Executive Summary
The global energy transition is unfolding, but not in the linear, substitutional pattern many investors and analysts predicted. Rather than renewables rapidly displacing fossil fuels, what we have witnessed to date is an “additive” transition where clean energy primarily serves new demand growth while traditional energy sources remain resilient. This reality requires investors to adopt more nuanced, probabilistic approaches that account for multiple transition pathways and timeframes.
Our Transition Thesis: What We Expected
In 2017, FFI Solutions began exploring ways for investors to monetize the concept of stranded asset risk. Renewable energy technologies – solar, wind, and battery storage – were rapidly becoming cheaper, and their economic competitiveness appeared set to quickly erode the value of fossil fuel assets. At that time, we believed there would be winners – the new disruptive entrants – and losers – the old economy incumbents.
This thesis inspired an affiliated entity, FFI Advisors, to incubate the Energy Transition Long-Short fund designed to capitalize on this inevitable shift. The strategy was straightforward: short select oil and gas stocks and go long a basket of clean energy stocks.
The market, however, had other plans. After seeding the strategy in 2019, we quickly learned that market pricing of the transition was far less straightforward than we had anticipated. Clean energy company valuations rose dramatically while oil and gas prices plunged, leading to unexpected and outsized returns. We opened the fund to outside investment just after fossil fuel prices began to surge and clean energy company valuations began to peak. Russia’s 2022 invasion of Ukraine caused oil and gas prices to rise further, resulting in significant drawdowns for the fund. By late 2022, we recognized our timing was premature and that the market was not factoring in the inevitable low-carbon transition. We decided to close the fund.
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What We (And Many Others) Got Wrong
Looking back, we weren’t alone in misreading the speed and nature of the energy transition. We thought that rapidly falling costs of renewables and battery storage would begin to displace fossil fuels. Just as importantly, we assumed that capital markets would anticipate this shift and price risk accordingly. This view, however, overlooked several critical factors.
The Nature of the Energy Transition
One key miscalculation was our expectation that the transition would follow a somewhat linear, substitutional pattern – where renewable capacity would increase, and fossil fuel generation would decrease at an equal or greater pace. Instead, global energy demand growth, particularly in developing economies, ensured that renewables largely supplied incremental new demand, while fossil fuel consumption remained stable or grew in some regions.
Cold Eye Earth highlights this issue, describing the transition as additive rather than transformative. Renewables, despite their expansion, have been layered onto existing fossil fuel infrastructure rather than displacing it outright. The energy transition, thus far, can be categorized as a gradual diversification of energy sources rather than a rapid substitution.
“The energy transition, thus far, can be categorized as a gradual diversification of energy sources rather than a rapid substitution.”
This dynamic is evident in power generation. The IEA’s Electricity 2025 report projects that global electricity demand will continue rising at nearly 4% annually through 2027. While renewables will capture most incremental growth, fossil fuels remain entrenched, with natural gas playing a crucial role in balancing intermittent renewable sources. The persistence of coal-fired power generation in Asia and growing natural gas demand illustrate the challenge of eroding fossil fuel dominance, even as renewable generation capacity expands.
Beyond electricity, other sectors – such as industrial manufacturing, transportation, and heating – have proven even more resistant to rapid decarbonization. Heavy industries like steel and cement production still rely heavily on coal and natural gas, with alternative renewable processes such as green hydrogen still in their infancy. Likewise, global oil demand has not declined, supported by slower-than-expected EV adoption in some regions and continued growth in aviation and petrochemicals.
Timeframe Misjudgment
Beyond structural barriers, geopolitical and macroeconomic forces have reinforced fossil fuel resilience. The invasion of Ukraine reminded the world that energy security concerns can override transition objectives, leading many countries to double down on domestic fossil fuel production. Governments must balance climate goals with ensuring affordable, reliable energy access – often prioritizing the latter during times of crisis.
Energy transitions are revealing themselves to be complex, path-dependent processes that unfold over decades, not years. The expectation that market forces alone would rapidly phase out fossil fuels underestimated the deeply entrenched infrastructure, political realities, and economic forces shaping energy consumption. While the direction remains clear – toward a lower-carbon energy system – the pace and structure of the transition are proving less predictable than many expected.
What’s Actually Happening?
The above is not to say that clean technologies are not growing rapidly. The scaling of renewable energy, energy storage, and electrification across key sectors signals meaningful progress toward a lower-carbon future – albeit at a different pace and structure than first envisioned. Several key indicators highlight this shift:
Renewable Infrastructure Scaling
The deployment of clean energy infrastructure is accelerating at an unprecedented rate. Solar and wind are no longer niche power sources but integral to global electricity generation. Investment in renewables hit record highs in 2024, and capacity additions continue to exceed forecasts. Many regions, particularly in Europe and parts of the U.S., now experience periods where renewable generation surpasses fossil fuels.
Battery Storage Breakthrough
Grid-scale battery storage is rapidly expanding, addressing intermittency issues that have historically limited wind and solar uptake. Advances in energy storage technology are improving grid reliability and enabling higher penetration of wind and solar power, reducing dependence on fossil fuel backup generation.
Electrification Momentum
The electrification of industries and transportation is reshaping energy demand. Global EV adoption is rising at double-digit rates, led by China, followed by strong growth in Europe and increasing momentum in North America. Heavy industries – long considered among the hardest to decarbonize – are making strides with significant investments in hydrogen, carbon capture, and electrified manufacturing. However, these shifts remain early-stage developments rather than full-scale transitions.
Lessons Learned
- Energy Transitions Are Not Linear: The assumption that renewables would immediately replace fossil fuels was overly simplistic. Instead, renewables have largely been additive rather than direct substitutes.
- Fossil Fuel Demand Remains Resilient: Even as renewable energy expands, fossil fuels maintain a dominant role in the energy mix due to energy security concerns, economic growth in emerging markets, and entrenched infrastructure.
- Policy and Market Forces Must Work Together: Market-driven renewables growth alone is insufficient. Strong policy frameworks and incentives are required for meaningful decarbonization.
- Investment Strategies Must Be More Nuanced: The story of our Long-Short Fund highlights the need for adaptable investment approaches. Successful strategies must account for the complexity of the transition rather than betting on a rapid shift away from fossil fuels.
The Path Forward
While the energy transition to date has been additive rather than transformative, the key question going forward for many is when will the growth in clean energy and the cleantech sectors enable the structural decline in fossil fuel usage?
“Investors who embrace uncertainty, plan for multiple pathways, and incorporate both transition and physical risks will be best-positioned.”
The answer is complicated. The technology-driven cost advantages of renewables and EVs are evident. Yet, just as evident, are the political and societal forces that inhibit the pace of transformation. At its core, it’s a question of generational equity – whether today’s world will take the required actions to decarbonize the global economy for the benefit of future generations.
Rather than seeing the future as one likely outcome, investors must approach the energy transition as a set of probabilities. Different scenarios (pathways) will unfold over years – if not decades – and portfolio positioning should reflect the range of possible outcomes.
Private Market Strategies
Institutions that have the capacity to invest in cleantech through private markets may wish to explore long-term investment opportunities through venture or private equity, which can shield them, somewhat, from the volatility inherent in public markets. The quarterly earnings pressure on public companies can make it difficult for clean energy companies (especially those that are pre-revenue) to focus on long-term growth, whereas private investments allow for a greater emphasis on scaling infrastructure and technology without the same short-term scrutiny.
Conversely, investors looking at traditional energy companies may prefer public markets, where liquidity allows for more flexibility. If transition risk accelerates, the ability to adjust allocations quickly is a key advantage. Committing capital to illiquid, long-term fossil fuel investments in private markets could expose investors to higher risks of asset stranding if global decarbonization efforts ramp-up.
Accounting for Climate Risks
At the same time, investors must recognize the pressing physical risks of climate change, which are already manifesting globally. Severe weather events, rising sea levels, and disruptions to agriculture and infrastructure are immediate concerns. Investors who believe that fossil fuels will remain a core part of the global energy mix should have a heightened focus on climate adaptation and resilience in their investment strategies to mitigate these risks.
Ultimately, positioning for the energy transition requires a balanced, adaptable approach. A rigid, binary view – betting entirely on renewables or doubling down on fossil fuels – ignores the complexity of the transition. Investors who embrace uncertainty, plan for multiple pathways, and incorporate both transition and physical risks into their strategies will be best-positioned for the evolving energy landscape.
Chris Ito
CEO
FFI Solutions
David Root
Head of Product Management
FFI Solutions
Drew Haluska
Senior Energy Transition Analyst
FFI Solutions