Despite significant growth across the energy transition sector in recent years, climate records continue to be broken – necessitating seismic change to the way we generate and use energy. Previously we outlined three energy transition themes and their impact on valuations. These included the evolution of energy transition technologies and investment strategies, diversified energy transition platforms, and rising demand in emerging markets. Here are three more trends that are being shaped by the evolving energy transition sector in 2025.
1 Price cannibalisation and co-location strategies
In recent years, the volume of solar and onshore wind projects has increased rapidly in developed markets, such as the UK, Germany and Spain. The greater penetration of intermittent renewable energy sources means that an abundant volume of power is generated during windy or sunny conditions. During times of greater supply, the price received by renewables generators will be below the baseload power price. The percentage of the baseload price that is achievable by an asset is also known as the capture rate. Capture rates have been declining, notably in Spain which averaged 97% in 2020 and 82% in 2023, before falling to a record low of below 50% in April 2024. Capture rates have since increased in Spain, but an ongoing decline in capture rates over the next five years in Germany and the UK is forecast as more renewable capacity comes online.
This phenomenon of excess renewable energy generation is also demonstrated by the increased instance of negative price hours. In the UK, 2024 was a record year for negative price hours, with the volume expected to continue increasing until at least 2027.
One possible solution to rising price cannibalisation is for developers to co-locate a solar or wind asset on the same site as a battery energy storage system (BESS) asset. This allows developers to benefit from a shared grid connection and to store energy during periods of low demand or low capture rates, meaning revenues for each asset can be optimised to maximise project returns. We’ve observed developers increasingly considering co-located sites to maximise the profitability of their projects and we expect the co-location market to grow in 2025 as a result.
Valuation considerations
Many energy transition projects include long-term power price forecasts. It’s necessary to consider how capture rates are factored into these forecasts. Capture rates can be sourced from third-party power curve providers but it's important to monitor the latest market trends and project-specific performance to ensure that any capture rate assumptions are reasonable. Forecast revenue assumptions should also be assessed on a net basis, ensuring that the reasonableness of both power curve and capture rate assumptions are considered in aggregate.
The potential benefits to be gained from co-location can vary significantly depending on factors such as location, grid connection and availability. Detailed planning is required by developers to ensure that revenues for each technology are optimised. Therefore, the approach to valuing a co-located site must principally address project-specific considerations, with a methodology that’s tailored to the project. The global co-location market remains relatively nascent with few observable transactions. This creates a challenge in determining the reasonableness of valuation assumptions for projects in the development stage with limited project-specific information, as quantifying the value of each individual asset at a co-located site is highly subjective.
2 Continued importance of secured offtake
Despite expectations across multiple markets that projects will transition towards having close to 100% merchant revenue, we expect contracted offtake to retain significant importance for energy transition projects. In part, this is to ensure projects can obtain project finance from banks but it’s also to protect against the downside risk of volatile power prices, which are hard to predict in the long-term. Many energy transition projects require a significant amount of capital expenditure, therefore having clear visibility over the payback period is important to determine the viability of a project.
Using the UK as an example, various forms of offtake exist. State subsidies continue to be vital, such as the contract for difference (CfD) scheme and the grandfathered Renewable Obligation Certificate (ROC) scheme, which closed to new applicants in 2017. CfDs are vital to the growth of the offshore wind and green hydrogen industries, with the importance of setting an appropriate price demonstrated in the failure of AR5 and subsequent success of AR6.
An alternative to state subsidies is the use of power purchase agreements (PPAs), which involve utilities or corporates purchasing contracted volumes of renewable energy. According to the Pexapark Renewables Market Outlook 2025, the European PPA market has grown from an annual contracted capacity of 10.9 GW in 2022 to 15.2 GW in 2024, with a c.94% increase in the volume of deals during the same period. We expect the PPA market to continue to grow, especially given the surge in energy demand expected from data centre expansion, albeit not necessarily at the same pace as the size and structure of deals will vary.
The structure of PPAs is evolving with a higher volume of co-located projects expected to secure PPAs in the future. These are better able to access baseload PPAs at higher prices, avoiding the risk of intermittency experienced by standalone sites. In the UK BESS market, Gresham House Energy Storage Fund Plc entered into a first-of-its-kind tolling agreement in 2024 to gain revenue security in the near term during a depressed trading environment. Meanwhile, there’s a growing market for insurance products in the energy transition market which provide protection against energy price risk.
Ultimately, we expect investors, funds and developers to continue to identify innovative contract solutions to reduce risk, meet return thresholds and ensure cash flows are predictable in the medium term.
Valuation considerations
The diversification of approaches to securing contracted offtake requires valuers to develop a deep understanding of the contract design for each project. The application of a sector-wide discount rate is becoming less relevant as contract structures diverge, meaning the consideration of project-specific factors continues to increase in importance. Merchant exposure, counterparty risk and the contract terms should all be considered when determining a discount rate and reviewing cash flows.
In more established markets, the useful life of an asset is often greater than the period of contracted offtake. The post-contract period has increased in recent years as asset lives have grown due to technological advancements and longer warranties. It’s therefore important to maintain awareness of the re-contracting risk for a project, giving reference to the maturity and future expectations of a merchant market, and considering a bifurcated discount rate where appropriate.
3 Growth in open-ended funds
As infrastructure investors continue to seek long-term, attractive yet stable returns, we’ve observed a growing volume of open-ended fund structures within the energy transition sector. Open-ended funds are perpetual, remaining open to investment continuously, whereas closed-ended funds tend to have a lifespan of 10-12 years with more distinct phases of invest, hold, and divest. Typically, open-ended funds are considered most appropriate for established, core infrastructure, with long-term, dependable cash flows. Closed-ended funds are often well suited to less proven technologies or investments at different life cycle stages, as an investor can benefit from higher returns which are available over a shorter time horizon.
To date, most private energy transition funds we work with are closed-ended. However, as technologies mature and the energy transition investing mandate expands further beyond renewable generation, we’re seeing more open-ended funds being considered. Sectors such as heating, renewable energy and transport have opportunities to provide essential infrastructure that offers stable returns. Utility-scale solar projects are an example where the technology has proven reliable, costs have fallen, useful lives have increased, long-term cash flows can be secured through a variety of offtake structures, and investors are more accepting of merchant risk. An open-ended fund allows for the full potential of long-term assets to be maximised through active asset management over the lifetime of the fund, and by enabling investment or divestment decisions to be primarily based on favourable market conditions.
Valuation considerations
Open-ended funds enable investors to buy and sell their shares frequently, which can be monthly or even daily, whereas investments in a closed-ended fund are locked in for a set investment period. This creates a challenge for open-ended funds to derive a valuation policy that appropriately considers the dichotomy of a long-term infrastructure asset with stable cash flows, within a highly liquid fund. Energy transition asset owners will typically seek to ensure that most cash flows are contracted. However, assumptions such as power curves require quarterly re-evaluation and historical asset performance can influence views on discount rates and availability on an ongoing basis. Monitoring developments in the market along with project-specific performance will help ensure the key valuation assumptions for an asset are up to date. It’s also important to retain a long-term view of the portfolio to avoid unnecessary volatility in valuations that aren’t reflective of an enduring trend. This challenge has been elevated in recent years due to rising interest rates, greater volatility in government bond yields and heightened energy transition policy uncertainty, especially in the United States.
Taking a long-term view on the impact of short-term volatility requires a deep understanding of the market and project-specific risk factors relevant to a particular fund structure.
Responding requires coordination
Challenges in the energy transition sector, such as price cannibalisation, require coordinated efforts from both national governments and the private sector to resolve. Investors, funds and developers are identifying innovative ways to respond to these challenges, with creative structures being used to deploy capital. An example of this relationship is the expectation that in future years, negative price risk will be increasingly factored into the terms of offtake contracts through innovative arrangements.
As a result of these innovations, our infrastructure valuations team is continually growing, reacting and evolving our approaches in line with best practice.
For further insight and guidance on energy transition valuations, get in touch with Tristan Rawcliffe or Jade Palmer.
Three energy transition valuation trends in 2025
