5 strategies to navigate the shifting frontiers of the energy transition

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Roberto Bocca, Head of Shaping the Future of Energy and Materials; Member of the Executive Committee, World Economic Forum & Harsh Vijay Singh, Project Lead, System Initiative on Shaping the Future of Energy, World Economic Forum Geneva

• Amidst economic and geopolitical volatilities the energy transition is entering an uncertain phase.
• For a timely net-zero transition, stronger political commitment, capital access, and climate justice must be unlocked.
• Energy security challenges affirm the need to double down on a clean energy transition.

The global energy transition, pivotal to climate change mitigation efforts and for delivering secure and affordable energy for all, has made gradual progress in recent years. According to trend analysis from the World Economic Forum’s Energy Transition Index – a composite indicator tracking the progress of the energy transition across countries – the global average score has increased in nine out of the past 10 years, with more than 80% of the countries worldwide making an improvement.

The speed of the energy transition kept some pace through the COVID-19 pandemic. In 2021, wind and solar powered electricity accounted for more than 10% of global power generation for the first time ever, and the scale of electric vehicles doubled.

Despite this progress, alarm bells on global warming keep getting louder, and the world is also facing an energy crisis with concerns about energy security and affordability. More than 700 million people across the world still lack access to basic energy needs, and progress on universal access has stalled since the onset of the pandemic. The latest assessment report by the IPCC issued a code red for humanity, posing a seemingly impossible challenge of peaking global greenhouse gas (GHG) emissions in the next three years to stay within sight of Paris Agreement goals of net-zero by 2050.

Energy transition strategies

Much of the progress on the energy transition has historically been enabled by supply side interventions, substituting the carbon heavy fuel sources with renewable energy alternatives. Considering that fossil fuels still supply more than 80% of world’s energy, supply side measures will not be sufficient for net-zero transformation. To add to the challenge, the “decade of delivery” has ushered in a phase of compounded uncertainties. Supply chain bottlenecks exacerbated by the pandemic, trade disputes, macroeconomic headwinds, and Russia’s war on Ukraine have shaken the foundations of the energy system.

Countries are facing simultaneous pressures on all three pillars of the energy transition: economic development and growth, environmental sustainability, and energy security and affordable access. There are significant unknowns beyond the frontiers of the energy transition, requiring a paradigm shift in strategies and immediate actions.

1. International climate targets need to be legally enforceable through domestic policies

An ambitious and stable long term policy environment is essential. Despite the landmark global consensus on climate goals achieved at the Paris Agreement, the voluntary Nationally Determined Contributions outlined by countries are not consistent with the level of ambition required to limit global warming to below 1.5C by 2050. Beyond international agreements, legally enforceable domestic policies are necessary.

Among the top 10 global GHG emitters, only Japan, Canada, the EU, and South Korea have legally binding net-zero targets. Given the increasingly volatile political climate marked by rise of populism, climate change efforts cannot be held hostage to shifting political priorities. Enshrining climate targets into domestically enforceable laws can offer stability and certainty, enabling steady progress through political cycles.

2. Energy security planning needs to shift to a “just-in-case” model

The unexpectedly fast economic rebound from the pandemic and Russia’s war on Ukraine have exposed the vulnerabilities of energy security in even the best prepared countries. The energy supply chain has so far proven to be a well-oiled machine, and a just-in-time approach has enabled innovation and optimized efficiencies across the value chain. However, the limitations of this approach are apparent, with security constraints prompting a strong comeback for coal-fired power generation in many countries.

As energy systems reconfigure through the energy transition, energy security planning needs to shift from just-in-time to just-in-case, requiring maintenance of sufficient reserve capacity and storage infrastructure, with market mechanisms to incentivize investments in these solutions. Further energy security gains can be found by working also on the demand side of energy and not only supply – energy efficiency and energy savings can play a role also here.

Moreover, the simple rule of “not putting all your eggs in one basket” also applies to energy security. By diversifying the energy mix and energy import counterparts, energy security can be improved.

3.

The financing gap remains large, and de-risking energy investments, especially in emerging countries, is critical. Global investment in the energy transition grew more than threefold in the past decade, to $755 billion in 2021. However, this surge in investments came on the heels of a decade of economic expansion and were partly enabled by expansionary monetary policy and low benchmark interest rates. Given the outlook of higher interest rates to tame inflation, supply chain challenges, and rising commodity prices, the cost-competitiveness of renewable energy projects against existing fossil fuel assets might be affected.

Capital intensive renewable energy technologies are more sensitive to financing costs increase than fossil fuels. Under increasing benchmark interest rates, addressing risks associated with operations, execution, and policies can help maintain the cost-competitiveness of renewable energy technologies. Measures such as offering revenue stability, improving creditworthiness of off-takers, operational and infrastructure improvements to reduce curtailments, and clear demand signals to enable balance sheet financing by industries can help maintain necessary flow of investments in clean energy.

4. Equity and justice considerations should take the centre-stage in the energy transition

Consumers and businesses around the world are reeling under record high prices for energy, largely due to an unprecedented rebound in energy demand in 2021, insufficient investment in supply, and geopolitical volatilities. Due to the relative inelasticity of energy demand in the short-term, high energy prices have contributed to highest consumer price inflation level in decades. Vulnerable sections of the population and small businesses are disproportionately impacted, highlighting the challenges to equity and justice of energy transition. Maintaining affordability of energy is essential not just for economic growth and social welfare, but also to sustain support for climate policies.

Temporary energy market imbalances can be recurring through the energy transition, necessitating long-term systemic solutions to ensure affordable access to vulnerable groups and small businesses. Effective support mechanisms will rely on the ability to target the recipients of necessary transfers and designing measures in a manner that does not disincentivize efficient and responsible consumption.

5. Learning from pandemic management to overcome behavioural barriers to energy efficiency

Supply side interventions need to be matched with demand side measures to supercharge the energy transition. The rate of improvement of energy efficiency, widely considered as the first fuel due to its cost competitiveness and abundance, is below the levels required for timely net-zero transformation. According to the International Energy Agency, the world’s energy intensity of GDP improved by 1.3% annually over the past five years, well below the 4% improvement rate required in this decade to achieve net-zero emissions by 2050.

Active consumer engagement and participation are pivotal for effective demand-side management. While behavioural and cognitive barriers have been persistent in energy efficiency initiatives, the experience from the pandemic demonstrated that social behaviour adaptation is possible in the short term. Transparent and consistent information dissemination, restoring trust in institutions, and designing interventions that consider distributional impacts across income groups can help drive consumer participation in energy efficiency.

We need a balanced energy transition

In the current environment of macroeconomic and geopolitical turbulence, the energy system is not immune to shocks. Navigating the energy transition through these uncertainties is essential, though the significant and fast incremental progress will come from beyond the low hanging fruits. Balancing and simultaneously progressing on the imperatives of economic growth and development, energy security and affordable access, and environmental sustainability can improve the resilience of the transition. It is now needed more than ever.