What are the best energy transition investment opportunities in 2025?

Set against a backdrop of geopolitical tensions and political risks, the energy transition investment landscape in 2025 may not present the clearest of images.

US President Elect Donald Trump, who has famously called climate change a “hoax”, has pledged not only to undo key pieces of US green industrial policy such as the Inflation Reduction Act, but also introduce tariffs, which may create trade tensions between the US, China, and, to a lesser extent, Europe. 

Yet investors speaking to Net Zero Investor remain mostly upbeat about the energy transition, despite these political and economic headwinds.

The main argument is that renewables are now an unstoppable economic force and therefore less dependent on subsidies and political goodwill. The global weighted average LCOE (levelised cost of energy) for utility-scale solar PV projects is now at $0.049/kWh, 29% lower than the cheapest fossil fuel-fired option, according to International Renewable Energy Agency.

Following the disruption to global energy markets caused by Russia's invasion of Ukraine, the argument that renewables are better for energy security than fossil fuels is also starting to gain traction. 

"While waning political ambition may slow the transition, we see it as an unstoppable trend that will continue to reshape our societies," said Tanguy Cornet, head of thematic global equity at Candriam. "The decisions guiding this energy transition will be increasingly driven by the pursuit of greater economic competitiveness and the imperative to secure maximum independence in energy supply chains."

New Inflation risk

One obvious political and economic risk is that a global increase in tariffs and protectionist policies could lead to the return of inflation, resulting in higher interest rates. Higher interest rates hurt renewables investors as the increased cost of debt reduces the profitability of capital intensive infrastructure projects, which rely on debt financing. Rising interest rates can also make safer, fixed-income investments like government bonds more attractive and thereby discourage investment in riskier assets like renewables.

“The performance of the renewable energy sector has been highly (negatively) correlated to bond yields,” said James Smith, manager of the Premier Miton Global Renewables Trust. “When yields on government debt have been increasing, the sector has been weak and vice versa. While 2025 should see a further softening of inflation, and interest rate cuts, there are many variables which could influence this either way, and this will likely continue to be a major determinant of the sector’s performance.”

While the performance of renewable and clean energy companies has been “poor” in recent years, Smith argued that this is mainly a result of economic and political factors, rather than anything fundamentally wrong with renewable energy companies.

In 2021-24, the renewables sector saw lower valuations as the demand for high-growth, riskier sectors weakened in a high-rate environment.

Renewables companies, especially those not yet profitable, saw declines in their stock prices, while climate-tech equity raising dipped dramatically to an estimated $43 billion in 2024 from more than $127 billion in 2022, according to BloombergNEF.

“If high interest rates return, highly indebted and negative cashflow generating companies will struggle once again. For us, this is another reason to stay higher up the quality curve when picking stocks,” said Chris Berkouwer, portfolio manager at Robeco.

Cautious approach to climate equity

In this potentially challenging macroeconomic and political environment, public equity investors should not chase everything that is green, but go back to basics by looking for companies that have strong operational track records and healthy balance sheets, according to Berkouwer.

He remained most upbeat on electrification and grid networks, storage solutions, nuclear energy and building modernisation and green retrofits, all of which enjoy bipartisan support.

But Smith had less conviction on areas such as offshore wind, residential solar, green hydrogen and biofuels. “In the US, offshore wind is thought to be in a more vulnerable position than on-shore, given its higher cost and the President Elect’s hostility toward it.” 

Anna Hancock, executive director at Pollination Group, said renewables stocks are “likely to remain challenged in 2025”, while “private equity is increasingly funding major energy infrastructure and driving some big portfolio shifts”.

Venture capital and climate start ups

Venture capital funding for climate start up continued a sharp downward trend in 2024.  

Patrick Sheehan, managing partner at venture capital firm ETF Partners, observed that the venture capital and private equity industry remains “highly selective”, favouring companies that demonstrate clear differentiation and robust growth potential.  To secure backing in an environment of heightened scrutiny, start-ups must present a truly compelling and defensible value proposition. In addition to this general backdrop, he has identified key factors that will shape the start-up world in the coming years:

1. Geopolitical uncertainty will force start-ups to navigate volatile supply chains, investor scrutiny, and IP risks.

2. Europe will cement its position as a global sustainability and climate start-up leader, driven by supportive policies, funding, and collaboration and the anti-thesis of the US under a second Trump presidency

3. M&A activity will gradually return if interest rates decrease and technological disruption accelerates.

4. The rise of AI will be a game-changer, revolutionising industries and business models like the early internet.

Listed infrastructure

Steve Jordan, portfolio manager and executive director at Morrison, predicted a rise of climate-related listed infrastructure investment opportunities alongside private.

He argued that stretched government balance sheets, increasing intermittency, and the rising demand from electrification and data centres are “driving an unprecedented scale of investment that far surpasses the capacity of government and private capital alone”.

Incumbent utilities, many of which are publicly listed, hold a “critical role in this transformation” as owners and operators of generation, transmission, and distribution infrastructure.

The magnitude of the required investment to alleviate bottlenecks and bolster the resilience of energy systems underpins a robust growth outlook for regulated asset bases across multiple geographies.

The expansion of power-hungry data centres, combined with their ambitious climate goals, will necessitate significant innovation in contract structures such as power purchase agreements, utility tariffs, and order book commitments for both established and emerging low-carbon technologies.

This evolution will help de-risk emerging infrastructure and technologies, which will be essential to the energy transition and achieving net-zero targets.

“Meanwhile, we expect listed renewable developers to continue recycling capital to limit the need for equity raises, presenting private capital with opportunities to acquire lower-risk contracted assets,” he added. “This dynamic ensures that private investors play a complementary role in the energy transition by supporting the scalability of renewable projects.”

Grid Investments

Investors note that a Trump administration, despite its anti-ESG agenda, will continue to support investments in the grid.

On the other side of the Atlantic, Tancrede Fulop, senior equity analyst at Morningstar, expects electric grid investments to boom by 2030 in the EU, thanks to strong support from policymakers. Grid investments have lagged behind renewables installations for many years resulting in costly congestion issues and connection queues for renewables and data centres.

According to the International Energy Agency, investments in grids must double to over $900 billion annually to meet climate goals, with every $1 invested in renewables requiring another $1 in grids. The European commission launched an action plan for grids in November 2023, calling for €584bn of investment by 2030, or €83bn annually, nearly double the average annual investments of the past five years. Similarly, the UK National Grid recently pledged £35bn investment to upgrade the UK’s electricity infrastructure, in a boost to the UK government’s clean power targets.

In recent years, the UK's power grid has been a major bottleneck for prospective investors looking to get solar and wind projects off the ground.  Investors have said “time and again” that otherwise viable projects have faced unacceptable wait-times to secure a grid connection, according to Joe Dharampal-Hornby, head of public affairs at UK Sustainable Investment and Finance Association. The National Grid’s pledge is therefore a “step towards increasing private investment into the UK’s energy transition”.