6 key insights into accelerating the energy transition

In the past three years, environmental, macro-economic, and geopolitical shocks have made it difficult for the world to transition to new energy sources.

6 key insights into speeding up the energy transition

  • In the past three years, environmental, macro-economic, and geopolitical shocks have made it difficult for the world to transition to new energy sources.
  • There are many risks associated with high energy prices, energy shortages, and not meeting climate goals. These risks threaten energy affordability, security, access, and sustainability.
  • The volatility of the energy market and security constraints present an opportunity to speed up the transition to clean energy by increasing investments in clean energy and changing how industrial and end consumer energy is used.

The World Economic Forum's Energy Transition Index (ETI) has shown that the world is making progress in its journey to use less energy. This is good news. However, we need to do more to fight climate change because it is getting worse.

The COVID-19 pandemic, followed by the faster than expected economic rebound, has caused energy supply-demand imbalances. These have been made worse by the war in Ukraine. This has resulted in energy price volatilities, which have severely affected households and businesses alike.

As we get closer to the World Economic Forum's Annual Meeting in 2022, we want to share some insights from this special edition index on energy transition. This will help countries and companies navigate their transition journey during turbulent times.

#1. The energy transition is not happening fast enough

The ETI (Environmental Technology Index) has improved over the past decade, but it is not improving quickly enough to limit warming to 1.5 degrees Celsius by 2050. In addition, recent disruptive events have made it more difficult to make the transition to greener energy. demand for fossil fuels is increasing, energy prices are rising, and energy security is becoming a top priority for many countries.

The three most important things for the energy transition are energy affordability, security and access, and sustainability. These are being challenged by strong headwinds. To make sure the energy transition is successful, we need to take a holistic approach that addresses these issues at the same time. We need to do this quickly so that we can be resilient in the face of future challenges.

#2. A lack of affordable energy supplies could prevent a just transition to cleaner energy sources

As energy systems move towards low-carbon technologies, there might be more problems with energy supply and demand. When this happens, the prices for energy often go up. This affects how much people and companies can afford to pay for energy. In 2021, the number of people without access to electricity increased by 2% to 768 million. We need to make sure that everyone has access to affordable energy, but this will require investments of $20 billion annually until 2030.

A lot of households, including in advanced economies, have been struggling to meet the basic needs of heating and lighting at an affordable price. But for vulnerable consumers and small businesses, the impact is going to be a lot worse. Rising energy and carbon prices can contribute to inflationary pressures, making the problem even worse.

We need to change how we use energy in order to use less of it. We also need to help people who are most vulnerable. This will help make the switch to new technology easier and more fair for everyone.

#3. There is a lack of diversity and security when it comes to energy

The ETI suggests that dual diversification (of supply source and supply mix) is key to strengthening energy security. Dual diversification means having more than one way to get energy. 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.

Short-term, having a variety of import partners is good for a country's energy security. In the long-term, it is good to have a variety of domestic energy sources that produce low levels of carbon emissions. This will make the country less dependent on other countries for energy and more self-reliant. This is especially true if the country takes measures to reduce overall energy demand.

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. The regulatory framework needs to be strengthened to meet the moment

We need strong regulations and policies to help with the energy transition. Right now, not all regulatory frameworks are strong enough to make the changes we need. If we want to make sure these changes happen, we should put climate commitments into legally binding frameworks. This way, they will last through political cycles and we will have enforcement mechanisms to make sure projects stay on track over the long term.

In order to mobilize necessary investments from public and private sources, developing countries need policy and institutional stability, as well as effective international collaboration to support their investment needs.

#5. Demanding change means that the demand for change is increasing

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. To achieve the transition’s objectives in the required timeframe, interventions on the supply side will need to be augmented with demand-side efficiencies.

If industrial and building efficiencies improve by 5%, it could offset the demand for 270+ MMboe per year in the US and Europe. There is a need for more initiatives to create a "clean demand" pull. This would involve things like making sure people can see how much oil is being bought and sold, and paying more for green products.

If governments implement clean initiatives quickly and on a large scale, this would encourage investments in low-emission technologies and production assets. This would help countries reduce their dependence on hydrocarbons.

#6. Industrial-strength decarbonization requires industrial-strength collaborations

Industries that produce a lot of pollution need to reduce their emissions. This is important so that we can make the transition to clean energy. However, it's not always easy for these industries to do this by themselves. That's why it's important for them to work together with other groups, like consumers and governments, to come up with solutions.

There are three types of partnerships that should be built and used as a model:

  • Working together with suppliers, customers can create low-emission products and reduce emissions throughout the supply chain. Some examples of this include offtake agreements, circular supply networks, value chain joint-decarbonization initiatives, etc.
  • Peers in different industries can work together to share knowledge and ideas about how to reduce carbon emissions. This includes working on things like building CO2 handling infrastructure and low-carbon manufacturing plants.
  • Many different groups of people are involved in helping to reduce greenhouse gas emissions. This includes governments, policymakers, financiers, researchers, and NGOs. They work together to develop things like emission measurement standards and low-carbon technologies. Additionally, they often partner with the private sector to create even more effective solutions.

It is clear that we need to urgently speed up the energy transition. The current market situation, while volatile, presents a unique opportunity to do just that by speeding up energy transition efforts 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.

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