ESG

The way the world produces and consumes energy is changing. How can we meet the needs of the future?

A worker inspects solar panels at a solar Dunhuang, 950km (590 miles) northwest of Lanzhou, Gansu Province September 16, 2013. China is pumping investment into wind power, which is more cost-competitive than solar energy and partly able to compete with coal and gas. China is the world's biggest producer of CO2 emissions, but is also the world's leading generator of renewable electricity. Environmental issues will be under the spotlight during a working group of the Intergovernmental Panel on Climate Change, which will meet in Stockholm from September 23-26. REUTERS/Carlos Barria (CHINA - Tags: ENERGY BUSINESS ENVIRONMENT) - RTX13UEF

How will we emerge from the 'energy transition'? Image: REUTERS/Carlos Barria

Morgan Bazilian
Director, Payne Institute for Public Policy, Colorado School of Mines
David G. Victor
Professor, University of California, San Diego (UCSD), Nonresident Senior Fellow, Brookings Institution
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ESG

The way energy is produced, distributed and consumed around the world is undergoing fundamental change of almost unprecedented proportions. This is commonly referred to as the “energy transition”.

The Global Energy Architecture Performance Index 2017 (EAPI), tackles elements of this transition in its fifth annual edition, as do the global Regulatory Indicators for Sustainable Energy (RISE) released by the World Bank a month earlier. Of specific interest to this essay are the underlying issues of governance and regulation and their relationship to progress towards sustainable and secure energy systems. In UN development terms, this focus helps us consider the links between Sustainable Development Goal (SDG) 7, which addresses energy, and SDG 16, which is about peace and justice.

Both reports consider the relationship between their indicators and indicators of governance, using the Worldwide Governance Indicators (WGI). That work, produced as a cooperation between the World Bank and the Natural Resource Governance Institute, says: “Governance consists of the traditions and institutions by which authority in a country is exercised.” The WGI considers six dimensions of governance. The two energy reports focus their brief analysis on “regulatory quality” and “rule of law”.

Many countries struggle to upgrade their energy systems to fully support current and future requirements of energy security and access, sustainability and economic growth. All of this takes place against a backdrop of economic power (and associated energy demand) shifting from developed to developing countries; political power shifting from the nation state to sub-national and supra-national entities; and processes of innovation broadening from large incumbent firms to agile newcomers. This is shifting the shape of the geopolitics of energy and changing the vocabulary used to describe it. While traditional issues of energy such as commodity price volatility and physical security of supply remain salient, the elements of the energy transition - including a focus on clean energy - require decision-makers to look beyond static approaches.

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During a private session at the World Economic Forum Annual Meeting 2011, 90% of participants, consisting of executives of the world’s largest energy companies, policy-makers and thought leaders from across the energy value chain, expressed a belief that significant change is underway in energy architectures around the world. Almost a third said they believe the world has reached an inflection point marking a radical shift in the way we source, transform and consume energy.

While the pressures and possibilities for change in energy architecture are at a historic height, what is less clear is the shape the transition will take. What will the new energy architecture look like? What enabling environment will create the most effective transition towards an energy architecture needed to meet tomorrow’s energy requirements both globally and for different countries? How can we ensure that the new architecture goes further to underpin the sometimes competing needs of economic growth and development, environmental sustainability, and energy access and security? Out of this discussion a set of global indicators that form the EAPI emerged.

The EAPI is produced by a joint team from the World Economic Forum and Accenture. It goes largely under-the-radar of mainstream energy discussions, but offers a useful set of insights on the massive transitions we are witnessing in the energy space. In 2016, the report said: “The stage has been set for a fundamental reshaping of energy systems and associated infrastructure (…) Scattered signs of progress are evident.” Those signs are increasingly visible. The various sub-indicators under the headings are shown for the EU28 as well as the wider countries in the chart below.

This year’s report has a short section on the relationship between scores on the index and issues of governance: “Energy policies are the tools governments can use to set the conditions for transforming their energy sectors. Quality policies formalize a government’s vision for the energy sector, setting realistic short, medium and long-term goals that direct and drive progress. A compelling link exists between well-designed policies, as measured by the World Bank’s Regulatory Quality Indicator, and the highest-performing countries on the EAPI, highlighting how important policies are to the sector’s governance and to achieving a top-performing energy system.”

Just a month before the launch of the EAPI, the World Bank launched its first global version of RISE, along with a rich data set. The RISE work provides a set of indicators that help compare national policy and regulatory frameworks: “Each indicator targets an element of the policy or regulatory regime important to mobilizing investment, such as establishing planning processes and institutions, introducing dedicated incentives or support programs, and ensuring financially sound utilities.”

Interestingly, RISE finds that while many of the “bones” of good governance are in place, the implementation and administration of these rules is lacking in many countries. To this end they note: “Across all pillars, countries are more likely to have a strong legal framework and undertake sector planning than to tackle more challenging aspects of the policy environment. For instance, more than three-quarters of all RISE countries score in the green zone on the legal framework for renewable energy indicator, while only 9 percent do for their energy efficiency mandates and incentives for utilities.”

Figure 3: RISE indicators (World Bank, 2017) Image: World Bank

The RISE scores show a positive correlation to investment climate indicators using the World Bank Governance Indicators of rule of law and regulatory quality. On these comparisons, RISE cautions: “In countries where general regulations are weak, it is likely that the policy elements measured by RISE are either inadequately implemented or insufficient to address more comprehensive barriers to investment. For example, Pakistan scores in the green zone for renewable energy, as does Russia for energy efficiency, while all score poorly on both WGI indicators. In such cases, the steps measured by RISE may need to be taken as part of a broader governance and policy reform agenda to scale up investment.”

RISE Index performance plotted against governance indicators (World Bank, 2017) Image: World Bank

A change of this magnitude for energy systems will not be feasible without a suite of strategic tools that help us understand different pathways to the future. Of course, both sets of indicators discussed here are highly abstracted and not meant as a comprehensive treatment or classification of an energy system. Rather, they each attempt to present and consider the complex information and the highly interdependent issues that prevail in the energy sector.

It is clear that there are now several efforts to take stock of the energy system and those efforts point to a central role for governance. Understanding the relationship between those results and the basics of governance and regulation in countries can help decision-makers and investors. More detailed analysis could be conducted by using other methods of correlation or using other dimensions such as “government effectiveness” or “control of corruption”. Ensuring the momentum of positive change in energy systems continues and is supported will require reinvigorated efforts on governance issues.

The Global Energy Architecture Performance Index 2017 is available here.

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