Clean energy deployment is growing at an impressive pace, largely driven by falling prices. But as evidenced by the Global Energy Storage and Grids Pledge at COP29, this momentum risks stalling if countries do not pay careful attention to building a fit-for-purpose energy grid centered on affordability and resilience. This article examines four key challenges related to renewable energy integration and how countries are leveraging innovative solutions to get to “Grid 2.0.”
In 2022, for the first time, global investments in clean energy equaled the amount spent on fossil fuels—$ 1.1 trillion. Despite these major investments and technological advancements in renewable sources, many regions still rely on outdated infrastructure, leading to various problems:
- In Latin America, where hydropower generates 45 percent of the region’s electricity, energy infrastructure is vulnerable to climate impacts and is increasingly unreliable, leading to blackouts and economic consequences.
- In Africa, a lack of generation capacity and transmission lines connecting regions has left 600 million people without any access to electricity.
- Across Asia, rising incomes are leading to rising energy demand—expected to grow by 70 percent by 2040—but underinvestment in grid infrastructure has created challenges for the clean energy transition and global competitiveness.
Power is essential to modern life, and as populations and economies grow, energy demand will continue to increase. At the same time, the energy sector—as currently configured—is the leading driver of the climate crisis, threatening our most basic human needs, including food, water, and energy production. Governments recognize the urgent need for a clean energy transition, with more than 90 percent of countries setting out some form of a net zero goal. Still, many lack the resources needed to achieve these goals.
The Good News
Low-carbon energy sources such as solar, wind, hydropower, and nuclear generate approximately 40 percent of the world’s electricity. In many geographies, they are a significantly cheaper option over the long term, given the absence of fuel costs and declining upfront costs due to technological advancements. In 2023, more than 80 percent of renewable sources generated cheaper electricity than fossil fuel alternatives.
The Challenge: Scaling Grid Integration
Taking advantage of these low-cost energy sources is not always easy, and without a targeted strategy for grid integration, it will be impossible to keep up the pace of clean energy deployment—especially as penetration gets higher. Around $215 trillion in funding is needed between now and 2050 to reach net zero goals and achieving this ambition will require investing in flexible energy grids that can accommodate variable sources, such as wind and solar, as well as firm power sources such as hydro, geothermal, nuclear, or natural gas with carbon capture and storage.
Current investment levels are not on track, and at COP 29, multiple countries endorsed a grids and storage pledge that aims to double grid investments, increase storage capacity six-fold by 2030, and add or refurbish 80 million kilometers of grids by 2040. To bridge this investment gap, increase funding levels, and ultimately create a resilient, low-carbon grid, policy makers and energy sector players must manage four key challenges.
1. Variability of renewable energy output
Because electricity grids require “just in time” delivery, integrating variable renewable power into the grid at scale requires careful planning. Countries are addressing this challenge in several ways: using modelling and forecasting tools that account for “negative correlations” (for example, where nighttime wind can complement daytime solar), hybridizing renewables by combining them with dispatchable power, and designing energy markets that incentivize energy storage.
Getting these market signals right can help make renewable energy projects more “bankable,” lower borrowing costs, and drive more renewable energy development. In Nepal, for example, where hydroelectric resources vary considerably during the monsoon season, DAI worked with local partners to support the development of solar microgrid projects in rural areas. These solar projects support the grid by i) complementing hydro during the dry season because solar radiation is highest outside the wet season and ii) siting generation closer to demand in rural areas, thus lowering the need to transmit centralized power over long distances.
2. Growing energy demand and electrification
Electricity demand, driven by economic growth and the electrification of new industries, is rising worldwide. Electric vehicles (EVs) are expected to make up 44 percent of global passenger car sales by 2030, while shipping, steel, and other transnational industries are looking to switch to clean fuels such as green hydrogen. Countries can take advantage of these trends by implementing policies that incentivize the growth of new industries and improving utility planning to harness business models that use distributed batteries and EVs effectively. In Vietnam, DAI worked with local and national governments in Danang and Ho Chi Minh City to improve energy planning and leverage innovative solutions for EVs and charging stations.
Proactive planning can also help countries harvest excess clean electricity, convert it to hydrogen, and sell it to industries like shipping and steel that need it most. In Namibia, a country with high renewable potential but limited local demand, DAI is working with local partners on a new $1 billion investment fund to finance green hydrogen projects able to export hydrogen to international buyers.
3. Rise of distributed energy resources
Small-scale energy sources such as urban rooftop solar or rural microgrids, located near where the energy is consumed, are growing in popularity. These “distributed energy resources,” or DERs, provide an opportunity to democratize and decentralize the power sector but create operational challenges for the utilities that manage the grid.
For cities, engaging with local stakeholders to determine, for example, how to incentivize DERs equitably while maintaining grid stability is key to developing policies that de-risk project development and unlock demand. These polices can be completed with tailored financing programs to further reduce risk. In Morocco, DAI worked with the European Bank for Reconstruction and Development and local banks to establish a €115 million facility to on-lend to small businesses and industrial companies looking to buy green-energy equipment.
For rural areas, support for mini-grids is crucial and starts with identifying the small and medium-sized enterprises (SMEs), such as healthcare facilities and farms that can anchor demand. In Uganda, DAI worked with Open Capital Advisors and local partners to identify the most promising mini-grid firms and support a subset with technical assistance and transaction advisory services to help drive private investment into off-grid communities. This assistance included supporting local productive use, such as freezer facilities for fishery SMEs in Uganda.
4. Need for upgrades and expansion of transmission and distribution
As renewable energy grows, power must be transmitted where it is needed. To achieve net-zero emissions by 2050, countries must double their investment in transmission lines and other infrastructure to connect regions, improve energy security and cooperation, and develop innovative solutions to power delivery. Innovative technologies—such as a “dynamic line rating” project in Thailand that uses weather conditions and other factors to calculate the maximum amount of current a transmission line can carry—are being piloted and, if successful, offer frontier economies the chance to accelerate progress toward the flexible power grids of the future.
In Malawi, DAI is working with the government and local energy agencies to support the development of distribution lines to connect peri-urban areas. The project is also introducing market reforms and capacity building for integrating the Malawi transmission grid with the Southern African Power Pool and Eastern Africa Power Pool.
Conclusion
Energy is the lifeblood of development—helping low-income countries power schools, hospitals, and businesses to build economic opportunities for the next generation. As energy demand grows and countries develop more renewable power sources, the need for a flexible and adaptive grid is clear. Resource-constrained countries need access to improved planning and grid modeling, capacity building for energy sector players, and better access to finance to increase investment flows in this critical sector. To help realize these needs, we will continue to work with countries to pioneer new solutions, share best practices, and build the integrated power grids of the future, ensuring that power is ubiquitous, affordable, and reliable for all.
