Financing the energy transition is a major focus—and opportunity—for companies and investors. But the opportunity is complex, and traditional ways to finance energy projects no longer work.
What new financing approaches are emerging in response? And what strategies will investors and governments have to adopt to capitalise on the opportunities they are generating?
Green energy marks the end of conventional project finance
“Today we find ourselves in a world where we’re not really financing green projects anymore,” says Carina Radford, a partner in White & Case’s Energy, Infrastructure and Project Finance Practice. “We’re financing new business models.”
On traditional energy projects, such as crude-oil extraction, sponsors and lenders can use tried-and-tested methods to decide on financing terms, such as price over time and the forecasted need for the product. But newer green energy projects often have several individual components that carry different levels of risk and investment. “A lot of our time is spent trying to create structures that support long-term debt, because that’s what the market wants,” says Radford. “But without the ability to forecast outcomes in the same long-term way as we used to.”
So traditional project finance has limitations. “Where there is technology and price risk, and where the project is left retaining other risks which are customarily allocated to counterparties, it’s difficult to get these structures banked through traditional project financing approaches,” explains White & Case project finance partner Joel Rennie. “In the case of a green hydrogen project, for example, you’re basically looking at a renewable energy project linked with a hydrogen production facility.”
A clean energy storage project in the UK demonstrates the complexities of new green deals. The UK government through the UK Infrastructure Bank (now the National Wealth Fund) and energy company Centrica led a funding round to support Highview Power in constructing one of the world’s largest liquid air energy storage facilities alongside other investors including KIRKBI (the LEGO families’ investment vehicle), Rio Tinto and Goldman Sachs.
“The Highview funding structure is completely unique,” says Kamran Ahmad, a partner in the Energy, Infrastructure and Project Finance Group at White & Case. “It’s a coalition of capital coming together to finance an entirely innovative, and potentially very disruptive, energy transition technology.”
Governments can empower private investment
Governments will play a crucial part in these new coalitions. Funding and incentives are important, but governments can also facilitate collaborations by creating optimum conditions for deals to take place. This includes introducing financial mechanisms to lower the risk for investors.
Brendan Quinn, White & Case’s Head of Project Finance in Asia-Pacific, says: “Governments have an important role in facilitating energy transition projects by promoting and supporting emerging technologies, such as green hydrogen, whether by grants or subsidiaries whilst these technologies are established.”
He adds that for existing technologies, like wind or solar, “government has an important role in supporting their delivery by, for instance, facilitating electricity transmission and distribution and attracting alternative pools of debt and equity capital with different risk appetites to these important elements in delivering energy transition.”
For example, the UK government launched Great British Energy in 2024. This publicly owned energy company will own and manage green energy projects, but will also partner with private companies. The Australian government recently committed to spending A$17.3 million over four years to encourage the private sector to invest in sustainable activities, including developing guidance for best practice on transition projects. And the Indian government set up a sovereign green bond framework in 2022, creating more opportunities for investment into the country’s decarbonization efforts.
Can investors keep up with the changes?
While government support is vital, following a year of elections in 2024 and the rejection of many incumbent governments, investors and businesses face much change in the regulatory space. Tariffs pledged by the new US administration, for example, could impact energy transition projects in the country.
“Businesses have to work hard to understand,” says Nadav Klugman, a partner in White & Case’s Project Development and Finance practice. “Negotiating now in the face of tariffs and the cost of those tariffs is a different reality than it was 24 months ago—even 12 months ago.”
Despite these challenges, opportunities for investment are opening up in this rapidly shifting environment, as new business models and funding structures are created for energy transition projects. “You have this confluence of factors that play a part in the energy transition, and a highly sophisticated, complex financial industry that knows how to finance things in different ways,” adds Klugman. “There’s a great number of options and opportunities, and players that can contribute.”
But these opportunities require investors, policymakers and asset managers to shift their mindset and be open to different approaches to collaborate effectively. Governments must develop policies and structures that attract more private capital, while investors must be open to the potential of longer-term government deals, even if returns take longer to materialise.
“We’re at this wonderful inflection point where both supply and demand are in development,” says Radford. “What’s really interesting is we’re asking quite traditionally minded financiers, typically, to take an innovative and creative view on where the world is going.”