Energy Transition

The energy industry is changing. Are governments switched on?

An electricity pylon.

If countries are to keep pace with the global energy transition, innovation and a strong enabling framework are key Image: Mike Wilson/Unplash

Harsh Vijay Singh
Acting Head, Equitable Transition, World Economic Forum
Pedro Gomez
Head, Climate; Member of the Executive Committee, World Economic Forum
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Decarbonizing Energy

This article is part of: World Economic Forum on Latin America

The global energy transition has many dimensions. The ubiquity of energy in modern industry and society will ensure that the impacts are felt across the global economy. Policymakers have an opportunity to pursue pathways that effectively channel the transition to deliver a future energy system that is secure, sustainable, affordable and inclusive. A strong enabling framework and multi-stakeholder collaboration are key for an effective energy transition.

There are some universal drivers for energy transition, which make it a concern for all countries to actively investigate their priorities:

Demand and supply shifts: Global energy consumption is expected to increase by 30% from 2017-2040. This growth is driven primarily by Non-OECD countries, as they move closer to universal access to energy and consume more energy to support economic and industrial growth, and as developed countries decouple energy consumption and GDP. Additionally, the future demand will also be met by a more diversified primary energy fuel portfolio, driven by the gradual replacement of coal in power generation by renewable energy sources and natural gas, by reduced demand for liquid hydrocarbons due to electrification of transport, and by increased prioritization of national energy security and import independence.

Innovation: Innovation has been a constant companion of the energy system, ushering previous transitions from biomass to coal, and subsequently from coal to liquid hydrocarbons. While previous transitions were gradual processes, the energy industry is looking forward to a dynamic future. Recent trends in technical maturity and cost reductions in solar photovoltaics, onshore and offshore wind, battery storage and unconventional fuel extraction have fundamentally altered the global energy balance. Moreover, technologies like smart grids, demand response and blockchain will open up new frontiers for the future energy system by changing the relationship between consumers and suppliers. These new energy market participants demand new set of skills, highlighting the need for human capital development.

Environmental concerns: The energy system contributes two-thirds of global greenhouse gas emissions. The need to act has materialized in landmark international cooperation (as in the Paris agreement) and national renewable energy targets in countries such as India and China. Private sector organizations have stepped up their responses: the Norwegian sovereign wealth fund announced divestment from coal-based assets, while oil and gas majors have raised stakes in renewable energy and Swiss Re is implementing ESG benchmarks across its entire $130 billion investment portfolio. However, progress on environmental sustainability is slow, as the carbon intensity of the global energy system remains flat, while air pollution has worsened in many countries and two-thirds of the world's energy consumption is not subjected to efficiency interventions. Going forward, as countries work to meet increased demand, environmental concerns will intensify the implications for energy system reliability and fuel diversity planning.

Driven by these trends, the energy transition is well underway, and there are significant opportunities for countries to improve the performance of their energy systems. Policy decisions made today will determine whether the energy system of the future is capable of delivering across its three key imperatives: economic growth and development; energy security and universal access; and environmental sustainability. The challenges in the current system are largely due to path dependencies from historical over- (or under)- prioritization of one of these three key imperatives. Consumption patterns and sunk- investments represent significant socioeconomic lock-in, contributing to the system inertia.

Countries need to take a longer-term approach, which anticipates future shocks and informs current policy and business decisions. Even countries with mature energy systems actively need to prepare an action-oriented toolkit of policies to effectively navigate the energy transition. The pursuit of a well-performing future energy system depends on the presence of a strong enabling environment that considers multi-stakeholder perspectives and facilitates the prioritization of policies and business decisions. The World Economic Forum's Energy Transition Index introduces an analytical framework with six key dimensions that should be present to foster an effective energy transition, including regulatory frameworks, political commitment and the investment climate, to name a few.

Analysis from the Energy Transition Index indicates that, on average, countries that have a strong enabling environment (marked by presence of readiness indicators) are more likely to rank in the top quartile in terms of their energy system performance. Additionally, countries that rank high on energy performance are more likely to have adopted a balanced approach, simultaneously pursuing the imperatives on economic growth, energy security and environmental sustainability.

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While energy transition is a global phenomenon where regional shocks reverberate across global markets, the decisions on energy transition planning will be taken locally. Countries have different starting points based on the maturity of their energy infrastructure, and different near-term priorities depending on their development status, fiscal priorities or infrastructure requirements. This calls for a tailored approach to transition planning that acknowledges the implications on their energy transition imperatives, and targets improvement of the enabling environment.

There are encouraging signals that this might already be happening. Norway, which scores highly on the Energy Transition Index, is actively investing in lowering the carbon footprint of its energy consumption and diversifying the economy to reduce reliance on energy exports. Likewise, China has tackled the environmental challenges head-on, initiating ambitious plans such as implementing a national emission trading market and mandating electric vehicles quotas. Emerging countries like Kenya have created a strong enabling environment to make giant leaps towards solving the energy access puzzle. Given the high stakes and pitfalls of potential ill-informed decisions, countries need to actively commit to developing long-term energy transition roadmaps. Decisions that optimize energy systems locally by balancing the three objectives of energy transition will ultimately deliver a global energy system that is secure, sustainable, reliable and inclusive.

The World Economic Forum's energy transition index and framework intend to support countries in the development of their long-term energy transition roadmaps. The framework considers the cross-disciplinary nature of the challenge, and the need for multi-stakeholder collaboration to foster a common understanding of the destination of the energy transition, necessary imperatives, and the policies and market enablers required for an effective transition. We encourage countries to use the framework in their energy transition planning efforts.

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