With 2024 confirmed by Europe’s Copernicus observation agency as the first year to exceed 1.5°C above pre-industrial levels – the target set under the Paris Agreement – 2025 represents a vital year in the evolution of the energy transition. Various challenges and opportunities are emerging for investors as different technologies and approaches compete to provide a secure, zero-emission energy system for the future that respects planetary boundaries.
There's a growing volume of innovative technologies and companies seeking to establish the viability of projects in nascent sectors. The desire to store intermittent renewable energy over longer periods of time is leading to larger battery energy storage system (BESS) projects and long-duration storage technologies, such as liquid air energy storage. Investment in technologies with the potential to decarbonise heavy industry has expanded, such as green hydrogen, sustainable aviation fuel, and electric thermal energy storage projects. Various EV charging and transport decarbonisation platforms are emerging to target vehicles and fleets of various sizes. Meanwhile, the necessity of updating grid infrastructure has led to rising investment in transmission assets such as synchronous condensers.
During 2024, many such projects experienced delays. According to BloombergNEF's Energy Transition Investment Trends 2025, there was a year-on-year decline of 23% in global investment into nuclear, carbon capture and storage, hydrogen, clean shipping, electrified heat and clean industry. But the market fundamentals of energy transition are set to remain intact and therefore we expect these sectors to expand again in the future, with new technologies also emerging.
The strategy of many investors is evolving from a focus on traditional renewable energy technologies, such as solar and wind, to more nascent technologies with higher growth potential. New funds have emerged, such as Sustainable Development Capital LLP's London Edge Fund which focuses on energy efficient and decentralised energy projects, and Octopus Energy Generation’s Octopus Energy Transition Fund which aims to support alternative methods of decarbonisation. As part of this evolution, the funding structures being used to invest in energy transition have diversified as investors seek to protect themselves against the additional risk of investing in early-stage companies and technologies.
It's increasingly necessary to determine a valuation approach for early-stage energy transition companies with significant cash flow uncertainty, or for projects in nascent sectors with a lack of directly comparable benchmarks. Considering venture capital valuation methodologies, such as milestones analysis and scenario analyses, is important, ensuring that any approach is aligned with International Private Equity and Venture Capital Valuation (IPEV) guidelines.
The use of different investment instruments – such as convertible preferred equity, convertible loan notes, and share options – requires considering a specific valuation approach for each instrument. The approach should reflect a detailed understanding of the terms of the instrument, ensure that any equity valuation is appropriately allocated between different share classes, and that both upside and downside risk are reasonably considered.
It's also critical to determine a reasonable discount rate or multiple which reflects the risk profile of the investment, especially when offtake or the structure of a merchant market isn't yet established. Here, offtake refers to the purchase by customers of electricity produced from a zero-carbon source. For some emerging technologies, the cash flow profile of a project may involve a short period of contracted cash flows followed by a merchant tail with limited visibility of future pricing.
Monitoring performance over time for early-stage energy transition investments is needed to understand the nature of any downside risk and whether milestones have been met or missed. A key consideration here is determining whether delays to project timelines are reasonable for an early-stage project or reflective of a more structural issue which exists in a nascent market.
In 2024 we observed rising investment into projects at various stages of development. As the demand for clean energy rises and governments set more stretching targets, developers are growing in size, volume and complexity. Many developers may own and operate energy transition projects, while also developing projects and identifying a potential pipeline. Others may focus on selling projects before they reach construction.
We've observed developers entering multiple elements of the energy transition, such as providing operations and maintenance services or participating in the manufacturing of energy transition components. As investors seek access to multiple revenue streams, it's likely that investments into diversified energy transition platforms will continue to rise. A platform includes an overarching company which has control of multiple components, such as operating assets, a development pipeline and service companies. This allows an investor to access both asset-level and topco-level cash flows in a platform.
A sum-of-the-parts approach is often used when valuing energy transition platforms. This requires a technical understanding of each component in the platform to ensure the valuation approach and assumptions applied to each component are reasonable.
While an energy transition project is in the development phase, before the project has reached ready to build (RTB) status, there's likely to be uncertainty over future cash flows as project-specific assumptions are yet to be determined. Therefore, the market approach is often applied for projects in development. There are various stages within the development phase, such as securing land leases, planning and permitting certificates, grid connections, technical feasibility and finally forward contracts. While there are often transactional benchmarks available for projects sold at RTB stage, there is limited public data pertaining to projects being sold prior to RTB.
It's common to see investors allocate some value to either a platform premium or an unidentified pipeline. A platform premium reflects the additional value above a sum-of-the-parts approach, such as value from economies of scale, efficient asset management, or an established management team. An unidentified pipeline represents the expected future run rate of projects that management will be able to develop beyond its immediate, identifiable pipeline. Ascribing value to these areas is inherently judgmental. It requires a deep understanding of the platform, the track record of the developer and access to comparable benchmarks for similar deals.
Emerging economies, particularly ASEAN countries, India and the Middle East, are expected to drive between 66% and 95% of energy demand growth through to 2050, according to a report by McKinsey & Company on Global Energy Perspectives 2024. For many, a unique opportunity therefore exists to drive economic growth and wider access to electricity through bypassing fossil fuels and developing a net-zero energy system instead. One example is in Djibouti, which has historically imported around 80% of its electricity from Ethiopia, where the government has targeted 100% of electricity to be sourced from renewables in-country by 2035. Another is the Philippines which removed foreign ownership restrictions in 2022, to encourage international investment. While clean energy investments are expected to rise by more than 50% in emerging markets between 2020 and 2024, according to the International Energy Agency (IEA), this is from a low starting point, with significant further growth required to meet rising demand.
As capital flows into emerging markets, new energy transition sectors will evolve, which have less established structures compared to those in mature countries. For example, there's significant potential for offshore wind in South Korea, green hydrogen in India and Brazil, and utility scale and distributed solar throughout much of Asia and Africa, despite there often being no operational projects at present. This presents a challenge as investors are seeking to price first-of-a-kind projects and overcome the myriad challenges inherent to being an investor in nascent markets.
In numerous emerging markets, no wholesale market exists for the sale of electricity from independent power producers. Therefore, counterparty risk and the terms of the offtake contract are vital, such as whether the contract involves a take-or-pay structure. It's necessary to ensure any offtake risk is either captured in the cash flows for the project or the discount rate. The useful life of a project is one example of risk mitigation, especially in countries with no wholesale market, where the project’s useful life can be aligned to the length of contracted offtake.
When determining a discount rate, a key consideration is the extent to which various risks have been mitigated and are reflected in project cash flows. Given the lack of comparable benchmarks in many emerging markets, multiple methods of discount rate triangulation are necessary. The risk assessment should include:
Last year was a challenging one for the energy transition sector with multiple projects experiencing delays and certain sectors, such as EVs and green hydrogen, experiencing slower growth than expected.
However, we remain optimistic about the future growth prospects for energy transition. This is due to ongoing innovation in the sector and the willingness to invest in diversified technologies, platforms and regions in order to decarbonise. As energy transition develops and increases in complexity, the approach to valuing projects, platforms and companies will also continue to evolve.
For insight and guidance on energy transition valuations, get in touch with Tristan Rawcliffe or Jade Palmer.
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