Costs and conflicts: taking stock on energy supply

July 2026 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

July 2026 Issue

The energy narrative is evolving faster than ever before. The dominant theme over the past few years has been ‘net zero’ and its progress, with artificial intelligence entering the discourse more recently given its enormous energy demands.

The net-zero narrative has been punctuated by two conflict caused supply shocks: Ukraine and Iran. Unsurprisingly, existential and immediate threats to energy supply cause a sharpening of focus on the security, diversity and reliability of supply. Are we seeing energy transition fade from the narrative as the Iran crisis unfolds?

The costs of certain energy transition technologies were under the microscope throughout 2025, driven by cost data, technology readiness levels and the repricing of transition risk by capital markets. This was not an exercise in ideology or driven by energy security concerns.

Economic rationalism began to prevail in relation to certain transition technologies – with much hyped ‘green hydrogen’ being a case in point. 2025 saw a very substantial tempering of appetite for cross-border green hydrogen due to the compounding challenges of cost, transport logistics and weak demand-side signals.

Throughout 2025, governments and industry examined the support that was likely to be required for certain transition projects like green hydrogen. Europe’s price on carbon provides a good point of reference to contextualise costs and support.

The European Union (EU) has a mature and well-developed price on carbon (which reached nearly €100 per tonne in 2023 and at the time of writing is around €80 per tonne).

The logic is that a business subject to a carbon price will seek to avoid that cost impost and, if it cannot do so, will invest in decarbonisation solutions to avoid the carbon cost. This logic holds if the invested costs are less than paying the price on carbon. The EU price on carbon has not proved sufficient to make many large transition projects viable.

Using green hydrogen as an example, the cost to produce it depends in large part on renewable energy costs at the point of production. Geography matters. In Spain, which has low cost renewable energy relative to other EU countries, at the time of writing, estimates indicate the carbon price would need to be in the range of €160 to €280 per tonne for a green hydrogen project to proceed on its own merits. This is significantly higher than the current price on carbon in the EU.

If the EU’s current price on carbon is not enough to support investment in a transition technology, host governments or EU funding must cover the difference for those transition projects to proceed or businesses will do nothing, and pay the carbon price.

It is no coincidence that the architecture of the EU carbon price requires the carbon price revenue received by EU governments to be deployed as support for energy transition projects. Consequently, the question is not whether to support projects, but rather ‘what’ to support and ‘how much’ is the level of support that makes sense. These two questions were under the microscope worldwide, for fuels like green hydrogen.

This reflection on costs was not an EU phenomenon or a price on carbon issue (as many countries have no price on carbon). Consequently, as we entered 2026, policy support frameworks have shifted in the case of green fuels in particular making the investment case for high-profile transition fuels like green hydrogen, very hard beyond specific use cases.

Policy shifts on energy transition in the US have perhaps been the biggest. It would be simplistic to categorise these shifts as purely inspired by ideological objection to climate change – but fair to conclude this was a primary driver of the administration.

The US had dialled back support mechanisms for green projects in mid-2025, withdrawn from the Paris Agreement at the beginning of 2026 and, through the ‘One Big Beautiful Bill Act’ (OBBBA), severely limited prospects for green and blue ammonia projects and most wind projects in the US.

The US then withdrew from a global shipping green fuels initiative under the International Maritime Organisation – further signalling a wholesale retreat from climate-oriented energy policy at the federal level.

The OBBBA changes were felt as far afield as Japan, a country that had positioned itself as the anchor demand market for clean ammonia globally, intending to co-fire clean ammonia with coal in its power stations to reduce emissions. While Japan’s clean ammonia ambitions remain intact in volume terms (30 million tonnes by 2050), the colour has shifted from green to blue – a direct consequence of US policy recalibration.

All the while, installed renewable energy capacity has continued to accelerate globally year on year. The powerhouse of this growth in recent years has been Asia. Over 500 gigawatts of renewable energy capacity was installed in Asia in 2025, representing 74 percent of total global renewable energy capacity installed that year.

China alone installed 440 gigawatts of this capacity, in wind and solar, and reached its 2030 renewable goal five years early. The world has China to thank for low-cost, scalable renewable energy – the hero of energy transition globally.

Sunshine and wind are not bestowed in equal measure on all countries. Nor are hydro or geothermal resources. Some countries have no choice but to rely on fossil fuels to meet power demands and some must import those fuels. Developing countries often struggle with importing lower carbon, liquified natural gas (LNG), and instead rely on lower priced (higher carbon) coal.

While exceptions exist, the energy systems in most countries are underpinned by the reliability of fossil fuels, and this will remain so as the world pursues the Paris Climate targets. Supply shocks to those energy systems inevitably cause governments to reassess priorities, as prices surge when supply is limited. This reassessment comes with greater urgency than energy transition policy.

The Iran conflict has caused major supply shocks. The crisis was described by the head of the IEA as the “greatest global energy security challenge in history”. Much of the immediate impact has centred on Asia, where Qatar’s interrupted LNG deliveries were mostly headed.

The consequences across Asia have been immediate and severe. Urgency prevails. Gas to coal switching is firmly in play across the region, representing a direct reversal of the emissions trajectory that years of transition planning had sought to establish. India is losing an estimated 45 to 50 percent of its total LNG imports and has rationed gas (and deployed this to fertiliser production) while instructing coal generators to defer maintenance and run at maximum capacity.

Japan and South Korea have both lifted operating caps on coal-fired power stations. Thailand is reactivating decommissioned coal-fired power plants, the Philippines has instructed coal-fired plants to run at capacity and Vietnam is seeking alternative crude supplies to replace its usual imports from Kuwait.

From a structural perspective, the Iran crisis is accelerating a fundamental rethinking of how governments plan for energy security and self-sufficiency. Diversifying sources of supply for LNG is a major priority for those countries in Asia affected by the curtailed Qatari LNG. But diversifying LNG sources is not the only policy response for affected countries in Asia.

Japan, which possesses the third-largest strategic petroleum reserve in the world, has announced plans to pursue 100 percent energy self-sufficiency, largely through an accelerated nuclear comeback. South Korea is exploring domestic uranium enrichment (not without its own issues, given its neighbours) and China, which had already planned 23 new nuclear reactors over the coming decade, is fast-tracking those plans.

For the Western Hemisphere, the Iran crisis presents a markedly different set of dynamics underpinned by hydrocarbon opportunities. The US, Canada, Brazil and Guyana are well-positioned to benefit from this renewed global emphasis on energy security and supply diversification. Despite their significant hydrocarbon reserves, Mexico and Venezuela risk being left behind due to historic underinvestment.

If there is an accelerating global shift toward diversified energy supply chains, it is also conceivable that African gas assets could become more central to the European and Asian energy mix over time.

Undoubtedly, the Iran crisis has shifted the narrative sharply to energy security and diversity of supply sources for hydrocarbons. But, for countries with the option of developing domestic renewable capacity (or nuclear), a drive for self-sufficiency and energy security will also see a focus on domestic resource development.

Moving electricity across borders, particularly renewable energy, is becoming a focus of policymakers in regions (like ASEAN) that are geographically proximate with different renewable resource potential. Bi-directional cross-border interconnectors have been a feature of Europe for many years now, successfully wheeling renewable energy across great distances. However, much of the world does not benefit from the overarching EU-style framework that facilitates this development.

In 2025, the world reflected, and in 2026, it has reacted. The catalysts for reflection and reaction were different. Diversifying LNG supply chains in reaction to supply side shocks from the Iran crisis does not entrench fossil fuel dependence to the exclusion of climate pursuits. Countries without renewable reserves face the same decarbonisation challenges as they did prior to 2026.

Countries endowed with their own renewable resources are now increasingly incentivised to prioritise renewable development as part of energy resilience. As Bill McKibben, a prominent American author, environmentalist and climate advocate, noted: “Energy from the sun travels 93 million miles directly to Earth without having to pass through the Strait of Hormuz.”

Richard Guit is a partner at Baker Botts. He can be contacted on +65 8882 7149 or by email: richard.guit@bakerbotts.com.

Richard Guit

Baker Botts