Overcoming grid congestion in emerging markets

The convergence of energy and technology has produced a number of significant innovation races in recent years. From microchips to mining, solar panels and wind turbines, nations have been seeking to gain an advantage in response to increased geopolitical risks and changes in global energy policy. Now, a new race is taking shape, write Chris Taufatofua, Joshua Hayes, Alex Lee and Aaron Sahota

As the dynamic between renewables and traditional energy continues to evolve, and energy-intensive technologies including artificial intelligence and blockchain proliferate, nations are finding that their existing grid infrastructure is ill-equipped to deal with the unpredictable and rapid increase in demand.

At the same time, there remains considerable appetite for investment opportunities in emerging markets. Developers, financiers, asset managers and investors recognise the opportunities for significant returns, facilitating development where pricing is still competitive. Some of this is manifesting with countries tendering large-scale public-private partnership (PPP) projects, as we have recently seen in Vietnam, Chile and Peru. Successful development in 2025 and beyond necessitates a stable and reliable power supply, creating a particular need to develop the grid infrastructure of emerging markets to ensure that they can continue to power all of this expansion.

The key challenges

Power outages are occurring more frequently everywhere, such as those well-reported in Spain and Portugal, and are an enduring issue in emerging markets which have not meaningfully advanced their energy supply systems in a long time despite existing industry and population growth. Now, many nations are reaching the same inflection point. Will this be the next big global race? With electricity demand expected to more than double from 25,000TWh in 2023 to between 52,000 and 71,000TWh by 2050, swift action is needed.

It is estimated that due to electricity outages, each year firms in emerging markets experience an efficiency loss of around USD 38 billion from operating below capacity, sales losses of USD 82 billion, and fixed and variable costs of USD 65 billion for back up electricity generation. This also contributes to the high cost of capital of investment in infrastructure. As an example, despite plenty of solar resources, domestic solar module manufacturing and steady demand, the cost of capital in India for utility-scale solar PV is still more than double that in Europe.

If left untreated this might create a negative cycle whereby congestion leads to lack of confidence in the investment opportunities presented by emerging markets, reducing capital inflows and preventing the changes that are needed to improve grid infrastructure. Over time, this could see some nations fall behind as others modernise.

Learning from experience

Responding to the challenge involves improving the components of the system itself, however alongside this nations might seek to think more creatively about how existing systems are used.

As an example, Australia has designated ‘Renewable Energy Zones’ (REZs) which concentrate high volumes of renewable energy infrastructure in certain areas, creating locational coordination and mitigating the stress placed on the grid by an unpredictable influx of renewable energy. Emerging markets may find this an attractive model given the fact it would be more manageable, and likely cheaper, to improve infrastructure is such a focused way. This would also allow the best of a nation’s relevant skills and expertise to focus on one or a few high-impact projects.

Further improvements may include more ambitious, large-scale changes to existing grid infrastructure. For example, certain Nordic countries including Denmark and Finland have adopted high-voltage direct current interconnection lines which boost and balance capacity across regional lines and support energy-sharing. This would supplement and enhance the locational coordination of REZs, powering regions far away from any dedicated zones of grid infrastructure.

On top of this, nascent technologies such as microgrids, battery storage, and behind-the-meter systems allow for local generation and storage of electricity, easing pressure on centralised national systems. Statistics show that these are growing at an exponential rate, with China, the USA, the UK and Australia installing a combined 300GWh-plus of battery energy storage system capacity in 2024. 

Emerging market leaders may also look to the framework provided by the EU’s 14-point Action Plan for Grids, which was released in November 2023. The 14 tailored actions are based on seven key action areas to enable the region’s grids to operate more efficiently and be rolled out further and faster: 

1. Accelerate the implementation of cross-border interconnection ‘Projects of Common Interest’, of which more than 100 have been identified over the past decade, and develop new projects.
2. Improve the long-term planning of grids to accommodate more renewables and electrified demand by integrating onshore and offshore network planning and mapping distribution development plans by Distribution System Operators (DSO’s).
3. Introduce regulatory incentives through guidance on anticipatory investments in grid projects and cross-border cost sharing for offshore projects.
4. Incentivise better usage of grids with enhanced transparency on grid hosting capacity and improved network tariffs for smarter grids, network efficiency, and innovative technologies and solutions.
5. Improve access to capital by identifying tailored financing models and increasing visibility of opportunities for EU funding programmes for smart grids and modernising distribution grids.
6. Stimulate faster permitting by providing technical support for authorities and guidance on better engaging stakeholders and communities.
7. Improve and secure grid supply chains by harmonising industry manufacturing requirements for generation and demand connection and improving visibility on grid project pipelines.

Conclusion – no singular blueprint, but a huge opportunity

The race for grid infrastructure is already underway, and is poised to become even more intense in the coming years. Emerging markets must act to ensure they continue to attract and reap the benefits of investment, avoiding the negative cycle that may ensue if supply chain issues leave latent movers outpaced.

There are no definitive answers or ideal strategies. Much depends on variable factors including relative market maturity and geographic constraints. Still the examples set by other nations are good starting points to consider, with regional action plans giving further guidance on how best to proceed. Governments can assist by establishing favourable regulatory and planning regimes which work towards allowing capital to flow. At the same time, developers, financiers, asset managers and investors that embed themselves into these economies early will be poised to reap the benefits as development flourishes over time.

At Vinson & Elkins, we help our clients to unlock these opportunities, realise profit, and create prosperity for the economies we serve. This includes advising on regulation, the structuring and development financing of concession-based projects, PPPs, and in the acquisition, disposal and privatisation of infrastructure assets and projects globally.