The Energy Transition: Financing the Energy Transition

Series 2: The Energy Transition

The Energy Transition is a series that reframes energy as the physical system underpinning the transition economy. It examines how power is generated, moved, stored, and priced- and how this energy system architecture shapes risk, return, and the durability of capital across the transition landscape.

Article 2: Financing the Energy Transition

The ‘financing gap’ of the energy transition is a structural capital engineering challenge. 

Early-stage energy assets begin with uncertain development exposures. Traditional project finance requires contracted revenues and defined construction timelines while, by contrast,  venture capital typically seeks shorter deployment cycles than 4-5 year infrastructure development allows. Between these mandates sits what practitioners describe as the “missing middle”(OECD,2021): development-stage capital that does not yet meet bank underwriting standards but requires patient horizons. Financing the energy transition therefore hinges on risk migration down the capital stack: who absorbs first-loss risk, and how efficiently early-stage uncertainty can be structured into infrastructure-grade yield to mature fragmented markets. 

In discussion with Lihn Tran, Portfolio Manager at Clime Capital, this article reframes the gap into three distinct capital engineering challenges aligned with the physical layers of the power system: development-stage capital before financial close, scale mismatch between project size and institutional mandates, and the pathway from subscale platforms into refinanceable infrastructure. 

1. Asset Development: Manufacturing Bankability

Asset development moves a renewable project from concept to financial close. It includes land control, permitting, resource assessment, grid interconnection approval, and negotiation of power purchase agreements (PPAs). Capital is deployed without operating cash flow and often before regulatory certainty is secured.

This is where risk concentrates.

A 20-year PPA does not automatically create bankable revenue. If curtailment provisions allow the grid operator to stop taking power without compensation, or if offtake obligations are weak, lenders treat the cash flow as uncertain. In Southeast Asia, currency denomination compounds the issue: local-currency PPAs create foreign exchange exposure for international investors, raising required equity buffers and limiting debt availability. Bankability is therefore a legal-structural question.

Development capital must absorb early volatility in a way that allows the asset to refinance once milestones are achieved (IFC,2025; Convergence, 2025). Convertible instruments, staged capital disbursement tied to permitting and commissioning progress, and junior positioning within the capital stack allow risk to be intentionally concentrated before being distributed.

Tran describes, referencing Clime Capital’s SEACEF I fund, this is “designing for refinance from day one.” In practice, this means deploying capital in tranches that convert after defined KPI thresholds - for example, once power purchase agreements are secured or grid connection is approved. By deploying small catalytic tickets - often around US$1 million - into pre-bankable platforms, taking junior positions, and requiring co-investment and governance discipline, Clime Capital could design a staged disbursement which controlled downside while aligning incentives. 

In Southeast Asia’s distributed solar commercial and industrial segments (Bock, G. (2025)), this approach has been essential. When early-stage exposure is sequenced deliberately, risk is migrated and development assets become refinanceable infrastructure assets (UNDP, 2020; Jadidi, H. ,2025).

2. Infrastructure Operation: Solving Scale Mismatch

Once construction completes and assets begin generating revenue, risk shifts from permitting to operational performance. Cash flows stabilise. Senior project finance debt enters the stack. Equity can be refinanced into longer-duration infrastructure mandates. The weighted average cost of capital declines as uncertainty reduces.

Yet a second constraint emerges: scale mismatch.

Distributed generation projects - rooftop solar portfolios, embedded energy assets, efficiency platforms - are individually subscale relative to institutional mandates. Institutional investors such as pension funds and insurers seek deployable tickets measured in tens or hundreds of millions. A fragmented pipeline of US$1-5 million assets does not meet that threshold. In developed markets, exposure may centre on 200-300 MW assets or established portfolios. In parts of Southeast Asia, viable projects are often smaller – 1-15 MW – due to grid design and absorption limits. These assets can be economically sound yet too fragmented for direct institutional underwriting (Climate Bonds Initiative, 2020; Crédit Agricole CIB, 2022).  

Aggregation becomes a capital solution.

By consolidating operational assets into portfolios with diversified counterparties and geographies, cash flows become statistically smoother and transaction costs decline. This portfolio construction process allows assets that were initially financed through catalytic capital to access lower-cost senior debt and, eventually, institutional equity (González, F.F., 2025).

From a portfolio manager’s perspective, when describing the expansion of Clime Capital’s CSEF II fund, Tran emphasises that operational discipline and reporting architecture are as important as asset performance. Institutional capital does not simply require yield - it requires visibility. ESG covenants, governance standards, and performance tracking established during early development stages often determine whether refinancing can occur at scale.

In this sense, governance discipline is a refinancing precondition. Where scale mismatch is resolved, the cost of capital falls. And where the cost of capital falls, deployment accelerates.

3. Energy Delivery & Enabling Infrastructure: Financing the System

Beyond generation and distributed portfolios sits the enabling layer: storage, grid services, demand-side management, and digital energy infrastructure. The value of these assets lies in their system reliability and flexibility and present a different profile.

These assets are fragmented, customer-facing and operationally complex. Revenue ramps gradually. Utilisation builds over time. They rarely generate immediate positive cash flow, making them ill-suited to short-horizon Financing requires underwriting market design risk - how tariffs evolve, how ancillary services are priced, and how regulatory frameworks mature (IEA,2023).

Here, the third capital engineering challenge appears: enabling infrastructure that underpins system reliability but lacks early cash flow visibility.

Catalytic capital structures play a different role here. Rather than merely absorbing construction risk, they often absorb policy timing risk. Staged deployment aligned with regulatory milestones allows investors to participate in system-building without taking binary exposure (Dai, A., 2025; Garttan, G.et.al, 2025).

As Tran observes, markets do not mature linearly. “Capital has to move in advance of full regulatory clarity – but not recklessly. You structure in a way that allows adaptation.”

Clime Capital’s response has been to pair capital with capability. Its independent technical assistance facility centralises pre-investment feasibility work — market mapping, grid analysis, storage identification — and post-investment governance strengthening, including ESG systems and financial controls. Rather than applying for fragmented donor support deal by deal, technical assistance is structured at portfolio level.

The Risk Transformation Principle

Across all layers, the same mechanism governs capital mobilisation: early-stage risk must migrate down the capital stack over time.  

Effective transition financing models share structural features:

• First-loss tranches that absorb initial downside
• Milestone-based capital staging aligned to regulatory gates
• Governance and ESG discipline as prerequisites for refinancing
• Introduction of leverage once cash flows stabilise
• Clear pathways for equity recycling

Understanding where an asset sits within this progression is essential to pricing risk correctly.

For private equity, credit funds, and development finance institutions, the opportunity lies in structuring mechanisms that enable migration down the stack. For pension and insurance capital, the opportunity lies in entering once volatility has been engineered into predictability.

For investors operating at the top of the capital stack, the implication is capital structure architecture. Solving this alignment problem is the gating factor on deployment speed. Development finance and philanthropy can catalyse markets, but private capital must ultimately scale them. Collaboration across the capital stack is therefore not optional.

At éthica Capital and GBC Group, we analyse the transition through this lens: how risk is sequenced across physical energy layers, how catalytic tranches crowd in institutional yield capital, and where structured capital can accelerate deployment. Our Energy Transition Industry Report examines grid architecture and infrastructure capital flows, while our Critical Minerals Industry Report explores the upstream material foundations of electrification. Together, they provide a capital allocation framework across energy systems and the resources that underpin them.

‍

Citations

Bock, G. (2025) ‘Vietnam Rooftop Solar Company Stride Completes Series A Funding Round’, Climate Insider, 24 March. Available at: https://climateinsider.com/2025/03/24/vietnam-rooftop-solar-company-stride-completes-series-a-funding-round/ (Accessed: 20 February 2026).

Climate Bonds Initiative (2020) ASEAN Sustainable Finance: State of the Market 2020. Climate Bonds Initiative. Available at: https://www.climatebonds.net/files/documents/publications/ASEAN-Sustainable-Finance-State-of-the-Market-2020.pdf 

Crédit Agricole CIB (2022) Project Bond Focus: U.S. Residential Solar ABS 101. Crédit Agricole CIB (research note). Available at: https://www.ca-cib.com/sites/default/files/2022-03/Project-Bond-Focus-Solar-ABS-2022.pdf 

Convergence (2025) State of Blended Finance 2025. Convergence, Toronto. Available at: https://downloads.ctfassets.net/4cgqlwde6qy0/72p9ovKBeb8KVrBIbneKeL/3782139338b3a02b26f05756e0e9c8be/Convergence_State_of_Blended_Finance_2025.pdf 

Dai, A. (2025) Energy Storage Report (UC Berkeley Law / affiliated publication). Available at: https://www.law.berkeley.edu/wp-content/uploads/2025/09/Energy-Storage-Report-Final-EN-2.pdf 

Garttan, G. et al. (2025) ‘Battery Energy Storage Systems: Energy Market Review…’ Energies (MDPI). Available at: https://www.mdpi.com/1996-1073/18/15/4174 

González, F.F. (2025) ‘Financing smart local energy systems: A conceptual…’ Sustainable Energy, Grids and Networks (ScienceDirect). Available at: https://www.sciencedirect.com/science/article/abs/pii/S2214629624005061 

IEA (2023) Electricity Grids and Secure Energy Transitions. International Energy Agency, Paris. Available at: https://www.iea.org/reports/electricity-grids-and-secure-energy-transitions 

IFC (2025) The Role of Blended Finance in an Evolving Global Context. International Finance Corporation, Washington, DC. Available at: https://www.ifc.org/content/dam/ifc/doc/2025/role-of-blended-finance-in-an-evolving-global-context.pdf  (Accessed: 20 February 2026).

OECD (2021) Evaluating Blended Finance Instruments and Mechanisms: Approaches and Methods (OECD Development Co-operation Working Papers No. 101). OECD Publishing, Paris. Available at: https://www.oecd.org/content/dam/oecd/en/publications/reports/2021/08/evaluating-blended-finance-instruments-and-mechanisms_c995f112/f1574c10-en.pdf (Accessed: 20 February 2026).

UNDP (2020)  Derisking Renewable Energy Investment (DREI). United Nations Development Programme. Available at: https://www.undp.org/publications/derisking-renewable-energy-investment (Accessed: 20 February 2026).

Jadidi, H. (2025) ‘Risk mitigation in project finance for utility-scale solar PV…’ Energy Policy. (See journal page for bibliographic details.) Available at: https://www.sciencedirect.com/science/article/pii/S0140988325000441 

‍