Smart Grids: how to energize your investments?

After smartphones and artificial neural networks, intelligence is now present everywhere, including in our electrical networks. Imagine an electrical grid as smart as our connected devices, where every home, building, and electric vehicle not only consumes energy but also produces and redistributes it in real time, with seamless but essential fluidity. While this vision might seem as futuristic as artificial intelligence, it’s the promise of smart grids intelligent networks that optimise our energy management.

The topic is not new, as electricity lies at the heart of the climate neutrality challenge. But it has been brought to the forefront by two major recent factors: the 2021 energy crisis, which underscored the dependence of our economies on fossil fuels and accelerated the urgency to find alternatives; and the growing demand for electricity, driven by the rise of energy-hungry artificial intelligence¹.

Did you know? A single query on ChatGPT is estimated to consume 10 to 25 times more energy than a simple Google search².

While the topic may seem less high-profile than it was a few months ago, it remains structurally global and strategically critical.

Energy and challenges in Switzerland

In Switzerland, around three-quarters of energy needs are imported as oil, natural gas, and electricity. In winter, when hydropower production declines, nearly 40% of electricity is imported to meet demand, especially due to peaks related to heating and lighting. This situation makes the country vulnerable to global price fluctuations and geopolitical tensions, as seen with the Ukraine war, which caused gas prices to soar by 200% in 2022. Adding to these are sustainability challenges: while Switzerland aims for carbon neutrality by 2050, only 7% of its electricity in 2022 came from solar and wind, with hydropower accounting for around 55%. Yet, a study by the École Polytechnique Fédérale de Lausanne (EPFL) predicts a 7% to 8% decline in hydropower production by 2050 due to changes in precipitation and glacier melt.

Smart grids: a solution to prevent economic short-circuits?

The term "smart grid" refers to an interconnected electrical distribution system that autonomously and automatically adjusts production to meet demand. By making the electrical grid "smart," the smart grid allows for decentralisation by integrating new producers and renewable energy sources, such as solar and wind, for generation; and real-time data collection via sensors on these sources for consumption management. According to the Swiss Federal Office of Energy (SFOE), smart grids could reduce inefficiency-related losses by up to 5%.

Investing in smart grids: prioritising equipment suppliers

The wide-ranging and multi-sector value chain of these smart networks offers significant potential. However, it’s essential to avoid pitfalls by focusing on high-value players with the most promising growth prospects. From renewable energy leaders in solar or wind, to intelligent infrastructure modernising networks for improved efficiency, to energy storage and management solutions, and even utility companies organising and managing distribution networks, we recommend focusing on the midstream and downstream segments. These areas are less competitive, less regulated, and offer significantly greater growth potential. With global annual spending projected to double to nearly $800 billion over the next eight years, according to the International Energy Agency, electric grid equipment suppliers stand to benefit most, which is why we recommend prioritising these key players in the sector.

Powering portfolios: but how?

To diversify and complement exposures, it is wise to consider thematic certificates or specialised trackers. For bond investors, green bonds issued by utility companies may also be sensible additions to a portfolio to gain exposure to the theme. However, the challenge in the green bond space is that there are no standards or regulations defining these bonds. In other words, any issuer can release a "green bond" labelled as such in databases, provided it is issued exclusively to finance an environmental project, such as renewable energy, energy efficiency, waste management, biodiversity preservation, or water management. Utility companies, as key players in the value chain, face significant modernisation and financing needs to optimise current networks and transition towards an interconnected structure.

Conclusion: seizing the opportunity for sustainable electrification

Electrification and smart grids are far more than a simple link in the energy transition chain; they represent a sustainable vision for energy security and economic resilience in both the world and Switzerland. By limiting import costs and stabilising energy prices, these technologies offer significant long-term economic advantages. For investors, electrification and smart grids present a unique long-term engagement opportunity. By identifying the key companies and technologies driving this revolution, you can not only diversify your investments but also contribute to building a resilient and sustainable energy future. To avoid any blackout in your portfolios, we invite you to explore our investment solutions and reach out to our team of expert advisors.

References:
¹ The demand for energy from data centres in the United States is expected to grow by 15% annually by 2030, with data centres’ share of total electricity consumption rising from just under 4% today to over 8% by 2030. U.S. Energy Information Administration, 2022.
² According to the International Energy Agency, energy consumption per ChatGPT query is considerably higher due to the massive computational power and cooling requirements of data centres needed to generate high-quality responses.
³ Swiss Federal Office of Energy (SFOE)
⁴ COP climate targets.
⁵ Melting glaciers have a limited impact on Swiss hydropower production; Like snow on a summer day | EPFL | Les dossiers de l'actu