It might appear as though investors are struggling to see how to make the energy transition profitable, but European investor appetite hasn’t waned for the right transaction. Below we consider some topical issues and risk mitigants for those deploying capital in a nuanced deal environment.
Fund raising
A shift in the US political environment has added an extra layer of volatility around the sector and certainly M&A activity has slowed down, but European fundraising in the infrastructure, and particularly energy transition space, remains a bright spot in an otherwise somewhat softer fund-raising environment. Some highlights include:
- Antin Infrastructure Partners V closing at €10.2 billion in 2024;
- Swedish private equity investor EQT raising €21.5 billion for its infrastructure fund EQT Infrastructure VI in early 2025; and
- Blackstone Energy Transition Partners IV closing its fund at €5.6 billion [26/02/25].
This allocation of capital is an ongoing trend with many other mid and large cap sponsors joining the ever-growing reserve of dry and sophisticated private capital keen to invest in previously novel energy transition technologies that are now maturing.
Technology and demand
From solar fields and green hydrogen to carbon storage and battery-powered smart grids, scaling the technology needed for energy transition infrastructure is essential to meeting Europe’s ever growing energy demands, provided such technology marries with new macro industrial realities.
This demand presents both challenges and opportunities: driven by traditional customer needs and combined with the increasing electrification of vehicle fleets, transition to heat pumps, emerging technologies and the growing data center sector (projected to account for 5% of European power consumption by 2030 on the back of the AI boom (McKinsey 24/10/2024) European energy demands continue to be a lucrative problem to solve.
The scope of investable energy transition projects is broadening. Each energy transition vertical may differ in their risk profiles and maturity, but what unites them is growing sophisticated investor interest – and the need for smart management to ensure they’re viable, scalable and resilient.
Political will
The energy transition is a challenge to push through within a low-growth environment. It is similar in some senses to organic food: people say they want it, but if it costs 50% more, enthusiasm quickly cools.
In Europe there remains a disconnect between the political and the practical objectives. A desire to use more hydrogen, for example, is disconnected from the cost of achieving it. Regulations like (EU) 2024/1789 and the Renewable Energy Directive (RED II) aim to harmonise the rules across the EU. However, national planning frameworks remain inconsistent and harmonised rules for renewable gases are still lacking. For investors, that makes execution harder – albeit the macro drivers of home grown and secure energy, especially given the ongoing uncertainty with respect to Ukraine and east-to-west energy flows, is unlikely to change in the near future.
There are also other global forces adding to the unpredictability. The prospect of tariff disruption has the potential to upend clean tech supply chains and increase costs for critical materials and components. For projects reliant on imported equipment or cross-border contracting, this kind of geopolitical volatility adds another layer of complexity to already finely balanced business models.
With these challenges in mind, expert and innovative support becomes crucial, helping investors to navigate fragmented regulatory landscapes, understand how local and regional laws apply and structure deals with built-in resilience.
The importance of proof of concept, resilience and geography
Investors in energy transition technologies must prioritise proof of concept, resilience, cost and geography. Technologies and supply chains now benefit from years of operation and learning from past mistakes. For instance, early battery storage units often experienced thermal runaway events after short periods of use. Investors should ensure that apparatus can function within reasonable operational tolerances.
Despite advanced tried-and-tested apparatus, unexpected events such as the Heathrow sub-station fire and the recent Iberian power outages require investors to be resilient and prepared to weather an ever evolving, and sometimes unforgiving, news-scape.
Additionally, a project site’s geographical location is crucial. If investing in a new power plant, it must have a thought-out plan for connecting to the grid. Even a well-funded and technically sound wind farm can stall without connection to the grid. In the UK, connecting to the grid has been particularly challenged, with some projects taking up to 15 years to be connected – although recent Ofgem reforms focus on the prioritisation of clean energy being connected.
Another consideration is that if the power requires a specific type of what is known as feedstock (such as waste-to-energy projects), a steady supply of the correct materials at the right price is essential. Changes in feedstock pricing or regulatory control of output pricing can render a project uneconomic and so legal and commercial due diligence needs to assess this risk upfront.
Look at the details
Once a project has demonstrated its technical and operational feasibility, investor attention turns to finance and execution – two areas where complexity has grown significantly in recent years.
Green bonds and sustainable financing have matured beyond their earlier incarnations as marketing tools. Such instruments now require more rigorous structuring, detailed technical oversight, and careful tracking of how proceeds are used. What at one time needed relatively little oversight now often calls for a technical adviser to monitor compliance with evolving “green” and “sustainable” standards and to ensure that reporting holds up under scrutiny.
Power Purchase Agreements (PPAs) are another key building block. They help secure financing by demonstrating a long-term revenue stream – sometimes over periods of 20 to 25 years. But structuring a reliable PPA today is more complicated than simply locking in a price. Investors must consider timing, volume risk, delivery obligations and how shifting market dynamics could affect the contract over its full term.
Just as revenue streams must hold up across a project’s lifetime, energy inputs must too. There needs to be a clear, consistent power supply for all phases of the build – not just early delivery milestones. Overlooking this can create costly downstream risks.
Key risks to consider in PPAs
- Volume risk: When actual power generation falls short of forecasts, revenue targets may be missed and contractual obligations can be affected.
- Shape risk: Electricity may be produced at times that don’t align with peak demand or market value, reducing its commercial benefit, hence the increasing focus on storage solutions.
- Price risk: Long-term PPAs may become misaligned with market rates, creating a risk for either overpayment or missed upside.
- Regulatory risk: Policy or subsidy changes can alter project economics or impose new compliance burdens over the PPA’s lifespan.
- Credit risk: If the off-taker defaults or underperforms financially, it can jeopardise the project’s cash flow and viability.
Supply chain sustainability
Provenance of materials and the sustainability of the supply chain as offtakers and regulators demand higher standards and transparency. Investors should expect more rigorous due diligence especially as green bonds and private credit products mature and require compliance with evolving green standards.
The long-term opportunity
Despite occasional disruptions the trajectory for energy transition, provided it can be achieved at the right price over the long term, is strong. Investments in this sector are not fleeting trends: they represent a fundamental shift towards a sustainable future.
However, achieving success requires more than just good intentions and passive capital deployment. Projects must be technically robust, economically viable, legally secure, and proactively managed.
Investors who thrive in this sector will be those who address every detail from the outset, ensuring resilience and inspiring end-user confidence and then proactively manage the projects on an ongoing basis. The long-term rewards are substantial for those who committed their energy transition investments.
