Is the green transition facing tailwinds or headwinds? What the data shows us

The green energy industry faced headwinds in 2024 from geopolitical tensions, trade barriers, and rising costs. While investments continue apace across sectors like wind, solar, and electrified transport, profitability and policy hurdles remain.

The year 2024 was marked by major disruptions in global energy markets, slowing the pace and direction of the green transition, especially in the Western world. Rising capital costs driven by inflation and pricier raw materials have made new energy projects more expensive. At the same time, significantly higher interest rates have hurt the profitability of capital-heavy ventures like hydrogen and offshore wind, prompting delays and cancellations. In both Europe and the US, permitting processes remain slow and unpredictable, with some US projects even losing previously granted approvals, shaking investor confidence. Finally, geopolitical tensions have pushed countries to prioritise energy security and control over supply chains, resulting in more protectionism, fewer cross-border projects, and higher costs for green energy initiatives.

Two decades of growth in green investment

Despite numerous challenges, global investment in the energy transition is progressing well. In 2024, annual spending surpassed USD 2 trillion for the first time across key sectors such as renewable energy, electrified transport, and power grids - more than a 20-fold increase since 2005.

Solar PV and onshore wind offer the lowest levelised cost of electricity (LCOE), making them among the most attractive sources of energy. Offshore wind, although more costly, has faced a tougher year due to supply chain disruptions and rising costs. Still, long-term investor interest remains strong. Investment in wind and solar energy has doubled since 2020, attracting a record USD 700 billion in 2024. Battery system deployment has also gained traction in recent years, largely driven by dramatic cost reductions thanks to massive investments in manufacturing capacity, particularly in China.

In contrast, investment in newer and riskier technologies - such as hydrogen, carbon capture and storage (CCS), and green fuels for shipping declined during 2024 amid the current challenging macroeconomic environment. These sectors appear to be in a holding pattern as investors wait for demand-side developments to mature. For now, it is the mature and well-understood electrification technologies that are expected to lead the green transition.

Much of the growth in energy transition investment has been led by China, with Europe and the US following behind. However, both Europe and the US diverged from their recent upward investment trends in 2024, raising the question: is this a temporary setback or the start of a longer-term shift?

Looking ahead, S&P Global forecasts that wind and solar energy production will double by 2030, triple by 2035, and quadruple by 2040. Around 80% of this capacity is expected to be installed in China, Europe, and North America. Even if these targets are met later than projected, the upward investment trajectory appears strong and likely to continue. Berne Union members are highly likely to see opportunities for increased activity within this area.

However, it is important to keep perspective: it will not be until around 2035 that the world is expected to generate as much energy from wind and solar as it currently does from oil, coal, and gas.

The second half is harder than the first half

The future is undoubtedly electric, but there are also several key challenges on the horizon that need to be addressed to keep renewable investments up and the green transition in high gear. Incorporating more renewable energy becomes increasingly hard due to the physical nature of fluctuating sources, and the second half of the green transition is much harder than the first half. Continued investments will require updates to regulation and policies.

Simultaneity of electricity production cannibalises profits

A key challenge in green energy investment is simultaneous power generation, which lowers profitability. When many renewable sources produce electricity at the same time, supply surges and prices drop. This phenomenon, often referred to as "profit cannibalisation," weakens the business case for new projects and can result in reduced electricity prices and financial losses for producers. The cannibalisation is most severe for solar. Wind is less affected, especially if grids allow exports to other regions, due to its more varied production profile.

Securing a long PPA helps mitigate the financial risk for projects and their lenders but does nothing to fix the underlying effects in the physical power market. Storage, stronger grids, and higher – and more flexible – electricity demand are all part of the solution to this challenge. Financial institutions could consider adding more projects in this space to their portfolio of ‘regular’ renewable energy transactions.

Electrification of demand and renewable energy needs to increase in parallel

For a balanced market and viable investments, electricity demand must grow in step with wind and solar production. This requires households and industries to shift from fossil fuels to electricity. Until now, renewables have mostly replaced fossil-based electricity. But to accelerate progress, they must also replace fossil fuels in other areas, such as heating and transport. So far, electrification of demand has progressed quite slowly. Since 1990, the global electrification rate has only increased by 1.5% annually.

Policy support is key. Energy taxes often favour fossil fuels - in Denmark, for instance, electricity is taxed at EUR 120/MWh, versus EUR 22/MWh for gas. Correcting such imbalances and supporting transport electrification, like charging infrastructure, would help speed the transition.

Security of supply must be maintained at a high level

Electricity markets follow basic economic principles: more renewable output reduces the need for other suppliers, leading many fossil power plants to shut down. While this is a climate win, it also removes important technical services that these plants provided to the grid and that are needed for robust operation.

First is firm capacity - generation on demand - especially during “dunkelflaute” periods with little sun or wind. Second is flexibility: the ability to ramp output up or down instantly to balance supply and demand in real time, not just across the day or the hour. Third is system stability: provision of technical capabilities like inertia, grid-forming solutions, voltage control, to name a few of the ‘invisible’ services.

Fossil plants are not the only providers of these services. Alternatives exist, but they must be built and integrated. Traditionally, the responsibility for security of supply remains with the system operators in charge of the grid, but one can see a case for the private market to help provide the assets needed as a new line of business - or being paid for the invisible services they provide today.

The big questions ahead

Today’s geopolitical tensions, rising public spending in other areas, and increasing protectionism are putting pressure on green development. With defense, healthcare, and education competing for public funds, the question is no longer just about ambition, but about prioritisation. Will governments stay the course on climate, or will targets be scaled back?

Whether facing headwinds or tailwinds, the direction is clear: the energy system of the future will be cleaner, more electrified, and more interconnected. The pace behind mature sectors like solar, wind, and electrified transport looks strong and will continue to attract capital, but emerging technologies may take longer to scale.