The biggest barriers to energy sector growth are often policy-related.  Here’s how to overcome them

Out of the 10 biggest barriers to growth for companies in the energy sector, five are primarily influenced by policy and politics, according to our recent survey of 1,289 senior energy industry professionals. The top barrier to growth was political risk, which encapsulates factors including conflict and change of government.

The other four politics-influenced barriers are skills shortages and ageing workforces, permitting or licensing barriers for new projects, supply chain challenges and a lack of investment in technology and innovation. Policy and politics also heavily influence four of the other five barriers to growth in the energy sector.

These results show the intrinsic link between the energy sector and government decision-making and why energy policy must encourage investor confidence to help finance the renewables of tomorrow.

Among the ways in which energy and climate policy currently affect energy sector growth, unrealistic targets can backfire and hamper private sector activity. This is often because of the inherent complexity involved in creating target-based policies. They can have significant and far-reaching impacts spanning environmental, social, economic and political spheres. Policymakers often struggle to foresee all of the potential unintended consequences of their legislation.

For example, the UK Government’s 2023 annual renewable energy auction, Allocation Round 5 (AR5), failed to attract any bids from offshore wind developers because it did not promise a high enough maximum unit price for electricity. The maximum £44 per megawatt hour (MWhr) price offered by the government was considerably below wholesale prices at the time, sending a negative signal to investors and denting the country’s net-zero ambitions. Offshore wind developers returned for the more successful AR6, with awarded projects totalling 5GW and with a higher winning strike price of £54/MWh.

While no energy transition policy is immune to the impacts of political turmoil and uncertainty, careful and comprehensive planning that heeds the lessons of the past can help to mitigate such problems.

Ecological and climate risks are borderless problems that require cooperation and so alignment and integration of policies across countries and regions is key to successful energy transition planning. Fracturing geopolitics can interfere with such joint efforts to achieve climate goals, however.

To overcome this, policy development must include industry and communities, and address domestic and international issues. International agreements such as the Global Climate Finance Framework, the Global Methane Pledge and the Paris Agreement are all vital cogs in this worldwide machine. But smaller scale collaborations that are equally ambitious in scope are also crucial.

The Visegrád Group’s Energy Collaboration of four central European countries and the North Sea Wind Power Hub – a partnership of three European energy companies – are great examples of how countries can collaborate on targeted energy and emissions policies, and use their unique strengths and geographic advantages to advance common goals.

Another obvious, but no less important, example is the United States’ Inflation Reduction Act of 2022. It aligns decarbonization goals with broader economic strategies – including supply chain resilience, development of domestic manufacturing, job creation and securing national security. Crucially it prioritizes attracting equity to ensure a just energy transition.

In APAC, the Australia-Singapore Green Economy Agreement lays the foundations for collaboration between these two countries to drive growth while reducing emissions by combining trade, economic and climate objectives.

The clock is ticking when it comes to global warming targets. CO2 emissions must be approximately half of 2019 levels by 2030, while GHG emissions must be cut by 43% by 2030 and 60% by 2035. Instead, global energy-related CO2 emissions grew in 2023.

Targets are hanging by a thread and the global warming trend is clear. Data from the Copernicus Climate Change Service recorded the warmest June on record in 2024, marking the 13th month in a row in which the global average temperature reached a record monthly high. This is a stark warning that more ambitious climate action is needed.

The finances needed to drive the energy transition are enormous, however. The International Energy Agency believes it will take $4 trillion in annual average spending on physical assets to achieve net zero by 2050, while McKinsey suggests that number will be closer to $9.2 trillion. Either way, innovative and collaborative financing will be needed – beyond anything the finance industry has ever seen.

There is a widespread expectation that the capital is likely to be available, but securing and allocating it is complex. The success or failure of the energy transition will hinge on matching money at the right price and time to the right projects in the right places.

For that to transpire, the energy companies at the forefront of this transition must be able to operate with confidence and freedom. Policies such as the UK’s Energy Profits Levy risks hampering energy company investment decisions by affecting the long-term clarity needed to finance the renewables of tomorrow.

Ultimately, governments and private sector organizations must work in tandem to ensure that dynamic, flexible energy and climate policies are built in a way that ensures market stability, investor confidence and an unwavering commitment to net zero.