Financing the Energy Transition 2025

Infrastructure and energy transition projects are typically financed by large corporations or through project finance. Using a company’s own balance sheet to fully finance a project is more efficient from a cost and time perspective, but the investment is often too expensive for smaller companies and refinancing can introduce additional risk. Flagship projects signal corporate commitment to energy transition goals, but stand-alone projects may lack sound economics and bankability. Project finance, which relies on the project’s cash flows, indicates a technology’s readiness for commercial application. The success and bankability of a project depend on effective risk mitigation and allocation among investors, lenders, contractors, governments and other stakeholders. Meanwhile, blended finance combines public and private capital to fill investment gaps, attract private investment and make otherwise non-bankable projects viable. This chapter explores tools and solutions for investors and governments to enable investment and advance the energy transition. Development finance institutions 4.1 4.2Development finance institutions (DFIs) provide risk mitigation instruments such as insurance and guarantees, as well as capital through concessional loans, loan guarantees and bonds to support international development. Thanks to their high credit-worthiness, DFIs are able to raise funds in the capital markets before lending on to promoters. DFIs are willing to take risks that private investors avoid, such as political and foreign exchange risks. They work closely with governments to ensure projects meet strict environmental and social standards.DFIs can work with companies of all sizes and offer loans, equity investments and guarantees to banks and other lenders. However, their longer decision-making processes and stringent terms can limit business flexibility. Governments and other stakeholders should work to ensure that DFIs have the agility required to support all types of players in the energy transition. Performance guarantees Performance guarantees – provided by the engineering, procurement and construction (EPC) contractor or by an insurance company – are crucial for providing certainty and risk mitigation to investors and operators, ensuring technology performs as expected. They incentivize operational excellence through proper maintenance and optimization, which is especially important for newer energy transition technologies with limited operating data. These guarantees encourage investment in otherwise risky projects.Lessons learned from solar and wind development can accelerate emerging technologies. Debt and equity partners often require performance guarantees for critical equipment to ensure reliability and mitigate financial risks. However, manufacturers of less mature technologies may hesitate to provide these guarantees due to operational uncertainties. Governments can help by providing insurance to original equipment manufacturers (OEMs) and EPCs, supporting performance guarantees, spreading risk and facilitating wider adoption. This approach shortens the learning curve, lowers costs and improves bankability. Financing the Energy Transition: Meeting a Rapidly Evolving Electricity Demand 23