The World Economic Forum's Energy Transition Index (ETI) has shown that the world has made steady, albeit measured, progress in its energy transition journey over the past decade. Forward momentum is to be celebrated. Yet, the urgency for transformative interventions to mitigate climate change has intensified.
A series of systemic shocks over the past three years has had an acute impact on national and regional energy systems. The COVID-19 pandemic – followed by the faster than expected economic rebound – led to energy supply-demand imbalances, which have now been further compounded by the war in Ukraine. The resulting energy market volatilities have driven energy prices sky-high, severely affecting households and businesses alike.
As we approach the World Economic Forum’s 2022 Annual Meeting in Davos, we would like to share key insights from this special edition index on energy transition so that countries and companies may better navigate their transition journey in turbulent times.
1. The energy transition is not keeping pace with the growing urgency for change
The global average score on the ETI has steadily improved over the past decade, but the pace of improvement is inadequate to limit warming to 1.5°C by 2050. And most recently, successive disruptive events have made the transition even more difficult. Demand for fossil fuels is on the rise, energy prices have jumped, and energy security has moved to the top of many countries’ agenda.
Strong headwinds are now buffeting the three imperatives of the energy triangle: energy affordability, energy security and access, and sustainability. The situation highlights that the energy transition is not immune to external shocks. What’s needed now, more than ever, is a holistic approach that delivers concurrently on these three imperatives at an accelerated pace. A unified approach, carried out at speed, is critical to establishing a resilient energy transition capable of achieving long-term climate ambitions.
2. Lack of access to an affordable energy supply has emerged as a key threat to a just energy transition
As energy systems reconfigure to low-carbon, energy supply-demand imbalances might become recurrent phenomena. These imbalances and the high energy prices that often accompany them affect universal access and affordability of energy for consumers and industries. In 2021, the number of people without access to electricity increased by 2% to 768 million. Access to affordable energy must clearly be reprioritized. But it comes with a cost. Delivering universal energy access by 2030 would require investments of $20 billion annually until 2030.
While an increasing number of households, including in advanced economies, have been struggling to meet basic needs of heating and lighting at affordable costs, the impact is expected to be more severe for vulnerable consumers and small businesses. Rising energy and carbon prices can contribute to inflationary pressures, thereby making matters worse.
Therefore, a paradigm shift is required to optimize energy consumption through behavioural interventions and fourth industrial revolution technologies. Actions must also be taken to protect those most vulnerable through direct-benefits transfer and support measures. An inclusive and just transition that ensures equity and affordability demands nothing less.
3. Energy diversity – and security – are in short supply
The ETI suggests that dual diversification (of supply source and supply mix) is key to strengthening energy security. Globally, 103 countries can be classified as lacking diversity in energy supply. That puts their energy security at risk, especially when faced with adverse climatic events, supply shortages or geopolitical crises.
Diversifying the ecosystem of import partners in the short-term and diversifying the portfolio of domestic energy with low-carbon alternatives in the long-term have demonstrated significant benefits to countries’ energy security. Countries shifting towards more decarbonized domestic energy sources are likely to be more self-reliant and less dependent on the global trade of energy. That is especially true if they couple their decarbonization efforts with efficiency measures that reduce overall energy demand.
However, the transition to renewables and low-carbon technologies can bring new energy security concerns to the fore. These might include, for example, the tenuous state of supply chains needed to secure transition materials or the lack of flexibility of power grids. Such concerns must be addressed with mitigation measures upfront.
4. Regulatory frameworks need to be strengthened to meet the moment
Regulations and policies that reinforce and advance the energy transition are essential. Currently, not all regulatory frameworks are robust enough to drive the necessary actions and investments. Anchoring climate commitments into legally binding frameworks would not only ensure that those commitments endure political cycles, but also provide enforcement mechanisms to keep the long-term implementation projects on track.
Similarly, mobilizing necessary investments from public and private sources requires policy and institutional stability, appropriate de-risking mechanisms, and effective international collaboration to support the investment needs of developing countries.
5. Demanding change increasingly means changing demand
Achieving a transformation of the energy transition’s magnitude and complexity requires ambitious, long-term policies, enabling infrastructures, and significant investments. It also demands changes in energy consumption behaviours. Supply-side interventions will need to be augmented with demand-side efficiencies to achieve the transition’s objectives in the required timeframe.
Clean demand signals could be a turning point for emission-intensive sectors. The impact would be significant. Accenture has found that a 5% improvement in industrial and building efficiencies, alone, could offset demand by 270+ MMboe per year in the US and Europe. At present, most demand-side initiatives to create a strong “clean demand” pull (e.g., visibility on offtake volumes, acceptance of green premiums, etc.) remain isolated.
Clean demand initiatives that are rapidly scaled up would incentivize investments in low-emission technologies and production assets and help countries forge a demand-driven path to reduce their hydrocarbon dependence.
6. Industrial-strength decarbonization requires industrial-strength collaborations
The decarbonization of industries, which together represent 30% of total anthropogenic emissions, is fundamental to the global energy transition. However, industrial firms face complex challenges that act as “choke points.” Because the remedies are seldom found within a single firm or even industry, new forms of multi-stakeholder collaborations are essential to enable a step change in ambition and to provide a greater focus on emission reductions.
Three archetypal partnerships should be built upon and replicated:
• Collaboration between customers and suppliers (e.g. low-emission products offtake agreements, circular supply networks, value chain joint-decarbonization initiatives, etc.).
• Collaboration among industry and cross-industry peers (e.g. CO2 handling infrastructure, low-carbon manufacturing plants, knowledge sharing for decarbonization, etc.).
• Collaboration across a wider ecosystem of stakeholders that includes governments, policymakers, financiers, researchers, and NGOs (e.g. emission measurement standards, integrated research for low-carbon technologies, public-private partnerships, etc.).
The need to urgently accelerate the energy transition is clear. The current market scenario, as volatile as it is, presents a unique opportunity to do just that by speeding up energy transition endeavours and building up resilience in the energy systems. Winning the race requires stakeholders at every level and in every geography to step up and work together on reducing demand for fossil fuels, ramping up clean energy investments, decarbonizing industries and reshaping end consumer energy consumption in a way that lays the foundation of a sustainable future that is both inclusive and resilient. The time for action is now.