Harnessing headwinds

As we head into 2026, there is continued demand for energy transition investments. The International Energy Agency’s World Energy Outlook 2025 reported that renewables met much of the 2% increase in total global energy demand in 2024, driven by rising demand from data-centres, electric vehicles and air-conditioning. Long-term forecasts indicate electrification for energy security and decarbonisation will continue to drive growth in the energy transition.

However, investments, particularly in renewables, faced continued headwinds in 2025. As new opportunities developed amid macroeconomic and market challenges, we consider what strategies are needed to reach a final investment decision in the current climate.

Headwinds or hurricanes?

Geopolitical tensions challenged economic models in 2025, with the spectre of trade tariff barriers between the US and China exacerbating cost increases for essential components across already stretched supply chains. In some markets, this was coupled with tax authorities taking an increasingly tough stance on compliance and enforcement, creating uncertainty as to the availability of expected tax reliefs for major energy projects.

In 2025, even markets that were historically stable experienced increased political risk when the US federal government intervened in offshore wind licensing for projects already in construction. Consequently, investors added a new election risk category to their registers.

With rising levels of intermittent renewables like solar and wind, power markets and grid networks in developed economies are facing growing challenges to maintain a stable electricity supply. These issues become acute in the context of increased demand, at times when generation from wind and solar is limited. Network constraints are contributing to increased delays and cost risks for projects, as well as system-wide changes. Although a new wave of network expansion is underway, power projects face lengthy delays for grid connections and may face rising charges, as the costs of upgrade works are shared amongst users. To ease network strain across Europe, reforms to manage grid congestion are being considered. However, these reforms may heighten actual or perceived change in law risk. Additionally, there have been growing incidents of negative prices, caused by over-supply of renewables pushing power prices below zero. As a result, the average capture price of some intermittent renewable generators is now reportedly lower than the average market price.

Strategies for harnessing headwinds in turbulent times

This volatility has created opportunities for those ready to harness them. We are seeing several strategies employed by governments, corporates and investors, often in combination:

1. Accessing innovative support schemes

For investors looking to mitigate key risks, government support through regulatory schemes is becoming increasingly important. Examples include:

• Governments in the UK, Germany and the Netherlands are deploying Contracts for Difference to mitigate power, fuel or carbon market price risk. This approach encourages investments in sectors such as offshore wind, low carbon hydrogen and carbon capture, effectively fixing revenues at a strike price, and settling against a market reference price.

• Traditionally used in gas, water and electricity networks, Regulated Asset Base (RAB) models are now also being deployed in the UK to support new large-scale infrastructure such as new nuclear power generation, hydrogen transportation and carbon dioxide pipeline and storage networks. Central to any RAB model is the price control process. At each review, an economic settlement is agreed with the regulator, providing an allowed revenue to be charged to consumers, depending on the achievement of certain performance incentives and outcomes.

• Cap and floor regimes are also being extended to long-duration electricity storage and offshore hybrid assets (OHAs). OHAs combine interconnection with the transmission of electricity generated by offshore wind farms, creating direct links between power grids and wind farms. Under these schemes, the regulator sets upper and lower revenue limits, designed to mitigate the asset owner’s exposure to market risk.

2. Transaction structuring

In constrained markets, transaction structuring is key to enabling energy transition investments. Portfolio or platform transactions can spread risk across a pool of investments, allowing greater flexibility for project development. Structured finance also enables different types of capital to participate in large-scale investments, allowing private equity and institutional capital to take risk-adjusted positions in high-capex projects.

3. Tax risk management

Initiatives to increase tax certainty are starting to emerge, as governments begin to understand that a lack of tax certainty often affects economic modelling and investment decisions for major projects. The UK is considering the introduction of a special new HMRC clearance process for the largest and most significant projects. At times, this pro-investment and pro-tax certainty message can strain against governments’ increasing push for tax authorities to collect more revenue without new taxes being imposed. This tension is well illustrated by the Gunfleet Sands litigation in the UK, in which HMRC are attempting to disallow tax relief for pre-development expenditure for a wind farm – even though this appears to run contrary to government policy on the issue. Tax certainty initiatives may help to avoid issues like this in the future.

4. Leveraging blended finance

Blended finance may be used to reduce the cost of capital for energy transition investments. Sources of blended finance include equity, debt and guarantee products from national and multilateral financial institutions. Blended finance is common in emerging markets financing but also plays a key role in large-scale projects in OECD countries. For example, the new Sizewell C nuclear power plant project leveraged government-backed and private debt through a £36 billion term loan facility from the UK’s National Wealth Fund and a BpifiranceAE export credit facility alongside 13 commercial banks supporting a £5 billion debt raise.

5. Stimulating demand

A clear route to market and revenue generation are essential for all investors. However, in energy transition investments, demand for low carbon products often requires regulatory intervention. Government or international schemes to establish demand are important to stimulate investment by introducing carbon pricing, labelling schemes and/or mandates that underpin long-term demand. In the EU, the ReFuel Aviation initiative promotes the increased use of sustainable aviation fuels (SAF) by setting a requirement for aviation fuel suppliers to gradually increase the share of SAF blended into conventional aviation fuel supplied at EU airports. When used in combination with other support and carbon pricing schemes, these provide a powerful signal for investment.

6. Value-chain integration

Integration of value-chains can also de-risk projects, thereby attracting investment and/or making debt-finance terms more attractive. Intra-group or JV partner participation in the supply or offtake arrangements covering all or part of a project’s supply or production can significantly reduce "project-on-project" risks, mitigating the risk of undersupply of a crucial input and / or ensuring revenue for at least a minimum proportion of the project’s output, underpinning the investment case.

7. Political risk management

As geopolitical tensions rise, so does the importance of managing political risks. Due diligence is crucial to assess legal system risk and change in law risk. Jurisdictions with robust and independent legal systems can offer stability and predictability for investors in an unpredictable geopolitical environment.

Establishing a clear investment pathway in 2026

While energy transition investments continue to face obstacles in 2026, there are nevertheless opportunities for investors. By employing innovative structures or financial models, leveraging government support, and integrating risk management strategies, both public and private sector actors can unlock new opportunities and drive sustainable growth. As the market evolves, resilience and agility remain critical, with collaborative approaches and forward-thinking policies shaping the next wave of energy investments.