expected to see growth in demand for their services by power companies. Exactly how decision-makers may act on this new focus on grid congestion remains to be seen. But judging by the stock price action in recent days, there are a growing number of investors who expect key companies to play an important role. Reuters

Gavin Maguire is a Reuters columnist.

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