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Why the response to the energy crisis must embrace an accelerated and balanced transition

The energy transition and energy security cannot be considered separately.

The energy transition and energy security cannot be considered separately. Image: Rabih Shasha/Unsplash

Lucia Fuselli
Program Analyst, Energy, Materials and Infrastructure Platform, World Economic Forum Geneva
Mohammed Algeer
Fellow, Energy, Materials and Infrastructure Platform
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This article is part of: World Economic Forum Annual Meeting

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  • We are living through the first truly global energy crisis, and all dimensions of the 'energy triangle' are now under pressure.
  • Countries' short-term responses to the crisis highlight the need to reshape current transition strategies, ensuring they balance affordability, security and sustainability.
  • The crisis provides an opportunity to rethink energy security in a way that ensures an equitable transition is at its centre.

For more than a century, companies and countries have depended on continuous access to energy at affordable costs. Since the concept of “energy security” emerged strongly with the 1970s oil crises, the meaning of the term has evolved from diversification of oil supply by industrialized nations to the wider and more complex “uninterrupted availability of different energy sources for all nations, at an affordable price”.

Despite the world having already weathered several energy crises, the one we are living through now is the first truly global one due to the interconnections in energy markets. The crisis has emerged after a decade of under-investment in legacy energy sources, in addition to a very slow scale-up of renewables compensating for that gap. This has led to a perfect storm, via a mix of shocks following the COVID-19 pandemic and Russia’s invasion of Ukraine. While energy should be affordable, secure and sustainable, this “energy triangle” is under strong pressure on all three fronts. There is an insufficient buffer in the system to absorb recent shocks without unprecedented price rises.

While countries have been scrambling for supply diversification in recent months, it’s become clear that resilience (the capacity to withstand and recover from physical, cyber- and market shocks) is now integral to energy security. But what has been less evident is that the concepts of energy transition and energy security can no longer remain separate. A new report by the World Economic Forum in collaboration with Accenture explores how to rethink the security of energy systems that are centred around the transition.

Have you read?

The short-term responses to the energy crisis have included rapid realignment of energy trade, fast-tracked infrastructure development plans, unprecedented volumes of fiscal interventions, and emergency revaluation of energy policies. While the socio-economic impacts of the crisis cannot be overlooked, this is also a chance to structurally align the energy system’s trajectory with a transition that leads to a system that doesn’t endanger the 1.5C global warming target and, at the same time, delivers on energy security and affordability. We missed a similar opportunity for structural change in the recovery period from the pandemic – so how can we devise short-term responses that achieve that positive change this time around?

1. Align energy supply reinforcements with energy transition goals

After years of underinvestment in all forms of energy (notably clean energy), the disruption of pipeline natural gas from Russia triggered a global energy supply shock, directly impacting Europe and indirectly elsewhere. As countries rapidly seek supply reinforcements, there is a risk of extended emissions lock-in, stranded assets and overcapacity.

While EU-level coordination in the planning of new LNG (liquid natural gas) regasification terminals reduces longer-term energy security risks, it is unlikely to offer any near-term price relief while locking in additional emissions for many years. Similarly, coal plants revived or kept open in Germany are estimated to add around 4% to its total annual emissions; China and India have announced plans to increase coal production by 700 million tonnes per year in the next two years, and several US states have announced delays in the planned closure of coal-fired plants. While there is a parallel effort to invest in renewables and efficiency, the International Energy Agency’s recommendation of investing $5 in renewable capacity for each $1 spent on new fossil fuel generation is far from the current reality: Around $1.4 trillion was invested in clean energy in 2022, out of total energy investments of around $2.4 trillion.

For emissions to be constrained to keep the 1.5C goal alive, the return to coal must be temporary and not lead to significant investments in new infrastructure, new gas infrastructure should align with decarbonization objectives (i.e. designed for hydrogen and leakage-proof), and effective plans to address the concern of stranded assets should be in place. Investment should prioritize scaling up renewable energy development, while ensuring the availability of a low-emission and diversified fuel and energy trade mix. This will ensure balancing affordability, security and sustainability on the supply side and will ultimately address systems’ current vulnerabilities.

Recently announced fiscal measures in response to high energy and food prices
Recently announced fiscal measures in response to high energy and food prices Image: IMF

2. Incentivize efficient demand through fiscal measures

Since January 2022, 26 out of 31 advanced economies and 45 out of 103 emerging and developing economies have announced at least one fiscal measure. In Europe alone, different fiscal measures amounted to upwards of $700 billion as of December 2022. If not appropriately administered and not linked to a strong social security framework, such measures can create dependence and reduce the future investment capacity of countries in energy and other important areas. Even before the crisis, developing countries struggled to implement the infrastructural investments needed for sustainable energy development and access. 2022 was the first year in decades when the number of people without access to electricity increased.

At the same time, industry subsidies that could be tailored to incentivize spending in efficiency and renewables have been under-utilized. Instead of providing households with widely ineffective or consumption-based energy price subsidies, economic support should be targeted, income-based, and coordinated across countries (to discourage arbitrage). It should preserve market signals while incentivizing reduction in energy consumption.

Implementing subsidies to vulnerable consumers requires robust information systems at the level of national social security, linked to databases with information on individual energy consumption, as well as the broader socio-economic context. Efforts focused on efficient targeting now can help create consumer databases that can be instrumental in implementing future fiscal measures that facilitate the social equity and fairness of the energy transition.

3. Make energy efficiency the first fuel

Regarding raising consumer awareness of efficient energy consumption, little has been done besides advising citizens to lower thermostat temperatures, turn off unnecessary lights and reduce hot water usage.

Energy efficiency and conservation have a very important role to play in an effective response to the energy crisis. Citizens’ participation has long been a challenge, but the pandemic lockdowns have taught us that creative communication relaying trustworthy and consistent information can lead to strong engagement. Another example is how Japan worked with major utilities to send quarterly information on energy use to 300,000 households soon after the 2011 tsunami, leading to substantial savings. The RePowerEU Plan also underscores the importance of demand-side measures to strengthen supply side ones on energy security.

Information and campaigns should be flanked by incentives linked to switching to energy-efficient equipment or purchasing digital enablers measuring and optimizing domestic consumption. Past success stories include Chile’s 2008 distribution of efficient lighting amid drought-caused electricity shortages or government-supported renovation waves in France (Hauts-de-France Pass Rénovation), Mexico (FIPATERM) or Spain (the PPP-based “Barcelona Sustainable Energy Mechanism”).

A new era of globalized energy

Solutions and strategies to address energy security must consider the implications on energy transition and help hedge against its disruptions. This will require an unprecedented level of coordination between countries and between the public and private sectors. Joint purchases and joint gas storage policies (as implemented in the EU) are examples. Greater policy coordination will be also required in a world that, given the uneven distribution of renewable resources, will have to strengthen and unify its energy grids (Europe and ASEAN countries are moving in this direction).

While the Ukraine war has been said to usher in the end of 30 years of globalization, energy systems are so interconnected geographically and economically that eliminating interdependence is not an option. Instead, the war might and should be the start of a new concept of globalization, founded on the coordination of efforts aimed at equitably balancing energy security and sustainability, avoiding creating new vulnerabilities while transitioning to the energy system of the future.

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World Economic Forum

May 21, 2024

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