Electrification: investing in the backbone of the energy transition

Harriet Topham, Product / Sustainability Specialist, Montanaro Asset Management

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.

 

Electrification: investing in the backbone of the energy transition

Harriet Topham, Product / Sustainability Specialist, Montanaro Asset Management

Renewable energy and electric vehicles dominate the conversation around the energy transition. Yet both ultimately depend on a quieter, more structural shift: the growing electrification of the global economy. In our view, one of the most important and often overlooked questions is no longer whether enough clean power can be generated, but whether electricity networks can expand quickly and reliably enough to transmit and distribute that power where and when it is needed.

Electricity currently accounts for only around 22% of global final energy consumption. The vast majority of the world’s energy is still supplied by fossil fuels such as coal, oil and gas. As transport, buildings and industry move away from those fuels, much of that demand could ultimately be electrified, highlighting the scale of the long-term investment opportunity across electricity infrastructure.

The direction of travel is clear. As economies build-out data centres, adopt electric vehicles, and electrify heating and cooling of buildings and industrial processes, McKinsey estimates that electricity demand could more than double by 2050.

Chart: IEA

Beyond decarbonisation, electrification also strengthens energy security, reducing dependence on imported fossil fuels and giving countries greater control over supply and pricing, a priority that has sharpened following recent disruption to global energy markets. Rising demand, energy security and long-term decarbonisation targets together point to a substantial and sustained investment cycle across electricity infrastructure.

The grid: a critical bottleneck

Renewable generation capacity has expanded rapidly in recent years, but electricity networks have struggled to keep pace. The constraint is not the ability to generate clean power, but the ability to transmit and distribute it reliably across ageing grids. Much of today’s infrastructure was originally designed for centralised, fossil-fuelled systems rather than decentralised, renewable-heavy networks, with rising demand from electric vehicles, heat pumps, industrial electrification and AI-driven data centres.

The result is mounting bottlenecks across electricity systems globally. BloombergNEF estimates that around 1,000GW of solar projects and 500GW of wind projects across Europe and the US are currently waiting for grid connection. Together, that queue exceeds the capacity of the entire US power system. Without significant network expansion and modernisation, large parts of the energy transition may simply struggle to scale at the pace that policymakers, businesses and consumers increasingly require.

Chart: BloombergNEF

The investment required to fix this is enormous. According to International Energy Agency analysis, approximately 80 million kilometres of electricity grids may need to be added or modernised by 2040 to meet national energy and climate targets, equivalent to rebuilding the world’s entire existing grid network. Much of what already exists is old: in the US, for example, BloombergNEF estimates that around 70% of transmission lines are more than 25 years old. As systems become more reliant on intermittent renewable sources, grids will need to become not only larger, but also more flexible, resilient and interconnected. That, in turn, supports sustained demand for a broad range of enabling equipment.

The impact of data centres and AI

The rapid growth of AI and cloud computing is emerging as a structural driver of electricity demand in its own right, tying the expansion of digital infrastructure ever more tightly to the availability of physical electricity infrastructure. According to Ember, data centres already accounted for between 33% and 42% of electricity consumption in Amsterdam, London and Frankfurt in 2023, while Dublin approached almost 80%. European data centre electricity consumption is projected to rise by more than 150% between 2024 and 2035.

The same pressure is visible in the US, where demand is concentrated in hubs such as Northern Virginia, already the world’s largest data centre market, and where utilities are warning of mounting strain on local networks. In some established markets, waiting times for grid connections have already stretched to between seven and ten years. Large-scale projects are facing delays linked not only to grid bottlenecks, but also to hurdles over permits, labour shortages and limited availability of critical electrical equipment such as transformers and turbines. In some regions, projects requiring power loads comparable to a nuclear reactor are competing for already constrained grid capacity, as highlighted in Financial Times reporting.

This reinforces an important point: the ability to deploy AI at scale now depends not only on software and semiconductors, but on the physical capacity to generate, transmit and distribute electricity reliably. Electrification and grid modernisation are becoming critical enablers not just of the energy transition, but of the broader digital economy itself.

A long-term SmallCap opportunity

This is where we believe the most attractive opportunities lie, and where they are most often overlooked. Public discussion tends to focus on the visible names: renewable developers, electric vehicle manufacturers and AI platforms. Rather than trying to predict which of them ultimately wins, we invest in the specialist SmallCap businesses supplying the critical components, equipment and infrastructure across the wider electrification ecosystem. Many of these companies are sitting further up the value chain and benefiting from the broader trend irrespective of which end-market technology prevails.

Chart: Montanaro Asset Management

Electrification is likely to remain one of the defining industrial and infrastructure themes of the coming decades. Rising demand from AI and digital infrastructure, growing energy security priorities and the broader shift away from fossil fuels across transport, buildings and industry all point in the same direction: a long, sustained wave of investment in electricity networks. The market may still be underestimating both the scale and the duration of what is required to modernise electricity systems globally. We believe specialist quoted small companies, sitting at the heart of the electrification value chain, should be among the beneficiaries.

The views expressed in this article are those of the author at the date of publication and not necessarily those of Montanaro Asset Management Ltd. The information contained in this document is intended for the use of professional and institutional investors only. It is for background purposes only, is not to be relied upon by any recipient, and is subject to material updating, revision and amendment and no representation or warranty, express or implied, is made, and no liability whatsoever is accepted in relation thereto. This memorandum does not constitute investment advice, offer, invitation, solicitation, or recommendation to issue, acquire, sell or arrange any transaction in any securities. References to the outlook for markets are intended simply to help investors with their thinking about markets and the multiple possible outcomes. Investors should always consult their advisers before investing. The information and opinions contained in this article are subject to change without notice.

The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.