Escalating Cost Biggest Obstacle To Energy Transition As Investment Hits $2.3trn In 2025

Escalating costs has been broadly predicted as the biggest obstacle to energy transition with renewable intermittency, expensive backup power, battery limitations and critical mineral requirements complicating electrification efforts.

However, wars in Ukraine and the Middle East have prompted an increase in EV sales to avoid retail fuel inflation and gas demand destruction in favor of other power generation sources.

Energy transition investment hit a record $2.3 trillion in 2025, yet fossil fuels still dominate global energy consumption and oil demand continues to grow.

With COP31 starting next week, some participants have signaled that faster electrification could become the focus of the event.

“I would like to see a strong outcome on electrification in our presidency-led decision,” this year’s COP’s head of negotiations, Australian climate change minister Chris Bowen, told Bloomberg. Bowen also said he would consider COP31 a success if all participating countries made a commitment to increase the share of electricity in their final energy demand mix.

Final energy is the kind that is actually used, as opposed to primary energy, which is energy in its raw form. While crude oil, for instance, is primary energy, gasoline, diesel, and jet fuel are final energy. Electricity is also a form of final energy, with its primary input coming from primary coal, gas, water, geothermal, and, more recently, solar and wind energy.

It is those two latter sources of energy that COP leaders have selected as favorites for the grid of the near and far future—but have so far failed to make dominant.

The world still sources over 80 per cent of its primary energy from hydrocarbons. In other words, over 80 per cent of the energy resources that the world consumes come from oil, gas, and coal.

But, according to Bloomberg’s Zero podcast host, Akshat Rathi, by the time the energy goes from primary to final, the share of hydrocarbons falls to 65 per cent. “Thus electrification is foremost an energy efficiency solution, because it reduces primary energy demand without cutting the useful outcomes that citizens want,” Rathi wrote in a recent report on COP31 ambitions. Electrification is the ultimate goal of the energy transition in every industry and aspect of life, excluding, perhaps chemicals production and related fields that rely on hydrocarbon feedstock for their output. Yet it is not just any electrification, of course, that transition advocates promote. Electrification must come from wind, solar, biomass, geothermal, hydro, and nuclear if it is to be done the right way, in view of emission reduction targets agreed a decade ago in Paris.

Over these past ten years, trillions have been invested in the goal of electrification. Indeed, transition investment just last year hit $2.3 trillion, according to BloombergNEF.

This was 8 per cent higher than total transition investment during the previous year—and there was not even a war in the Middle East to cause the most serious disruption to oil and gas supply in history. The biggest portion of that total went into transport electrification, and the second-biggest portion went into wind and solar capacity.

The buildout in electric vehicles, wind, and solar generation capacity and related technologies over the past 10 years has been quite impressive. It has failed to reduce global emissions of carbon dioxide, but it has led to regional declines, for instance in Europe, by means of energy demand destruction, mostly by discouragement through higher costs resulting from emission reduction policies. These higher costs appear to plague energy transition efforts—and the ultimate goal of near-total electrification of the world.

“Electrification is an unquestionably good thing,” Australia’s Chris Bowen told Bloomberg’s Rathi. “Even if your grid is powered by coal and you don’t have solar panels at home, if you’re just charging [an electric car] off a coal-fired grid, you are reducing emissions by something like 60 per cent between.”

Indeed, electric vehicles are widely seen as instrumental for the success of the electrification drive, but critics point out that the amount and kind of raw materials that EVs need is more than raw material inputs for conventional vehicles. Also, despite the robust growth in EV sales over the past decade, demand for crude oil for transportation fuel has not declined globally it has increased.

The big obstacle in the way of electrification is cost. While Australia’s Bowen, and many others, point out that the cost of solar power generation has fallen substantially over the past 30 or so years, countries with high solar penetration pay some of the highest electricity prices. The reasons for this are, first, state subsidies and compensation for negative power prices due to surplus generation, and, second, backup generation costs, because solar is variable and so is wind.

Batteries have been touted as the solution to the variability problem, but they come with their own drawbacks, such as cost, again, lower than optimal energy density, which leads to substantial land requirements, and the risk of fire: the Moss Landing battery storage site in California has caught fire twice in two years.

Electrification makes all the sense in the world, on paper. Out in the physical world, electrification comes with a range of challenges and problems, for which solutions remain elusive. Whether or not COP31 participants agree to a formal pledge to electrify, any such pledge would not make a practical difference.