5 strategies to navigate the shifting frontiers of the energy transition


May 23, 2022

SINGAPORE – The global energy transition, essential to efforts to mitigate climate change and to provide secure and affordable energy for all, has progressed gradually in recent years.

According to trend analysis of the World Economic Forum’s Energy Transition Index – a composite indicator that tracks energy transition progress in countries – the global average score has increased in nine of the past 10 years, with more of 80% of countries in the world improving. The speed of the energy transition has maintained a certain pace during the Covid-19 pandemic. In 2021, wind and solar electricity accounted for more than 10% of global electricity production for the first time, and the scale of electric vehicles doubled.

Despite this progress, alarm bells on global warming continue to ring, and the world is also facing an energy crisis with concerns about energy security and affordability. More than 700 million people worldwide still lack access to basic energy needs, and progress towards universal access has stalled since the start of the pandemic. The IPCC’s latest assessment report issued a code red for humanity, posing a seemingly impossible challenge to cap global greenhouse gas (GHG) emissions over the next three years to stay within sight of the targets for net zero of the Paris Agreement by 2050.

Much of the progress of the energy transition has historically been enabled by supply-side interventions, replacing heavy carbon-based fuel sources with renewable energy alternatives.

Given that fossil fuels still provide more than 80% of the world’s energy, supply-side measures will not be enough for net zero transformation. To add to the challenge, the “decade of delivery” ushered in a phase of heightened uncertainty. 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 face simultaneous pressures on all three pillars of the energy transition: economic development and growth, environmental sustainability, energy security and affordable access. There are significant unknowns beyond the boundaries of the energy transition, requiring a paradigm shift in immediate strategies and actions.

International climate goals must be legally enforceable through national policies
An ambitious and stable long-term political environment is essential. Despite the historic global consensus on climate goals reached during the Paris Agreement, country-defined voluntary nationally determined contributions are not consistent with the level of ambition required to limit global warming to less than 1, 5 degrees C by 2050. Beyond international agreements, policies are needed.

Of the top 10 global GHG emitters, only Japan, Canada, the European Union and South Korea have legally binding net zero targets. Given the increasingly volatile political climate marked by the rise of populism, climate change efforts cannot be held hostage to shifting political priorities. Enshrining climate goals in nationally enforceable laws can provide stability and certainty, enabling steady progress through political cycles.

Energy security planning must shift to a “just in case” model
The surprisingly rapid economic rebound from the pandemic and Russia’s war on Ukraine have highlighted energy security vulnerabilities even in the most prepared countries. So far, the energy supply chain has proven to be a well-oiled machine, and a just-in-time approach has enabled innovation and improved efficiency throughout the value chain. .

However, the limitations of this approach are apparent, with security constraints causing a strong comeback of coal-fired power generation in many countries.

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

Moreover, the simple rule of “don’t put 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.

De-risking clean energy investments is key to maintaining capital flows as interest rates rise
The financing gap remains large and de-risking energy investments, particularly in emerging countries, is essential. Global investment in the energy transition has more than tripled over the past decade, reaching US$755 billion (S$1.040 billion) in 2021. However, this increase in investment followed a decade of economic expansion and was partly made possible by an expansionary monetary policy. policy and low benchmark interest rates.

Given the outlook for higher interest rates to keep inflation in check, supply chain challenges and rising commodity prices, the cost competitiveness of renewable energy projects against the assets of existing fossil fuels could be affected. Capital-intensive renewable energy technologies are more sensitive to rising financing costs than fossil fuels. In an environment of rising benchmark interest rates, managing operational, execution and policy risks can help keep renewable energy technologies cost competitive.

Measures such as revenue stability, improved buyer creditworthiness, operational and infrastructure improvements to reduce cutbacks, and clear demand signals to enable balance sheet funding from industries can help maintain the necessary flow. investment in clean energy.

Considerations of equity and justice must be at the center of the energy transition
Consumers and businesses around the world are reeling from record energy prices, largely due to an unprecedented rebound in energy demand in 2021, insufficient investment in supply and geopolitical volatility. Due to the relative inelasticity of short-term energy demand, high energy prices have contributed to the highest level of consumer price inflation in decades. Vulnerable sections of the population and small businesses are disproportionately affected, highlighting the challenges for equity and justice in the energy transition.

Maintaining energy affordability is essential not only for economic growth and social well-being, but also for maintaining support for climate policies. Temporary energy market imbalances can recur during the energy transition, requiring long-term systemic solutions to ensure affordable access for vulnerable groups and small businesses.

Effective support mechanisms will rely on the ability to target recipients of needed transfers and design measures in a way that does not discourage efficient and responsible consumption.

Learning from pandemic management to overcome behavioral barriers to energy efficiency
Supply-side interventions need to be matched with demand-side measures to boost the energy transition. The rate of improvement in energy efficiency, widely regarded as the first fuel due to its cost competitiveness and abundance, is below the levels required for a timely net-zero transformation. According to the International Energy Agency, global energy intensity of GDP has improved by 1.3% per year over the past five years, well below the required 4% improvement rate over the past five years. this decade to achieve net zero emissions by 2050.

Active consumer engagement and participation is essential for effective demand management. Although attitudinal and cognitive barriers have persisted in energy efficiency initiatives, the experience of the pandemic has demonstrated that adapting social behaviors is possible in the short term.

Providing transparent and consistent information, restoring trust in institutions, and designing interventions that consider distributional impacts across income groups can help boost consumer participation in energy efficiency.

We need a balanced energy transition
In the current context of macroeconomic and geopolitical turbulence, the energy system is not immune to shocks. Navigating the energy transition through these uncertainties is essential, although significant and rapid incremental progress will come from beyond the low-hanging fruit.

Balancing and simultaneously advancing 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 needed today more than ever.

  • Roberto Bocca, Head of Shaping the Future of Energy and Materials, is a member of the Executive Committee of the World Economic Forum. Mr. Harsh Vijay Singh is the Project Manager for the Energy Futures Training System Initiative at the Forum.
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