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The energy transition is entering a new phase driven by economic pragmatism. Maintaining momentum will likely require significant collaboration and new financing mechanisms.
Energy transition is an important climate imperative. As the source of about 75 percent of global greenhouse gas emissions, the energy sector holds the key to responding to the world's climate challenge.1 Given the criticality of this sector as an economic engine, the transition needs to be looked at from the lens of supply security, affordability and sustainability.
Economic viability has always underpinned investments in sustainable technology. Just look at the uptake of solar and wind, for example. It wasn't until the cost of these technologies became comparative to traditional fossil fuel generation in the late 2010s that uptake really took off. That sparked a frenzy of capacity installation — Vietnam, for example, installed some 16.6 GW of solar between 2018 and 2020 alone2 — driven primarily by economic feasibility.
Now, however, we have largely plucked the low-hanging fruit. Sectors that were able to make clear business cases for electrification — transport, for example — have done so and are nearing the limits of their ability to transform. Until grids are strengthened and supported by energy storage options, renewables have also started to reach their limits in many markets, given the intermittent nature of their generation.
The focus is now shifting to harder-to-abate sectors and harder-to-finance projects. In some cases, these are initiatives that are either too small (a rural electrification project in Africa, for example) or too big (the commercialization of green hydrogen) for traditional finance models and investors to manage. Others may be projects that deliver massive carbon benefits but little economic return, or where the risks are prohibitive to investors.
For the energy transition to continue, therefore, leaders must take a much more pragmatic view that balances economic realities (security and affordability) against environmental outcomes (sustainability).
This year, expect pragmatism to drive greater focus on two key areas — collaboration and financing models.
Reset 2025
This year, expect pragmatism to drive greater focus on two key areas — collaboration and financing models. Start with collaboration. Despite recent rhetoric that suggests some markets might be backtracking on their energy transition goals, we expect to see most markets, particularly in Europe and Asia, come together to get ideas commercialized and get pilot projects into development.
We also expect to see greater collaboration across public and private sectors, bringing together technology companies, industry, academia and government to collaborate around innovative mechanisms and creative approaches to help unlock financing. Matchmaking tools (like DigiLeap by SEAS in Singapore) can help connect projects with technology and financing. Sharing best practices can help reduce risks by standardizing some of the contractual approaches and risk mitigation measures.
One area where we expect to see particularly strong activity is in the development of blended finance instruments. As we predicted in last year's Emerging Trends in Infrastructure, there has been a significant rise in the amount of available philanthropic capital over the past year.
This year, expect to see that capital start to get allocated towards marginal projects that have high societal and environmental impact. Innovative risk mitigation models like first loss debt, guarantees and carbon credits have provided the tools to create the right financing environment to attract philanthropic and foundation capital by blending with commercial capital.
Better data and quantification around project benefits will be key to unlocking finance. Philanthropic capital wants to know that their capital is making a measurable impact, helping achieve the UN's Sustainable Development Goals and facilitate energy transition. Measuring and reporting this data will be key to crowding in all investors, philanthropic in particular.
At the same time, capital market pressure — inspired both by investors and by carbon taxes and the like — will likely start to change the business case behind some investments which, in turn, should unlock some capital, particularly from institutional investors and asset managers eager to achieve some value creation by derisking their investments.
Climate risk models and assessment tools can continue to highlight the risk of maintaining the status quo. Irrespective of regulatory initiatives, most asset managers and financial institutions will realize they are staring at stranded assets and large economic losses imposed by climate events unless a deliberate mitigation and adaptation project pipeline is developed to drive the transition over the next decade.
Pragmatism doesn't make the energy transition easier. But it does provide a more transparent path to achieving energy transition outcomes.
We expect to see greater collaboration across public and private sectors, bringing together technology companies, industry, academia and government to collaborate around innovative mechanisms and creative approaches to help unlock financing.
Our prediction and advice
Pragmatism doesn't make the energy transition easier. But it does provide a more transparent path to achieving energy transition outcomes. Expect to see significant work go into creating blended finance models (such as the US$5 billion platform created by the Singapore Government to support the Financing Asia's Transition Partnership (FAST-P) last year),16 supported by concession capital.
On the project and portfolio side, we also expect to see owners start to put much more focus on capturing and reporting the data required to demonstrate the expected social and environmental benefits of their projects. In part driven by companies eager to quantify their Scope 3 carbon emissions, we expect to see some standardization and improved technologies deliver an important step change in the way environmental impact is measured.
We also expect to see significant competition start to build as markets and investors vie to attract philanthropic capital and other concessional finance players like multilateral banks to their projects. Creating robust economic business cases supported by clear evidence of environmental benefits will likely be key.
We believe 2025 is the tipping point where, irrespective of populist governments and economic nationalism in some leading countries, the momentum may only increase for energy sector decarbonization. The energy transition is entering a new phase where environmental outcomes must be carefully balanced against economic pragmatism. And a new phase requires new thinking.
Footnotes
1. IEA - https://www.iea.org/spotlights/the-energy-sector-is-central-to-efforts- to-combat-climate-change
2. Renewable Capacity Statistics 2024, International Renewable Energy Agency, 2024
3. https://www.mas.gov.sg/news/media-releases/2024/singapore-commits-us$500-million-in-matching-concessional-funding-to-support-decarbonisation-in-asia
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