Energy sector risk report

Fossil fuels resilient while renewables facing a profitability reckoning

SENSITIVE RISK FOR ENTERPRISES

Last Update: July 2025

Strengths & Weaknesses

Traditional oil and gas companies continue to generate robust free cash flows at current price levels, supported by production discipline and entrenched market positions. Strong balance sheets provide resilience against price volatility.
Natural gas is increasingly positioned as a duration transition fuel, with major producers (particularly in the US, Qatar and Australia) expanding LNG export infrastructure to serve growing demand in Asia and Europe.
Solar and wind continue to achieve cost reductions through scale and innovation.
AI and data center expansion is creating structural new electricity demand that reinforces the long-term investment case for all forms of power generation, including both renewables and gas.

Renewables profitability remains structurally challenged: rising capital costs, grid interconnection bottlenecks and merchant power price risk are compressing returns on new renewable projects in many markets.
Intermittency combined with inadequate storage capacity and grid infrastructure is limiting the effective contribution of wind and solar to system reliability, requiring costly backup capacity.
Oil and gas face long-term demand uncertainty as the energy transition gradually erodes fossil fuel consumption in transport and heating, creating strategic planning challenges for capital-intensive upstream investments with 20-30-year time horizons.
High financing requirements for both segments (capital-intensive renewables projects and new LNG and oil infrastructure) create sensitivity to interest rate levels and investor risk appetite.

Sector Overview

What to watch ?

Renewable deployment rates: The pace at which wind and solar capacity is added will determine how quickly the energy mix shifts. China is leading installations while other major economies are scaling up but at slower rates constrained by grid and permitting bottlenecks.
Grid infrastructure investment: In most major markets, grid expansion and modernization is lagging renewable capacity additions, creating a binding constraint on the clean energy transition and sustaining demand for grid infrastructure companies.
Peak fossil fuel demand: Oil demand in transport is expected to peak within this decade in most scenarios. The timing and pace of this transition will determine how aggressively oil and gas companies need to diversify or divest.
AI and data center power demand: The energy requirements of AI training and inference represent a new and rapidly growing source of electricity demand that was not anticipated in most energy forecasts even a few years ago..
Geopolitical risks: Supply routes for LNG, oil and critical minerals remain exposed to geopolitical disruption. Energy security concerns are driving both renewable diversification and domestic fossil fuel expansion in different markets, often simultaneously..

The global energy sector encompasses oil and gas extraction and processing, power generation (fossil, nuclear and renewable), electricity transmission and distribution, and the growing segment of grid-scale storage and smart infrastructure. Global gross output for utilities is estimated at approximately USD 6.5tn in 2025, rising to around USD 7.2tn in 2026, with a 2026-2028 CAGR of approximately 3%. Extraction (oil, gas, coal and other mining) is estimated at approximately USD 4.8tn in 2025, rising to around USD 5.6tn in 2026, though this segment is more cyclical and price-driven, with output projected to ease back toward USD 5.5tn by 2028 as commodity prices normalize. These two figures span different value-chain stages (extraction feeds into power generation as an input).

The sector is also characterized by a pronounced structural duality. Oil and gas companies have enjoyed healthy cash flows in recent years, with Brent crude oscillating in the USD70–90 per barrel range - elevated enough to sustain profitability while not triggering the political pressure that accompanied the 2022 price spike. These companies have maintained capital discipline, returning cash to shareholders rather than pouring it into new upstream capacity, a stance that could constrain supply in the medium term. By contrast, the renewables segment has faced tighter margins and investor scrutiny as capital costs rose with interest rates and power purchase agreement prices proved insufficient to cover financing costs on new projects. The result is a slower-than-anticipated pace of renewable deployment in some markets, even as China continues to install capacity at a pace that exceeds the rest of the world combined.

As a result, profitability metrics differ substantially across energy subsectors. Oil & Gas Production and Exploration shows the strongest margins in the traditional fossil-fuel space, with an EBITDA margin of approximately 43% and a net margin of approximately 15%, benefiting from operating leverage at current price levels. Integrate Oil & Gas companies run thinner margins (EBITDA margin approximately 22%, net margin approximately 8%), reflecting the lower-margin downstream refining and distribution activities blended into their results. Utility companies show high and stable margins (EBITDA margin approximately 35%, net margin approximately 14%), consistent with regulated, capital-intensive businesses with predictable cash flows. Green & Renewable Energy stands out for a large gap between operating and net profitability: EBITDA margin is the highest in the group at approximately 58%, but net margin is negative (approximately -11%), reflecting heavy depreciation, interest expense on project debt and impairments - direct evidence of the financing-cost and capital-intensity pressure.

The long-term direction of the sector is not in question: electrification of transport, heating and industry will drive substantial growth in electricity demand, and renewables will capture a growing share of that demand as costs continue to fall. The question is the pace of transition and the role that natural gas plays as a bridge fuel. The US has emerged as the world's leading LNG exporter, providing European and Asian buyers with an alternative to Russian pipeline gas and creating a new global gas trade architecture. AI and data center energy demand represents an incremental demand layer that was not anticipated in earlier energy transition models and is reinforcing investment in all forms of reliable power generation - gas, nuclear and batteries - alongside renewables.

Subsectors

Fossil fuels (oil and gas): Upstream exploration and production, midstream transportation and storage, and downstream refining and distribution. Companies are managing the long-term transition away from fossil fuels while maximising near-term cash generation from existing assets.
Renewables: Solar, wind, hydro and other non-fossil electricity generation. The fastest-growing segment in capacity terms but facing near-term profitability pressure as capital costs and grid bottlenecks weigh on project returns.
Power generation and utilities: Electricity generation, transmission and distribution to end consumers. Increasingly complex as the mix of generation sources diversifies and grid operators must balance intermittent renewables with reliable baseload.
Grids and storage: Infrastructure for electricity transmission, distribution and storage (batteries, pumped hydro). A critical bottleneck in the energy transition, with investment requirements far exceeding historical norms.

Contacts

Ano Kuhanathan

Head of Corporate Research

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