Gridlocked: Investment opportunities in America’s grid upgrade

The world’s electricity grids are large, but they are about to become giants with the fundamental shift to the electrification of everything as the world moves towards net-zero carbon neutrality targets. Ausbil’s Global SmallCap team looks at this generational change in power markets and discovers opportunities for unrecognised growth in the world’s global small-cap markets from this rolling thematic.

10 minute read

Key points

• Opportunity: Small companies that are demonstrating unrecognised growth potential driven by their exposure to the forthcoming US electricity grid infrastructure upgrade needed to deliver decarbonisation and achieve net zero targets.

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• By 2050, US power capacity is set to double with increasing demand and a growing dominance of renewable energy sources. It is estimated that the grid will likely need to triple in size by 2035 to be able to meet the supply and demand dynamics of renewable energy, and users of electricity.

• Extensive US stimulus packages focused on infrastructure, semiconductor chips, and on inflation reduction are providing significant capital to fund the changes needed by the grid and its users.

• It will not just be infrastructure and utility companies that benefit from the expansion, upgrade and renewal of America’s electricity grids. We believe that there are many opportunities in global small caps to benefit from this major grid expansion over the coming decades.

Q: What is happening to electricity grids as we decarbonise?

A: In order to address global warming and the existential threat of climate change, the world has embarked on a process of decarbonisation in order to reduce, and in many cases eliminate, carbon emissions that are damaging the earth’s atmosphere, with the aim of achieving net zero carbon emission by 2050. The shift from fossil fuels, which are the major cause of carbon emissions, to renewables is a multi-decade challenge. The US is expected to see installed grid capacity double or triple and will require approximately 10,000 miles of new high-capacity lines. We believe that there is a major opportunity in small caps that are leveraged to the huge flow of capital in all parts of this grid upgrade in order to ensure that it is not ‘gridlocked’ as the shift to renewable power grows.

According to the US Department of Energy (2022), more than 70% of transmission and power transformers in the US energy infrastructure are over 25 years old. Increasing demand will require an estimated 60% expansion in US transmission systems by 2030 and a three-fold increase in existing capacity by 2050. Moreover, frequent and extreme weather events like hurricanes and wildfires threaten reliability and resilience, requiring upgrades in cables, operating plants and technology. There is currently insufficient manufacturing capacity to meet demand for grid transformers and component parts in the US, which is creating major demand for a specialist list of companies that are optimally placed to benefit from the ensuing expansion of America’s grids.

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