The EU needs to open up energy-grid projects to private capital if it is to achieve the energy security and competitiveness that it is seeking, according to an infrastructure fund manager with experience of investing in electricity interconnectors.
Richard Thompson, partner at Foresight Group, told IPE Real Assets that the EU needs to introduce regulatory models comparable with the UK to enable infrastructure investors to participate in critical energy-storage, interconnector and grid projects.
While the UK is “doing the right things”, by allowing competition and putting in place stable regulatory frameworks to incentivise private capital, in continental Europe there is a “lot of positive discussion… but ultimately we aren’t seeing that translate into regulatory models that we as a private-sector investor can get behind”.
Foresight Group, which manages energy-transition infrastructure funds, is a majority investor in the MaresConnect project, a 750MW power cable that will link Ireland to the UK. But the firm has found similar investments less accessible in continental Europe.
“In almost all European countries, a private-sector investor like Foresight isn’t able to compete against the transmission system operator, which is normally a regulated monopoly,” Thompson said.
Foresight entered the renewables market in 2007, and now roughly 80% of its €15bn under management is in infrastructure and clean energy, with five gigawatts of generating capacity. Thompson said: “Our fund strategy is looking to invest in the assets that are generating renewable energy, but we’re also investing in two other buckets of assets: interconnectors that move that renewable energy from one geographic location to another, and storage assets that move it from one time period to another – ie storing that renewable energy to use at a later time.”
He added: “Batteries are very good for balancing the grid for a period of maybe one or two hours, [but] they’re less efficient when you’re going eight hours-plus. The biggest bottlenecks to delivering the energy transition in Europe, is having sufficient levels of interconnection and storage on the system.”
A stable regulatory framework is needed to incentivise private sector investment “in order to build out storage and interconnection”, Thompson said. “In the case of grid assets, it is important to allow competition and to allow the private sector to participate. We believe the UK is doing that well but we would say that that’s not happening quite so well in other parts of Europe.”
Interconnectors typically link two different countries with a high voltage direct current power cable, allowing power to flow from one to the other. “The benefits of interconnectors are that they enhance system security,” Thompson said. “If there’s a shortage of generation on the system in one market, power can flow from one market to another. Increasingly Europe is connected together by lots of these interconnectors.”
Interconnectors can also help reduce power prices and finally aid decarbonisation. “You can use an excess of renewable energy in one market to displace fossil generation in another,” Thompson said. Those benefits are clear with the MaresConnect project, which is key to both the UK and Ireland’s decarbonisation plans, he said.
Foresight invested in MaresConnect a few days before Russia’s invasion of Ukraine in 2022. “The power system security concerns that came about as a result of that invasion, really reinforced the benefits of these types of projects,” Thompson said. “Constraint costs will reduce for Irish bill payers, who are deprived of power when farms are switched off. You can effectively move renewable energy from one geographic location to another.”
Thompson said: “The UK government is the first market in Europe to bring in a form of regulation for long-duration energy storage – assets that can store power for at least eight hours – [which] is intended to incentivise the buildout of new pumped hydro-storage projects in the UK.”
UK regulator Ofgem has allowed competition in offshore transmission assets and developed a ‘cap and floor regime’ for interconnectors. Thompson hopes the EU can follow suit, citing the 2024 report on EU competitiveness by former European Central Bank president and Italian ex-premier Mario Draghi, which argued that the bloc needed cheap power if it was to remain competitive with the US and China.
“The cheapest form of power is generally renewable generation, but in order to enable the renewables build out that Europe needs we have to have investment in storage, interconnection and grid – because [those are] the kind of bottlenecks to integrating renewable energy into the system,” Thompson said.
Since the Draghi report, “we’ve seen lots of rhetoric from Europe, but we haven’t seen that translate into the [right] kind of regulation”, he added.
In January, the Hamburg Declaration, an energy security pact signed by 10 European countries in January, pledged to accelerate large-scale offshore wind deployment and related grids. Thompson said “the intention is very positive – cross-border cooperation between North Sea nations”, in theory opening the door to exactly the kind of interconnected energy systems he thinks are the future.
“[But] the proof is going to be whether we actually start to see cross-border [contracts for differences] or other cross-border forms of regulation to enable those assets to be built. The cap-and-floor mechanism, we think, is a good mechanism in that it provides the downside protection to enable investment into these very capital intensive, long-lived assets, one that prevents the risk of over-subsidy.”
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