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FOR decades, the world has wrestled with an energy trilemma, balancing three important goals – procuring a secure, resilient and reliable energy supply; providing universal access to affordable energy for domestic and commercial use; and shaping an energy system that mitigates and avoids environmental harm.

The energy system is evolving to meet our seemingly insatiable demand while balancing these three goals. Today, we find ourselves at a critical inflection point – shifting away from fossil fuels where possible, promoting electrification and adding renewables to the energy mix.

However, the challenge of balancing these competing priorities has dramatically increased as a result of multiple interlocking complexities. For one thing, dependable energy is not just critical for economic development, it is an essential aspect of national security. When faced with supply shortfalls and the stark prospect of energy rationing, even countries far along in the transition to zero-carbon sources put their need to meet current energy demand ahead of long-term decarbonisation goals.

Despite the substantial growth of renewable energy sources, fossil fuels continue to provide 80 per cent of global energy today and are likely to remain a significant part of global energy supply for the foreseeable future. There are many specific industrial uses for fossil fuels where renewables may not offer a viable substitute. Furthermore, the elaborate global infrastructure network around fossil fuels provides a huge incumbency advantage over renewables.

Amid our desire for a lower-carbon future, it is important to realise that there are no perfect solutions or silver bullets. It is important for investors to recognise the different stages of the transition to find the best opportunities – which we believe are encompassed by three overarching themes.

Supporting complementary infrastructure

Renewable power generation has grown significantly, and has achieved scale in many markets – but the landscape for investment becomes more challenging as the market matures.

Government subsidies enable growth and rapid technological innovation drives fierce competition; while supply chain bottlenecks, rising costs of equipment and labour, as well as higher interest rates all present mounting challenges.

For renewable power generation projects in mature markets, the best investment opportunities may lie in debt rather than equity. Debt financing tends to be less plentiful in this space, and senior debt in mature projects can offer attractive opportunities.

Investors should also look past wind and solar power generation and explore hydro and geothermal projects which can be dispatchable, have zero marginal cost and can take advantage of higher prices when wind and solar are not producing. These projects – limited to specific locations and are challenging to build new ones – face less competition and obsolescence risk, and their debt can also be very attractive.

As for emerging markets, India provides intriguing opportunities for investors. It is already the world’s fourth-largest electricity consumer as well as the third-largest renewable power producer. Today, renewable sources make up 20 per cent of India’s power generation, and this share is rapidly growing. In such a landscape, companies such as ReNewEnergy and GreenKo with established track records of project execution and cash flow from existing production to fund their growth can offer attractive equity investments.

At the same time, expansion in power generation has not been matched in other areas of renewable infrastructure, such as power storage and transmission. Such imbalance could lead to routine episodes of negative prices for electricity, power lost from curtailing electricity generation and long delays to get new projects connected to the grid.

For investors, the widespread need for expanded and upgraded power storage and transmission is obvious and clear. They can find opportunities in long-duration power storage players such as South Korea’s Samsung SDI and LG and Japan’s Panasonic as well as transmission cable producers Polycap and Apar in India.

Leaning into lower-carbon fossil fuels

While many aspects of the energy transition remain unclear, one thing is certain – fossil fuels are not likely to be displaced altogether. For investors, this segment of the energy complex offers opportunities to invest in elements that are quite stable, generate durable cash flows, and can bridge the transition to a low-carbon world.

Natural gas, in particular, can play a key role in a low-carbon future by displacing higher-carbon-emitting coal, especially in electricity production. For investors, companies across the natural gas supply chain can provide attractive debt and equity opportunities. In South-east Asia, there is much activity in Indonesia and Malaysia, which have seen several significant discoveries that have built momentum for natural gas production in the region.

Today’s Big Oil majors can also play a role in the new energy system. For today’s energy majors to remain winners, they need to shift their energy production to fuel sources of the future and leverage their technical expertise in, say refining, to operationalise green innovations. For example, Big Oil’s extensive experience in refining can make them a natural player in biofuels.

Avoiding the hype

Some speculative innovations such as hydrogen and nuclear fusion have garnered considerable attention in recent years. These innovations have two things in common. First, they have the potential, when fully mature and operationalised, to profoundly alter the energy landscape and accelerate the energy transition.

Second, they face immense challenges today in how they can be applied in the real world at scale. This means the risk-reward propositions they offer investors at this point is not very attractive.

For instance, one of the main challenges to wider adoption of hydrogen fuel cells is the specialised infrastructure (and immense cost) needed to produce, transport and store hydrogen.

Meanwhile, green solutions such as carbon capture and storage require significant capital investment in infrastructure, and it is unclear how to monetise such operations in the long term.

The energy transition will offer many opportunities but also a multitude of risks as investors navigate the uneven path to a lower-carbon future. While the transition will unfold at different paces in different places, it is already underway. It is critical for all investors to consider the many implications of the future energy system across their portfolios and stakeholders.

The writer is head of thematic research at PGIM