In today’s issue:

  • Why UK small caps are doing strategic U-turns
  • The industry where China is beating targets years ahead of schedule
  • The mysterious reason why our new PM can’t invest like China

Here’s a little-known fact for you.

You’ve probably heard that solar and wind projects are growing quickly across the world, as their prices fall, and their low-carbon benefits help us meet our climate targets.

[Our own Labour government has made clear its own green ambitions – though my colleague Nick has thoughts on whose really got control.]

What many people don’t realise, though, is that a lot of those projects still aren’t generating any power at all. Is that because of problems with solar and wind? Not at all.

The problem is with the grid. We can’t connect them to it.

These projects are currently sat idle, stuck at the traffic lights so to speak, waiting to be connected to the grid. They’re built, but they can’t generate any power.

You see, our existing grid systems weren’t built for all these new connections, and the industry hasn’t been prepared for the rapid rate of renewables growth.

As a result, a shortage of transformers, cables and other components is currently the number-one bottleneck threatening to delay the transition to clean energy.

We’re building green power generation, but we’re having trouble connecting supply with demand, which is resulting in shifts in company strategy and government policy across the world.

In the UK, private sector companies are seeing this and pivoting to take advantage.

Take Simec Atlantis.

Once, it hoped to become a tidal energy company and had some interesting technology, which briefly got investors excited. However, slow progress meant this excitement faded and, with it, the share price. It fell over 95% as fears of bankruptcy in the near-term overtook hopes for long-term technological success.

Companies use assets to generate returns, and Simec’s tidal assets weren’t ready for commercial use. It had, though, another asset that previously had little value, but has suddenly become a potential gold mine. Something powerful enough to make the share price do this:

Source: Koyfin

What Simec has realised over the past few months is that the grid connections they were previously awarded in case their tidal ambitions bore fruit were suddenly a scarce and valuable resource.

While many renewables projects are struggling because they have an asset but no connection, Simec was the opposite: it has connections but nothing to put into them.

So it pivoted to the simplest, fastest-to-deploy solution it could: batteries. It sold off some development rights on its land to raise money, and it has entered into agreements to deploy battery storage projects and connect them to the grid.

And this power grid pivot has sent its shares soaring over 220% in just a few weeks.

Market participants are seeing the situation, and reacting.

But it’s not just the small private sector companies reacting to the grid bottleneck. Take China, where the numbers take on rather different proportions.

Analysis by Carbon Brief has shown that clean energy sectors were responsible for 40% of China’s GDP growth last year. Its $890 billion of clean energy spending, a 40% increase on 2022, roughly matched total global spending on fossil fuels.

China does not do small measures. It accounted for 59% of total global solar installations last year, adding more in a single year than most countries have in their history.

China is rolling out solar and wind at an extraordinary rate, and becoming dominant in those industries as a result. In fact, it’s set to meet its 2030 renewables targets fully six years ahead of schedule.

However, it is now facing exactly the same grid connection issues as the UK and Europe.

According to the Financial Times, “over the past year, more than 100 counties and cities in five provinces have suspended new small-scale solar operations from connecting to distribution lines”.

As a result, China’s grid is in particular need of a revamp, and the response has been, well, Chinese. The central planners have announced an $800 billion investment project over the coming years to renew and expand the grid to catch up with the pace of renewables growth.

Given Simec’s pivot is based around spending that’s measured in the hundreds of thousands, $800 billion is a truly remarkable figure, highlighting just how acute this issue is, and how different the scale is in China.

Private and public sector are both shifting strategy to alleviate this key bottleneck. Sam Volkering and I recently recommended one company in Southbank Growth Advantage that is set to benefit from the global grid spending boom. It’s up 28% in under four months, showing how investors need to be focusing on this crucial theme.

From the turnaround plan of $15 market-cap company Simec to the $800 billion China grid strategy, and now to our recent recommendation in … it’s clear that the grid-as-the-transition-bottleneck theme is going to be a key driver of investment returns in the coming months and years.

But while in China the central government has the power to inject those enormous sums, it’s not so easy for the government here in the UK to do the same.

After all, we’ve already seen Labour cut its net zero spending pledge in half during the election, from £28 billion to £14 billion. The government will instead try to encourage private sector spending by reforming planning rules rather than driving entirety of the investment itself.

Why is this?

My colleague Nick thinks he has the answer. 

He says that the new prime minister isn’t the most powerful person in the country. And that Sir Keir needs someone else’s sign-off before he can commit to anything he promised in the campaign…

Is Nick right? I’ll let you be the judge.

Click here to see Nick’s research on the “Shadow Prime Minister”.

Until next time,

James Allen
Contributing Editor, Fortune & Freedom