Grid and battery investment: Why it matters to the energy transition
Key takeaways
The next phase of the energy transition depends on expanding grids, deploying battery storage, and improving system flexibility to support growing renewable generation.
- Battery energy storage systems (BESS) help absorb excess renewable generation, reduce curtailment, support grid stability, and balance increasingly complex power systems.
- Battery investments require active management because returns depend on multiple revenue streams, market design, technical performance, and permitting and grid connection timelines.
- Long-term opportunities include transmission infrastructure, smart-grid technologies, and suppliers of materials such as copper, lithium, graphite, aluminum, and specialized steel.
The energy transition is entering a new phase in which success depends less on adding renewable generation than on building the infrastructure that enables it. Grids, batteries and system flexibility are becoming both critical enablers of decarbonization and increasingly attractive areas for long-term investors.
The first phase of the energy transition has been centered on generation — the relentless build-out of solar and wind capacity. But the transition is, at its core, a systems challenge.
“It is not about building one specific element, but understanding how the pieces work together,” said Igor Lukin, CFA, Managing Director at Allianz Capital Partners in charge of several principal investments in infrastructure. Renewable generation alone is not enough, he explained. Electricity must also be transported, balanced and stored.
China’s renewable deployment illustrates this growing dependence on complementary investment in ultra-high-voltage transmission networks and energy storage systems. Together, these technologies help move electricity across vast distances and manage the intermittency inherent in wind and solar generation.
Grids and storage have become the critical bottlenecks to further renewables deployment globally. According to the International Energy Agency (IEA), more than 2,500 GW of energy projects worldwide are currently stalled in grid connection queues.
The availability of the required inputs compounds the problem: power transformer prices have risen sharply, with years-long lead times for the largest units.
Tal Lomnitzer, CFA, Senior Investment Manager on the Global Sustainable Equity Team at Janus Henderson Investors, said this represented one of the most compelling investment themes within the energy transition.
“We’re definitely seeing an acceleration in investment in grid modernization and expansion,” he said, pointing to transmission infrastructure, interconnections, digitalization and smart-grid technologies.
BNEF has substantially increased its outlook for battery deployment, expecting storage to jump 17-fold to 3.8 terawatts by 2050 from 223 gigawatts in 2025.
Lomnitzer warned, however, that it’s not a straightforward opportunity for investors to access. “You need to understand the technical aspects and the markets,” he said. “Active management and deep technical knowledge are going to be the keys to successfully making money out of this investment theme.”
The complex economics of energy storage
While grids are the arteries of the energy transition, storage acts as its balancing mechanism. Flexibility becomes essential as renewable penetration increases. The European Commission estimates that flexibility requirements could rise from 11% of electricity demand in 2021 to around 30% of total EU electricity demand by 2050.
Battery energy storage systems (BESS) are expected to play a central role in meeting that need and have become the fastest-growing power technology globally. Batteries can absorb excess renewable generation, reduce curtailment, support grid stability, and help balance increasingly complex power systems.
But storage is not a passive infrastructure asset class and requires a specialist management approach. Unlike a wind or solar asset operating under a long-term power purchase agreement, batteries often derive value from multiple revenue streams and require active optimization.
According to Filinto Martins, Co-Fund Manager of GHESF II at Gresham House, investors evaluating storage projects face five key challenges:
- Revenue stack complexity: Unlike renewable generation assets that often rely on a single contracted revenue stream, BESS can generate income from multiple sources, including energy arbitrage, ancillary services, balancing markets, capacity payments, congestion management, and tolling or cap-and-floor arrangements. While this creates significant value opportunities, the optimal revenue mix varies by market and evolves over time, requiring investors to assess a more complex and dynamic earnings profile.
- Cannibalization risk: Storage assets benefit from price volatility and market imbalances, but as more batteries are deployed, the arbitrage opportunities they monetize can diminish. Investors must therefore consider how increasing storage capacity may affect long-term market economics.
- Market design and regulatory risk: BESS revenues are highly sensitive to market rules and regulatory frameworks. Changes to capacity mechanisms, ancillary service procurement, balancing markets, congestion management arrangements or network charging regimes can materially impact project returns. The breadth of potential revenue streams creates additional upside but also increases exposure to policy and market-design changes.
- Technical degradation risk: Battery performance deteriorates over time and is influenced by operating strategy, cycling intensity, efficiency losses, and warranty constraints. However, batteries can be switched out within racks as technology improves far more easily than components of wind, solar and other energy assets can be upgraded. This allows operators to partially offset degradation and enhance performance over the asset’s life.
- Grid connection and permitting risk: As with many energy infrastructure projects, securing timely grid connections and permits remains a key challenge. Network congestion, interconnection queues and permitting delays can significantly affect project timelines and economics.
Given these dynamics, Martins stressed that success would not simply be a function of scale: “Battery storage is not just a megawatt game. Scale matters, but the real value is created with a combination of infrastructure discipline with operational and commercial optimization.”
It is also critical that market design and regulation remain sufficiently predictable over time. “Capital is mobile – long-term investors need a stable regulatory environment,” said Lukin. “If risk-adjusted returns become less attractive, capital will be allocated elsewhere.”
Thinking beyond sectors
Lukin expects energy systems to become increasingly integrated through what he referred to as sector coupling — the linking of electricity, transport, industry and fuels.
Rather than simply storing electricity in batteries, excess renewable generation could increasingly be converted into low-carbon hydrogen, ammonia and e-fuels. “Whenever you have an excess of green electrons, the pricing signals support using them to produce more green molecules,” he explained.
Lukin expects “green molecules” to play a larger role in sectors that are difficult to electrify directly, such as heavy industry, aviation, long-haul traffic and shipping. By absorbing surplus renewable generation during periods of oversupply, these sectors could help balance the wider energy system.
According to Lukin, future energy systems are likely to become far more interconnected than today’s electricity networks, with multiple technologies working together to balance supply and demand across the broader economy.
The picks-and-shovels opportunity
For many investors, the most attractive opportunities may lie not in owning generation or storage assets directly, but in supplying the infrastructure and materials needed to build them.
Lomnitzer described this as a “picks and shovels” approach to the energy transition. Rather than attempting to forecast long-term battery revenues or power prices, investors can gain exposure through grid equipment manufacturers, technology providers or critical materials producers.
Among those opportunities, it is the copper supply chain that most obviously stands out. The metal is essential to electricity transmission, renewable generation, electric vehicles, and grid infrastructure.
“By our estimates, the world is going to need to produce as much copper in the next 30 years as it has produced in the entire history of humanity,” said Lomnitzer.
Other beneficiaries of the energy transition include lithium, graphite, aluminum and specialized steel used throughout the electrification value chain.
To learn more about energy transition investment trends, explore these stories:
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Why data centers are driving investment in alternative energy
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