12 Mar 2024 5 min read

Could current headwinds derail the energy transition?

By Marija Simpraga

After a difficult year, we think the transition is changing shape, not stopping.


2023 was a difficult year for renewable energy investments. Renewable energy developers’ share prices underperformed as interest rates rose. At the same time, equipment manufacturers’ margins shrank as Covid and Ukraine war-related spikes in raw material prices disrupted global supply chains.

More recently, the difficulties faced by developers have received media coverage, leading to questions on the viability of a renewables-driven energy transition.

Against this backdrop, investor sentiment appears to have soured on clean energy and ESG themes, with renewable energy stocks declining more than the broader equity markets. We believe that this price correction is overdone. Current renewable asset valuations would suggest limited growth prospects for the industry, while available data suggest robust underlying economics could drive sustainable growth in the sector.

Demand for power capacity likely to grow

As electrification gathers pace, power demand in the UK, EU and US is set to rise significantly, especially as the transport and heating sectors increasingly move away from fossil fuels. New power capacity will need to be built to meet that demand.

energy_headwind1.PNGRenewable energy sources like wind and solar are the cheapest available technologies that can be deployed at speed, even after the recent uptick in wind equipment prices. A quick glance at the deployment data shows that 2023 was a record year for renewable capacity additions in Europe, with over 60 gigawatts of wind and solar capacity added last year – more than the peak wintertime total power demand in the UK.


Another look at the equipment costs shows solar panel prices dropped sharply in the second half of the year, falling back to pre-pandemic levels. While wind equipment prices remain elevated, we expect them to normalise in the medium term, further improving the economics of wind projects.

Are there alternatives to renewables?

Building new, large, gas-fired power plants is an unlikely option, especially in the UK and most of the EU. Even in the very improbable scenario where European governments abandon their decarbonisation plans, building further gas-fired power generation capacity could jeopardise the bloc’s energy security goals. The picture is different in the US, where ample domestic gas reserves mean that gas is likely to retain a role in the power system for some time to come.

Nuclear is often touted as an alternative. However, conventional nuclear plants take decades to build, and the reactors being built in Europe have experienced significant delays and cost overruns. Small modular reactors have been considered as part of the solution by the UK and other governments. However, this is a technology which has yet to be deployed at scale, and estimated costs far exceed those of renewables[1].

Gas and nuclear will probably retain roles in the power mix over the coming years, but we believe renewables will be the lynchpins around which new energy systems will be structured. This is a widely accepted consensus between policymakers, grid operators and developers. Two recent pieces of significant legislation reflect this – the Inflation Reduction Act in the US and the Green Deal Industrial Plan in the EU together offer trillions of dollars in support for decarbonisation and clean energy technologies.

Policymakers double down

Even more recently, governments have acted to ensure renewable project economics remain resilient against the macroeconomic and geopolitical headwinds.

For example, after a widely publicised failed Contracts for Difference auction in the UK, the British government has effectively increased revenues for future clean energy projects. This will likely mean that more projects can meet hurdle rates, increasing the scope of future additions to renewable energy capacity.

While assets have clearly been repricing to reflect a higher cost of capital, project fundamentals and policy support remain strong. Renewable capacity additions are therefore likely to accelerate further in our view.

For policymakers and investors alike, this will mean a new set of priorities. These include ensuring power grid upgrades are funded and executed to keep pace with renewable deployment.

Increasing interconnectors and battery storage capacity are part of this effort, as these assets can help reduce grid upgrade costs, provide stability and minimise renewable power wasted through curtailment. Investment requirements in this area are considerable – BNEF estimates that for each $1 spent on renewable deployment another 90 cents will be required to be invested in grid infrastructure[2].

Given the considerable government debt burden, private capital will be key to funding the essential network infrastructure. The relative resilience of energy transition-related strategies within private infrastructure fundraising highlights that energy transition infrastructure offers compelling investment propositions to investors able to take long-term views.

Finally, the priority for this decade and beyond will be delivering the solution to longer-term energy storage needs and bridging the ‘renewables gap’ on low-wind, high demand days. This will involve developing viable commercial frameworks for assets such as green hydrogen, liquid air storage and demand-side response.

The energy transition is well under way and is unlikely to reverse, even if it is not yet happening at a pace consistent with 1.5˚ scenarios. Economic and policy frameworks are set to continue supporting strong renewable energy buildout across key markets. The new frontier in energy transition investments will be grid and long-term storage solutions. We believe these challenges will increasingly dominate the policy and investment agendas in the years to come.


[1] Institute for Energy Economics and Financial Analysis, 2022

[2] BNEF, 2023

Marija Simpraga

Infrastructure Strategist

Marija is the Infrastructure Strategist in LGIM's Real Assets division. She is passionate about infrastructure as an asset class that underpins sustainable economic development. Marija joined LGIM in 2017 from Bloomberg Intelligence, where she covered the European utilities sector. When not pondering the energy transition, Marija can be found wondering around London's vintage furniture markets.

Marija Simpraga