The low-carbon transition can bolster countries’ energy security, but it can also increase risk in ways that are easy to overlook. Broad indicators are no longer enough to understand the links between energy transition, energy security and sovereign debt risk.
Read this article to understand:
- The growing links between countries’ low-carbon transition and energy security
- How domestic factors and distributed energy can impact fiscal risk
- Why investors should look beyond headline indicators to capture the nuance of sovereign debt risk
Few things are more critical to the economic prosperity of a nation-state than energy security. Keeping the lights on and powering industry are essentials for growth and political stability, not to mention quality of life.
Energy security has become central to the assessment of any national economy, including its exposure to inflation risk and its capacity for future growth. It is also therefore a key factor in assessments of sovereign debt risk.
Energy security has become central to the assessment of any national economy
Recent events, including war and the climate emergency, have made the importance of energy security even starker. Conflicts in Ukraine, Russia and the Middle East are driving up energy prices. A strong El Niño is increasing risks of floods and droughts in many areas of the world – an obvious risk to energy infrastructure. And of course, there is the drive for nations to implement climate transition plans involving vast investment in renewable generation and grid capacity.
These geopolitical factors and metrics are clearly critical, but they are only part of the story. Assessing energy security and its role in a sovereign state’s debt profile requires both a top-down and a bottom-up approach.
As we explore below, each market’s specifics, its stage of economic development, legacy energy infrastructure and distinct dynamics are all crucial elements for a meaningful assessment.
Energy dependency: The starting point
Our starting point for assessing energy security is through a dependency lens at an economy-wide level.
Across Europe, for instance, many government debt yields have been increasing significantly, in large part because of the energy shock from the Middle East conflict. That brings home the pertinence of the risk posed by energy security, while nations that are more advanced in their energy transition can show more resilience.
Countries such as Italy and Ireland rely on fossil-fuel imports for most of their overall energy needs. As a result, they are increasingly at risk from geopolitical factors including the energy shocks that followed the start of the Ukrainian and Middle Eastern conflicts.1 Meanwhile, Hungary illustrates how climate disruptions to nuclear capacity can create economic and asset-price risks. Around 40 per cent of Hungary’s energy comes from its nuclear capacity, which was disrupted by droughts over the hot summer.2
These country-specific differences can have material impacts on inflation, economic growth and fiscal balances. As such, they can inform investment positioning and risk monitoring.
It’s important for investors to capture the nuance of each country’s position and the actions they are taking
At the same time, if a country has significant oil or gas in its energy mix today, both the international situation and transitioning to renewables can cause disruption. It doesn’t necessarily mean transitioning would be negative overall, but doing so as early as possible should help reduce the disruption. It’s important for investors to capture the nuance of each country’s position and the actions they are taking to better understand the impacts on sovereign debt risk.
For example, in our developed market sovereign analysis, although far from being the only factor, it confirms our preference for the debt of a country such as Spain, which derives most of its electricity from renewables and is therefore more insulated from global energy shocks, over that of a country such as Italy, which is much more dependent on gas (see Figure 1).3
Figure 1: Energy baseload forward prices, October-December 2026 (€/MWh)
Source: Bloomberg, Aviva Investors. Data as of 3 November 2026.
Emerging-market dynamics: Both top-down and bottom-up
In emerging markets, particularly those where energy supply is less secure, the situation can be more complex. Taking a country-level, top-down lens can understate the importance of local, domestic factors. It’s important to complement it with a considered bottom-up view.
In many geographies, income growth is pushing up overall energy demand, while rising temperatures are increasing the need for air-conditioning. Several countries are also rapidly building data centres in a bid to profit from the AI race, adding to their national energy consumption. The IEA estimates that emerging countries will account for 80 per cent of additional electricity consumption between 2026 and 2030 (see Figure 2).4
Figure 2: Global electricity demand growth, 2015-2030 (terawatts/hour)
Source: Aviva Investors, IEA. Data as of 6 February 2026.
This adds pressure at the same time as internal factors, like the reliability of grids and other infrastructure, can reduce a country’s energy security – with economic and investment implications. Even emerging markets with sufficient domestic energy sources can suffer when those factors fail. When grid infrastructure, state utilities or government controls on private power generation stop working, it can lead to blackouts or force loadshedding (temporarily disconnecting power in times of excess demand or when grid stability is threatened).
For example, although Pakistan’s clean electricity production has surged over the last two decades, reaching 55 per cent of its electricity production in 2026, declining generation at several of its power plants led to an electricity crisis with prolonged blackouts in August of this year.5,6
Factors like these can also accelerate local demand for distributed energy, for example solar panels on homes that aren’t linked to a country’s power grid. In a number of developing countries, businesses and households are making independent decisions to install renewables, driven less by climate policy and more by individual and community-level responses to energy insecurity. It can provide users with cheap and reliable access to electricity, but this distributed capacity is not always immediately visible in government statistics.
In Pakistan, based on a mix of field data, market consultations and national statistics, think tank Renewables First estimated the amount of distributed solar capacity to be far higher than captured by other sources (see Figure 3).7
Figure 3: Pakistan’s estimated distributed solar capacity (gigawatts)
Source: Aviva Investors, Ember, Renewables First, CC BY-SA 4.0. Data as of June 2025.
Another energy think tank, Ember, estimates that 20 of the 26 gigawatts of total solar capacity added between 2023 and 2025 in Africa is distributed solar, which is not well reflected in national statistics.8
The nuances of organic growth
However, it’s important for sovereign bond investors to have a full picture of a country’s energy generation capacity. On the one hand, such levels of added power can increase a country’s headline energy and macroeconomic resilience over time, through reduced reliance on fossil-fuel imports, relieving pressure on current accounts, inflation, and fiscal space (thanks to lower fossil-fuel subsidies). And from a human development and a climate perspective, more people gaining access to cheap and reliable electricity from solar is a clear positive.
On the other hand, distributed energy can undermine the nation-wide energy system, particularly where it impacts state-owned energy providers. As consumers leave the grid, the income base shrinks. People who shift off the grid in these scenarios also tend to be the ones with higher disposable incomes. Those who remain are often more vulnerable to price increases, which can put state utilities in a bind if they need to recoup their losses from having fewer users. This can add fiscal risk to the sovereign issuer too, particularly if large grid and energy infrastructure investments are required to maintain access for the rest of the population.9
It’s important to understand which countries are taking action, and which ones are more passive
However, institutions like the IMF and multilateral development banks are supportive of the low-carbon transition. Through concessional financing and other support, they can help countries mitigate the related financial and fiscal risks. But governments need to be proactive in managing their vulnerabilities. For investors, it’s important to understand which countries are taking action, and which ones are more passive.
The devil is in the detail
Conventional analysis might only consider how much of a country’s energy is imported. Yet investors also need to gain a qualitative understanding of local infrastructure, governance and institutions, and the way they influence business and individual decisions on energy provision. This can add nuance when thinking about external accounts and fiscal risk from changes in energy prices and geopolitical shocks, helping investors make more informed decisions.
