Re-assessing progress; Re-writing the rules
This week, RBC will host its Energy Transition Conference in London, bringing together speakers to discuss a number of pertinent issues, from grid stability, the role of AI and datacenters, to progress on industrial decarbonisation and evolving efforts to finance the transition. Following the 2015 Paris Agreement, much emphasis has been placed on governments’ ability to provide the right environment to accelerate progress. However, the shifting geopolitical landscape means that the rules of the game need to be re-written, with a greater emphasis on energy security and costs, managing complex supply chains, and creating business models that are less reliant on policy support.
The perils of a poorly planned transition, with more emphasis on the trade-offs
While the energy transition remains a key item of policy and corporate agendas, associated trade-offs are becoming increasingly evident. The implications of higher renewable buildout on power price spreads are well understood; however, the risk of structural under-investment in grids and transmission over many years has moved to the forefront with blackouts in Spain and the UK over recent months. We expect many countries to take notes from these events, and we see the potential for improved planning and more strategic investment across the value chain, whether it be increased investment in grids, or more rapid deployment of batteries and demand-side technology to help manage more intermittent power supplies. For nations with industrial bases, we expect much greater focus on base load power over the coming years.
Satisfying power load growth from AI and datacenters while managing grid stability
The emergence of datacenters across many geographies gives rise to a new source of energy demand growth, and meeting these ever-increasing demands creates compelling investment opportunities for many companies. At the same time, multiple unplanned electricity outages in different regions have served to highlight the challenges of operating alongside ageing grids and brings rise to the urgent need for greater transmission investment to allow for flexible energy capacity, evolving supply & demand dynamics, while the accelerated roll-out of stationary storage solutions is also set to gain prominence. All of these forces are set to shape the way the transition materialises over the coming years.
Industrial decarbonisation, many solutions but a long journey
Beyond power grids and datacenters, decarbonisation in the “old economy” remains one of the key challenges across the globe. Using EU data as an example, industry accounts for approximately 25% of total primary energy usage—the third-largest segment after households and transportation—making it a critical focus for global decarbonisation efforts.
Immature supply chains and fickle policies create uncertainty
Despite these opportunities, some of the most nascent aspects of the energy transition—such as green hydrogen and CCUS—have encountered headwinds over the last few years, as illustrated by high-profile project cancellations. We attribute this to the costly and complex nature of these technologies, which face mounting pressure to prove their economic viability. Simultaneously, macroeconomic concerns have shifted focus to energy security and affordability. However, some projects have managed to progress and have been advancing despite their scale and complexity. We believe successful deployment in these flagship projects is critical to build momentum over the coming years.
How to pay for it all in a higher rate environment?
Amid these challenges, global energy transition investments have been increasing, reaching record highs of $2.1tn in 2024—more than 2x 2020 levels, driven by policy support, technological progress, and declining costs. Although at record levels, the IEA has noted this is around half the spend required by 2030 to meet net zero goals. Given many energy transition investments have a high upfront capital profile, they are much more sensitive to interest rates and thus higher rates present a headwind. Financial institutions have a critical role to play to bridge this gap, through scaling up low-carbon financing and investments and engaging with high emitters on transition plans.
