Financing the Energy Transition 2025

To manage the global energy transition successfully requires a balanced energy policy that combines renewable energy with flexible assets such as storage technologies and clean fuels. Policy-makers must ensure the transition is sustainable, affordable and secure, even as the world grows. Fossil fuels currently provide over 80% of all the world’s energy supply.4 Moving from this system to a nearly fossil-free world is a major societal, cultural, economic and political shift, requiring significant effort and investment. A balanced energy policy should consider the optimal mix of technologies and pathways to decarbonization. This includes promoting renewable energies, electrifying end-uses, enhancing energy efficiency, investing in grid infrastructure and implementing energy storage and flexibility solutions to ensure a secure and reliable energy supply. To do this requires international cooperation and financial resources to foster the global energy transition. This involves mobilizing capital for power generation, grid infrastructure and storage solutions, especially in developing countries where financing costs are higher and government budgets are limited. In addition to financing renewable energy projects, ensuring a steady supply of materials and equipment is critical for project developers. This extends from securing raw materials for components such as wind turbines and batteries to obtaining highly specialized equipment such as power grid substations. Many countries, including the US and India, are prioritizing the development of domestic supply and value chains to reduce reliance on global markets. However, if required investments fall short, gaps in these domestic supply chains could emerge, creating a significant bottleneck in the deployment of energy transition technologies. Strategic investments in manufacturing and supply chains are therefore essential to prevent supply constraints from impeding the deployment of energy transition technologies. Due to their innovative nature and cost structure, energy transition technologies require significant upfront investment and risk appetite. Investors such as equity sponsors and lenders – as well as individual investors within these groups – differ in their willingness towards taking risks. Their risk tolerance reflects the return they expect from their investment, with higher risk levels meaning higher cost of capital. While solar and onshore wind are mature in advanced markets, other energy transition technologies, such as floating offshore wind or electrolysers, are seen as riskier due to their lack of operating hours or disruptive nature. Risk is generally even greater in developing countries, where political instability and less-developed financial markets and infrastructure increase the cost of capital. Finding a way to reduce the cost of capital and mitigate risk properly is crucial for the success of any infrastructure project. Key players include developers, investors, financial institutions, governments, utilities, suppliers and regulatory agencies. The main risks can be categorized as follows: –Environmental and social: environmental impacts, social opposition. –Political and regulatory: policy changes, delays in permitting, expropriation, lack of robust regulatory compliance. –Financial: currency volatility, liquidity issues, interest rate changes, credit risk. –Project-specific: construction delays, technological challenges, operational issues. –Offtake: counterparty risks, payment defaults, dispute resolution, market fluctuations. Effective risk management includes the following options: –Climate and energy strategies: these form the basis of a low-risk environment by providing a clear long-term direction and rulebook for investments. –Regulatory and informational instruments that create transparency, ensuring confidence for investors and developers in regulatory certainty. –Insurance to shift certain risks to insurers or other third parties and allow improved risk hedging. –Robust network planning and infrastructure: foster investments and reduce risk perception around whether energy produced can effectively be transported where and when it is needed for consumers. –Strong project management to ensure oversight and accountability. –Contingency planning, with back-up plans to minimize disruptions. –Clear contracts, detailing scope of work, payment terms, performance guarantees, dispute resolution mechanisms, termination provisions, force majeure clauses, insurance requirements etc. Financing remains a common issue for achieving clean, affordable and secure energy supply worldwide. The measures outlined above can help manage risk and secure investment, but challenges and timelines vary by region. The following section examines some of the risks and challenges encountered in specific geographies. Fossil fuels currently provide over 80% of all the world’s energy supply. Moving to a nearly fossil-free world is a major societal, cultural, economic and political shift. Financing the Energy Transition: Meeting a Rapidly Evolving Electricity Demand 10