Moving the dial: financing the energy transition

April 2025  |  FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

April 2025 Issue

The energy transition, which involves shifting from fossil fuels to renewable energy sources to reduce greenhouse gas emissions and combat climate change, is a crucial yet contentious and complex process. This transition has been a topic of discussion for years and is vital for the planet’s future. It encompasses fundamental issues including the fight against climate change, enhancing energy security, creating sustainable energy systems and strengthening the global economy.

The energy transition is occurring on multiple fronts, from developing renewable energy sources such as wind, solar, hydropower and biomass, to improving energy efficiency in homes and businesses, to transforming transportation to use clean energy. The primary goals are to reduce energy-related CO2 emissions and limit global temperature increases to within 1.5C of pre-industrial levels.

Climate change advocates and policymakers have argued for years that leading energy companies must play a key role in decarbonisation to achieve net-zero emissions. There is a growing realisation that merely investing more in greener energy while maintaining traditional production will not suffice to accelerate global decarbonisation at the necessary pace.

Recent trends suggest, however, that the industry – far from rising to meet the challenge – appears to be heading in the opposite direction.

Increasingly, large multinational energy companies are scaling back their investments in renewable energy and pivoting back toward fossil fuels. Companies including Shell, TotalEnergies and Equinor have reduced their renewable commitments to secure higher short-term returns. Notably, BP has abandoned its target to grow renewable generation capacity 20-fold by 2030 and is divesting its US onshore wind business. Similarly, Equinor has halved its low-carbon investment from $10bn to $5bn.

Among the factors contributing to this change of direction are the rising costs and supply chain disruptions in renewable projects, making them less attractive compared to the more immediate returns derived from fossil fuel investments. Shareholder pressure has also come to bear, as they seek higher returns and prioritise oil and gas projects.

This trend will of course have implications for the energy transition, likely slowing the pace of renewable energy adoption. But it has also highlighted the need for a stronger policy framework and greater incentives to make renewable investments more attractive to organisations, encouraging movement toward a sustainable energy future.

Making a successful transition to green energy will be a lengthy and costly endeavour. Achieving net-zero targets by 2050 requires a complete overhaul of the world’s energy, transport and industrial systems, and transformation of agricultural and forestry practices. This will necessitate significant investment – far higher than current levels.

According to McKinsey, addressing the physical challenges related to the transition will require developing and deploying new low-emissions technologies, and entirely new supply chains and infrastructure to support them. Many components are currently in early or formative stages, with only about 10 percent of the required deployment of low-emissions technologies by 2050 achieved in most areas.

Despite the current shortfall, however, funding the transition is not impossible. Efforts are underway to address the substantial gap, with a variety of stakeholders, including private investors and governments, taking action. But stark realities and challenges promise to hinder the process.

An enormous gap to fill

It is difficult to fully quantify the financial cost of decarbonisation, particularly as many estimates involve rapid and therefore expensive emissions cuts. Similarly, many analysts tend to overestimate energy demand and underestimate the speed and breadth of technological advances and their impact on the financial aspects of the energy transition.

Despite these factors, cost estimates for the transition range from $3 trillion to nearly $12 trillion annually. UN Trade and Development suggests that achieving the energy transition will cost about $5.8 trillion annually from 2023 to 2030 for the 48 developing economies studied, equal to 19 percent of their gross domestic product (GDP).

The Energy Transitions Commission (ETC) estimates that achieving net zero by 2050 requires an average annual investment of $3.5 trillion globally between 2021 and 2050, totalling $110 trillion in capital investment, or 1.3 percent of projected global GDP, over the next three decades. Of the $3.5 trillion needed annually for a net-zero economy, around $2.4 trillion should be invested in the electricity sector, accounting for 70 percent of the annual investment, it says.

In 2022, global capital investment in clean energy totalled $1.1 trillion, approximately a third of the required annual average to reach net zero. But it is important to note that the ECT’s $3.5 trillion figure is an average over 29 years. Opportunities to catch up still exist, although the window is closing quickly. According to the ETC, investments should peak at around $4.2 trillion by 2040 to meet net-zero targets. Therefore, to stay on track for net zero, significant and rapid investments in all sectors, with a primary focus on the power sector, are essential.

For comparison, the International Renewable Energy Agency (IREA) notes that although global investment in energy transition technologies reached a new record of $1.3 trillion in 2022, yearly investments must more than quadruple to over $5 trillion to stay on track for the 1.5C target. By 2030, cumulative investments must amount to $44 trillion, with transition technologies representing 80 percent of the total, or $35 trillion, prioritising efficiency, electrification, grid expansion and flexibility.

To meet these targets, any new investment decisions should be carefully assessed to simultaneously drive the transition and reduce the risk of stranded assets, according to the IREA. Currently, 41 percent of planned investment by 2050 remains targeted at fossil fuels. Around $1 trillion of planned annual fossil fuel investment by 2030 must be redirected to transition technologies and infrastructure to keep the 1.5C target within reach.

According to BloombergNEF, investment in the low-carbon energy transition worldwide grew 11 percent to reach a record $2.1 trillion in 2024. Much of this growth was driven by electrified transport, renewable energy and power grids, all of which recorded new highs last year. Energy storage investment also saw significant growth. Electrified transport remained the largest investment driver, reaching $757bn in 2024. Investments in renewable energy reached $728bn, and investment in power grids, including transmission and distribution lines, substation equipment and the wider digitalisation of the grid, hit $390bn.

To reach the planet’s ambitious net-zero goals, the world’s high-income economies and China will need to double today’s investment levels by 2030. One of the most significant challenges will be securing requisite investment in middle- and low-income countries. According to BloombergNEF, these countries need to increase their investment fourfold to around $900bn a year over the next five years.

International financial flows, led by multilateral development banks (MDBs), along with changes in MDB strategy and approach, can help generate greatly increased private investment. Long-term investors will be particularly important as they can assume short-term risks, such as supporting early-stage technologies or projects in emerging economies. While these riskier projects may deter some investors, sovereign wealth funds (SWFs) and public pension funds (PPFs) have the financial clout and long-term horizons to lead the financing process.

Practical measures

There are several practical areas where investments are being directed to achieve energy transition. Green bonds, for instance, provide a dedicated funding source for environmentally friendly projects. They are issued to raise capital specifically for renewable energy initiatives, energy efficiency improvements and other sustainable developments.

Similarly, environmental, social, and governance (ESG) integration embeds ESG criteria into investment decisions. As a result, investments are not only financially sound but also contribute positively to sustainability goals. Under the same umbrella is impact investing, which targets investments that generate both financial returns and positive environmental outcomes. Today, many investors focus on projects that promote renewable energy, energy efficiency and sustainable practices.

Carbon pricing and trading also helps to finance the energy transition, by assigning a cost to carbon emissions, which, in turn, incentivises reductions. Carbon pricing mechanisms, such as carbon taxes or cap-and-trade systems, generate financial incentives for companies to lower their greenhouse gas emissions.

Additionally, energy storage enables the efficient use of renewable energy. Investments in storage technologies, such as batteries, help balance supply and demand, ensuring a stable energy grid going forward. These technologies store excess energy generated from renewable sources like solar and wind, releasing it when needed. By funding energy storage projects, investors support the integration of intermittent renewable energy into a grid that can meet future energy demands sustainably.

A U-turn in US priorities

Against a backdrop of geopolitical tensions and risks, the investment landscape for energy transition in 2025 may not present the clearest image. The most realistic path toward halving emissions by 2030 is an aggressive energy efficiency strategy, combined with ramping up renewables to replace fossil fuels. But phasing out fossil fuels is a complicated undertaking for countries heavily reliant on coal, especially those seeking a fair and just transition for workers and communities. Concerted action and international cooperation are therefore essential to progress.

The election of Donald Trump, who has previously called climate change a “hoax,” may call into question the achievability of energy transition, or at least disrupt planned timelines. Mr Trump has pledged to undo key pieces of US green industrial policy, such as the Inflation Reduction Act (IRA), introduced by President Biden in 2022, which successfully attracted clean energy investment from around the world. Foreign direct investment into the US reached a milestone of $200bn in early 2024, attributed to the IRA and related legislation.

The second Trump administration has also introduced tariffs, creating trade tensions between the US, China and Europe. Upon taking office, the president signed a flurry of executive orders concerning the energy industry, including withdrawal from the Paris Agreement on climate change, rollback of clean energy initiatives, a temporary pause on leasing and permitting for wind projects, and lifting export restrictions on liquefied natural gas. At the same time, the Trump administration aims to ramp up fuel production to push energy prices down.

Uncertain pace of progress

Despite the shift in US policies, companies are unlikely to abandon their commitment to sustainability for all stakeholders – employees, customers and shareholders – in the US and abroad. A significant part of that commitment is to rely more on clean energy, particularly as demand for electricity continues to soar. This demand is driven by the accelerating pace of electrification across multiple sectors, from technology to transportation to heavy industry. And the AI revolution is power-hungry – data centres, crucial for AI capabilities, are heavy users of electricity to run hardware and maintain temperature control.

Incendiary rhetoric aside, there is hope the energy transition will survive the second Trump administration relatively intact. During his first term, investment in renewables grew considerably, with installed renewable capacity rising to 235GW in 2020 from 141GW in 2016, according to BloombergNEF. While progress may slow over the next four years, it should not be halted entirely.

Technological breakthroughs and plummeting costs have made clean energy cheaper than fossil fuels in most places. The energy transition will continue even as the US loosens environmental and climate regulations, promotes domestic oil and gas production, supports gas-fired power plants, and ends incentives for clean energy and electric vehicles.

Utility companies in the US and elsewhere are set to continue their investment programmes, focusing on renewables to meet rising energy demand and ensure grid adequacy. Other industrialised countries will remain broadly committed to the Paris climate agreement despite the US’s withdrawal.

As 2030 approaches, the transition will continue, albeit at a slower pace. A protectionist and unpredictable US will undoubtedly complicate clean energy investment and development, but SWFs, PPFs and other key investors are set to play a crucial role as the world transitions to a cleaner, more sustainable future.

© Financier Worldwide

BY

Richard Summerfield