The energy transition is real, but so is energy demand

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For much of the past decade, discussions around energy investing have often been framed as a choice between ‘old energy’ and ‘new energy’. Oil and gas belonged to the past; renewables belonged to the future.

The reality may prove more complicated.

The transition towards a lower-carbon economy remains one of the defining developments of our time. Renewable energy continues to grow rapidly. According to International Renewable Energy Agency (IRENA), global renewable power capacity reached 4,448GW in 2024 after a record 585GW of additions during the year, accounting for more than 90 percent of net power capacity expansion globally. As investors, we remain excited about many of the businesses enabling that transition and continue to invest across a broad range of future energy solutions.

In recent years it has become increasingly clear how difficult replacing the existing energy system may be.

Global electricity demand rose strongly in 2024 and the International Energy Agency (IEA) expects demand growth to remain well above historical averages, driven by electrification and industrial activity among other factors. Emerging economies are industrialising. Electrification is accelerating. At the same time, governments have become increasingly focused on energy security and reliability following a series of geopolitical shocks.

More recently, another force has entered the ring. Just when the energy debate seemed complicated enough, along came artificial intelligence (AI).

The extraordinary investment taking place in AI infrastructure has brought a renewed focus on power demand. Data centers and semiconductor fabrication both require vast amounts of energy. In many regions, electricity demand forecasts are being revised upwards for the first time in years. For example, the IEA expects electricity demand from data centers to more than double by 2030, in part because model training and running large models are significantly more power-intensive than previous cloud computing. If the forecasts are correct, the demand would equal Japan’s current annual electricity consumption.

This rising power demand may support renewables where grid capacity and storage can keep pace. However, it also highlights a broader reality – the world may need more energy of almost every kind.

However, the more interesting opportunity may be understanding how the full energy system changes over time.

Some companies are building renewable generation. Others are strengthening electricity grids. Some are developing battery technologies and energy storage solutions. Others are investing in liquefied natural gas (LNG), which many policymakers continue to view as an important transition fuel. A number of traditional energy companies are increasingly difficult to classify neatly, with businesses spanning oil and gas production, LNG, electricity generation, renewables and energy infrastructure.

Our recent work on TotalEnergies and Petrobras has reinforced this point and has illustrated the complexities.

TotalEnergies remains a significant oil and gas producer, but it is also one of the world’s largest LNG players and has been building an integrated power business across electricity generation, renewables and trading. That mix matters because it changes how we assess the company: not only by oil exposure, but by LNG growth and capital allocation. In our view, the key test is whether the company can use hydrocarbon cash flows to fund growth in LNG and power while maintaining capital discipline.

Petrobras illustrates a different point. It is often treated as a geared play on oil prices, but we believe the more important question is the quality and durability of its Brazilian offshore resource base. Over the past decade, Petrobras has shifted more of its production towards the pre-salt fields, where scale, reservoir quality and relatively low lifting costs have supported higher production and cash generation. The investment case depends more on Petrobras’ ability to convert its resource base into free cash flow than on a single oil-price forecast.

The energy transition now spans environmental, industrial, geopolitical and technological questions. That could favour companies with exposure to both conventional supply and power infrastructure, and sharpens the mind when considering the best investments for our clients.

Final thoughts

The energy transition is real, but it will not remove the need for reliable, affordable energy. AI, electrification and industrial growth are making the system more demanding, not less.

That is why we think the old distinction between ‘old energy’ and ‘new energy’ is becoming less useful. The more important question is which companies can supply the energy the world needs, enable the infrastructure it requires, and still earn attractive returns on capital.

For long-term investors, the opportunity lies less in choosing a label and more in understanding how the energy system is actually changing.

Risk factors 

The Funds are distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited. All information is sourced from Baillie Gifford & Co unless otherwise stated.

As with all mutual funds, the value of an investment in the Fund could decline, so you could lose money. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty and greater volatility. These risks are even greater when investing in emerging markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. Currency risk includes the risk that the foreign currencies in which a Fund’s investments are traded, in which a Fund receives income, or in which a Fund has taken a position, will decline in value relative to the U.S. dollar. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. In addition, hedging a foreign currency can have a negative effect on performance if the U.S. dollar declines in value relative to that currency, or if the currency hedging is otherwise ineffective.

For more information about these and other risks of an investment in the Funds, see "Additional Information about Principal Strategies and Risks" in the prospectus. There can be no assurance that the Funds will achieve their investment objectives.

This communication was produced and approved in July 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

As at June 2026, Baillie Gifford held TotalEnergies and Petrobras.  A full list of holdings is available on request and is subject to change.

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