Full report
Published: 11 May 2022

Fostering Effective Energy Transition 2022

1. The energy transition under pressure

The challenge is compounded by risks to energy security, sustainability and affordable access.

Key Highlights, Fostering Effective Energy Transition 2022 Edition
Source: World Economic Forum

The COVID-19 pandemic, the war in Ukraine and collateral turmoil in the energy markets make clear the need for the global energy transition
to simultaneously address the imperatives of economic development and growth, energy security and access, and environmental sustainability. Imbalances will continue to impede efforts to reach the pace required to limit warming to 1.5°C.

"The current context highlights trade-offs inherent in the energy transition, which are complicated by the energy sector’s structure, socio- economic role
and geopolitical significance."

The global energy transition, pivotal to climate change mitigation efforts, is well underway. Over the past decade, the world has made progress during nine of the 10 years, as measured by the Energy Transition Index (ETI). However, the narrative’s urgency continues to increase. The 2021 United Nations Climate Change Conference (COP26) warned the world that “we have kept 1.5 degrees alive, but its pulse is weak”,8 amid endeavors to turn this decade into one of accelerated climate action and support. The early 2020s have seen a series of systemic shocks that affect the energy system and merit careful examination to support the development of robust energy transition roadmaps. Following the unprecedented pandemic-induced energy demand reduction in 2020, the consumption of energy rebounded strongly in 2021. This rebound resulted in substantial imbalances in energy markets, triggering soaring energy prices as well as significant growth in greenhouse gas (GHG) emissions. The situation was further compounded by Russia’s invasion of Ukraine. These events constitute a perfect storm, creating headwinds on all three imperatives of the energy triangle. High energy prices pose risks to economic growth9 and have raised the cost of living. Progress on energy access has stalled and countries face imminent energy security risks.10 The consumption of fossil fuels has also increased substantially, driving emissions up to their highest levels in history.11 The current context highlights some of the trade-offs inherent in the energy transition, which are further complicated by the energy sector’s structure, socio-economic role, and geopolitical significance.

The same ETI framework published annually for the last 10 years is used to structure the analysis in this special edition. The framework (Figure 1) strives to assess the performance of energy systems across three fundamental imperatives: the ability to support economic development and growth, energy security and access, and environmental sustainability. Balanced progress for a country’s energy transition means advancing along all three dimensions of the energy triangle.

Given the interconnectedness of the energy system across the modern economic and social fabric, the drivers and impacts of the energy transition are not restricted to the traditional boundaries of the energy system. Rather, a broad set of social, political, regulatory, macroeconomic and infrastructure-driven parameters enhance a country’s transition readiness (Figure 1), enabling an effective energy transition.

Figure 1: The Energy Transition Index framework

World Economic Forum, Fostering Effective Energy Transition: A Fact-Based Framework to Support Decision-Making, 2018
Source: World Economic Forum, Fostering Effective Energy Transition: A Fact-Based Framework to Support Decision-Making, 2018

The ETI framework has been used for the past 10 years to reflect on countries’ energy system performance and the readiness of their enabling environment for an effective energy transition. Slow but steady progress (Figure 2) was made from 2012 to 2021 on both the system performance and transition readiness dimensions.

Figure 2: Global average ETI System Performance and Transition Readiness scores

World Economic Forum, Fostering Effective Energy Transition; Accenture analysis
Source: World Economic Forum, Fostering Effective Energy Transition; Accenture analysis

A closer look at the energy triangle (system performance) reveals that countries’ progress over the last decade has not been uniform across
the three imperatives (Figure 3). Environmental sustainability improved steadily at a deliberate pace, and energy security and access also improved largely consistently over time, although recent developments warrant a fundamental rethink on energy security. The downward trend in economic development and growth since 2018 shows that countries are facing challenges to maintain energy affordability while progressing on their energy transition pathways.

Figure 3: Global average Energy Triangle sub-index scores

World Economic Forum, Fostering Effective Energy Transition; Accenture analysis
Source: World Economic Forum, Fostering Effective Energy Transition; Accenture analysis

1.1 Economic development and growth

Energy supply shocks are expected to accompany the energy transition journey, with significant pass-through effects on economic growth and the cost of living. Effective support mechanisms to protect vulnerable populations and businesses are necessary. Steady energy affordability is essential for economic growth and social justice, and both are key to keep the energy transition momentum going.

"The risks of high energy prices and economic headwinds are expected to flank the energy transition process, and increased volatility could be a recurring phenomenon."

The past two years have significantly challenged national economies and energy systems. In 2020, pandemic-related restrictions resulted in a steep drop in the demand for energy12 worldwide and reduced CO2 emissions, providing a glimpse of the impact demand-side measures could have on climate mitigation.

In contrast, 2021 experienced a fast rebound of demand for products and services and was marked by the global economy’s strong and exceptionally rapid recovery with global GDP estimated at 5.9%.13 As economic growth is strongly correlated with energy consumption, the global demand for electricity14 and oil15 promptly surpassed pre-pandemic levels, leading to the highest prices experienced in years. Natural gas prices also climbed to their highest in a decade in Europe, the United States, and major Asian markets, owing to a combination of both demand-side and supply-side factors,16 as well as a succession of extreme weather events.17

The energy market supply-demand imbalances of 2021 were carried over to 2022 with energy prices sustaining record-high levels even prior to Russia’s invasion of Ukraine. The surge in energy prices emerged as an additional factor, fuelling inflation on top of several other factors, such as strong consumer demand,18 restricted supply chains,19 rising wages,20 the increasing cost of housing21 and food,22 and low-interest rates.23 In 15 of the 34 economies that the International Monetary Fund (IMF) classifies as advanced, 12-month inflation through December 2021 measured above 5%.24 A similar trend was observed in emerging markets and developing economies as 78 of 109 countries tackled inflation of above 5%.25

The ability of high oil and gas prices to percolate to other sectors hinges on the relative price inelasticity of its demand. The supply of oil has become more elastic in recent years with the advent of shale oil production in the United States.26 But oil demand remains rather inelastic, especially in the short run. Geopolitical events and severe weather events can disrupt supply.27 Because energy demand is quite unresponsive due to its lack of elasticity, the risks of high energy prices, inflationary pressure and economic headwinds are expected to flank the energy transition process, and increased volatility is likely to be a recurring phenomenon.

Emerging and developing economies are disproportionately affected by spiraling inflation. Although the peak pass-through of high retail energy prices in advanced economies is twice that of developing economies,28 the cumulative impact on consumer price index (CPI) levels in developing economies is higher as prices stay elevated for a longer period of time. Higher energy intensity and lower substitution effects may account for the larger impact on inflation in developing countries.29 In essence, the impact of volatility in energy markets is likely to be more pronounced on developing economies, which adds to the concerns of equity and justice of the energy transition.

With the outlook of potentially recurring periods of supply-demand imbalance of transition fuels such as gas, and rising trends in carbon prices, the contribution of energy prices to CPI could be well above historical norms in the medium term, with potentially far-reaching consequences for households and businesses alike.30 An increasing number of households, including in advanced economies such as the European Union (EU),31 United Kingdom32, and the United States,33 are unable to meet their basic need for heating and lighting at an affordable cost. The energy crisis has also affected companies producing energy-intensive materials like ammonia, steel, or aluminium, with significant knock-on effects, such as rising costs of fertilizers, which has compounded food security concerns worldwide.34 With the price of consumer goods and services already rising due to constrained global supply chains, a sustained increase in energy costs will likely impact the cost of living and consumer spending while adding an additional cost burden to businesses and governments. Countries have taken various emergency response measures (Figure 4) in response to these concerns.

Figure 4: EU+ countermeasures enacted to combat high energy prices

Sgaravatti, Giovanni, Simone Tagliapietra and Georg Zachmann, “National policies to shield consumers from rising energy prices”, Bruegel Datasets, 21 April 2022 update, https://www.bruegel.org/publications/datasets/national-policies-to-shield-consumers-from-rising-energy-prices
Source: Sgaravatti, Giovanni, Simone Tagliapietra and Georg Zachmann, “National policies to shield consumers from rising energy prices”, Bruegel Datasets, 21 April 2022 update, https://www.bruegel.org/publications/datasets/national-policies-to-shield-consumers-from-rising-energy-prices

In the face of economic headwinds along with geopolitical uncertainty, governments have. also been taking measures to address energy affordability challenges from the supply side. As a last resort to counter recent sky-high gas prices, some countries have increased coal-based power generation. In the United States, where coal-based generation has been in decline since its 2007 peak,35 it increased by approximately 22%36 in 2021, with coal production expected to further increase by 4%37 in 2022. Germany is also investigating extending the life of certain of its coal-powered plants38 to maintain competitive energy access. In addition, some countries are reconsidering their nuclear power generation policy.

Moreover, strategic petroleum reserves (SPRs) have been leveraged and have proven once again to be a critical tool for emergency response measures39 to mitigate energy supply shocks. These could be crude reserves, petroleum product reserves or gas caverns. In the face of severe supply disruptions, this countermeasure can help economies mitigate some of the immediate economic impacts of a sudden supply shock. In early March 2022, a coordinated effort was orchestrated by International Energy Agency (IEA) member countries40 to address significant supply disruptions. At the time of writing, the United States announced the largest release of oil reserves in history, comprising 1 million additional barrels per day for six months.41 SPRs can lower oil prices in a high-price environment, thereby having a stabilizing effect on the economy during an oil supply disruption scenario.42 Their major impact is by way of price relief or even alleviating the physical shortage of supply to at-risk and strategic consumers.43 The system, however, focuses on handling short-term disturbances and has limited impact on medium- to long-term markets.

No universal definition of energy poverty or basic energy needs exists, because of sensitivities related to regional and income-driven differences.44 Addressing these concerns will rest on a robust framework of data transparency to determine the magnitude and prevalence of the challenge at the national and local levels, mechanisms to effectively target vulnerable consumers for financial transfers, and the design of support measures in a manner that does not reduce incentives for efficient consumption.45 However, the systemic nature of the challenge calls for long-term measures to safeguard vulnerable consumers and businesses from volatilities resulting from the transition.

"Developing the necessary support mechanisms to cushion energy supply shocks until the low-carbon energy systems reach the scale and flexibility required will be essential."

Building resilience in transitioning energy systems to mitigate the adverse effects of volatility on small and medium-sized enterprises (SMEs),46 consumers and the most vulnerable households is key to help advance energy affordability and a just and socially accepted transition. In this sense, the pivotal events of the past two years advocate for an energy transition that helps ensure energy affordability while pursuing sustainability goals. Developing the necessary support mechanisms to cushion energy supply shocks until the low-carbon energy systems reach the scale and flexibility required to consign the risks of a major fossil energy crisis to history will be essential.

Building resilience will likely come at a price to countries, companies, and consumers, owing to potential inefficiencies, redundancy, extra capacity, or green taxation. However, by minimizing the risks of dropouts and delays for economic reasons, it will be the only viable pathway to achieve close to a net zero47 society by mid-century.

1.2 Energy security and access

High energy prices and new risks of energy shortages, resulting from the fast COVID-19 economic recovery and the war in Ukraine, have forced a reprioritization of energy security. Countries can strengthen energy security by diversifying their fuel import partners in the short term and diversifying their energy mix with low-carbon alternatives and improving energy efficiency in the long term.

The prospect of robust progress hinges on the ability to manage short-term shocks.

According to the latest evidence from the Intergovernmental Panel on Climate Change (IPCC), global emissions need to peak by 2025 to keep the target of 1.5°C alive. The reconfiguration of the entire energy system, including the underpinning fuels, technologies, markets, and geopolitics, may not proceed smoothly.48 The prospect of robust progress hinges on the ability to manage short-term shocks, especially those that pose risks to the reliability
and affordability of energy. The IEA defines energy security as the “uninterrupted availability of energy sources at an affordable price”.49 As measures to combat climate change accelerate, adequate and affordable access to energy will be critical to the continued prioritization of environmental policies. In the long run, energy security means securing the energy supply needed for a country’s economic development and growth. In a world aiming to reach net zero emissions by mid-century, long-term energy security is closely tied, if not constrained, by national sustainability ambitions.

Energy market volatilities and geopolitical events over the past two years have elevated energy security risks. Following a period of low investment in legacy assets,50 a faster-than-expected economic rebound from the COVID-19 pandemic51 strained the energy supply chain,52 leading to concerns about the availability of gas for winter heating,53 industrial activity slowdown54 and pressure on the fiscal budgets for energy subsidies.55 Indeed, the record-high energy prices took countries by surprise and spotlighted their severe reliance on imported fossil fuels as well as the strong interdependence of their domestic electricity prices with global gas markets.56

High prices created heavy financial pressure not only on households but also on businesses of all sizes, leading to social protests and industrial production cuts in several countries.57 Additionally, in 2021, intensifying extreme weather events pushed power grids to the breaking point,58 which led to severe blackouts affecting 4% of the world’s population.59 And, currently, energy security concerns arising from the war in Ukraine are forcing a fundamental rethink of energy and foreign policy, even in countries not reliant on imported fossil fuels from Russia.

Bilateral energy trade among countries, globally integrated energy markets, and technology standards for mid-stream and downstream infrastructure are among the core building blocks of the current geopolitical landscape. Resource endowments aside, the spatial distribution of reserves vis-à-vis demand centres and infrastructure considerations including pipelines, refinery configurations, etc., necessitate even resource-rich countries to rely on imports, a case in point being Canada.60 Hence, complete energy independence may not be feasible for countries in the near term. While a decarbonized future energy system can provide energy security dividends due to the localized resource abundance of low-carbon energy sources, ensuring energy security and affordability through the transition will require fossil fuels. Many countries either do not benefit from natural energy resource endowments required to meet their energy needs or are unable to exploit them for their own use due to political, technological or financial reasons. The essence of the energy security challenge in these countries is typically dual: countries’ insufficient diversification of their energy mix or insufficient diversification of energy import partners, or both. As an example, Europe relies on natural gas for 19%61 of its power generation and 38-41%62 of its residential heating, and 45% of the EU’s consumed natural gas is imported from Russia.63 A majority of countries continue to rely on a handful of trade partners to meet their energy requirements (Figure 5).

Figure 5: Country fuel imports diversification

UNCTAD, World Economic Forum and Accenture analysis
Source: UNCTAD, World Economic Forum and Accenture analysis

Eleven of 34 advanced economies are reliant on only three trade partners for over 70% of their economy’s fuel imports. Similarly, 10 in emerging Asia, 8 in emerging Europe, 27 in Latin America and the Caribbean and 26 in Sub-Saharan Africa are heavily reliant on just three countries for a majority of their fuel imports. These are all at-risk countries whose energy supply chains could potentially experience disruption in the face of adverse climatic events, supply shortages or geopolitical crises. The lack of diversity in imports results in the countries’ energy system having less cushion to deal with disruptions in supply from a given partner, which eventually could precipitate into a national security concern.

"An energy mix, dominated by low-carbon energy systems, is more likely to have a national or regional footprint, implying that a convergence of energy security and sustainability."

As nations continue to evolve their energy security priorities in light of the rising uncertainty, governments’ role in ensuring energy security is not straightforward, as countries with different energy system structures may follow different pathways. What differentiates today’s energy crisis from past crises, though, is the fact that scalable alternative technologies and renewable energy sources are available today, which enables policy-makers to facilitate a more integrated, efficient and flexible energy system. Whenever possible, countries can consider strengthening energy security by diversifying their fuel import partners in the short term as well as diversifying their energy mix with the development of domestic renewable and other low-carbon energy in the long term, driving down both the need for energy imports and strategic geopolitical dependencies.64 There are reasons to believe that diversification will remain critical in increasingly decarbonized energy systems, where high-carbon energy systems powered by fossil fuels, at least in the coming decades, will continue to cohabit with low-carbon energy sources.

A future energy mix, dominated by low-carbon energy systems, such as solar, wind, hydrogen and biomass, is more likely to have a national or regional footprint, implying that a convergence of energy security and sustainability could be possible. Countries shifting towards more decarbonized domestic energy sources are likely to be more self-reliant and less dependent on the global trade of energy, especially if coupled with efficiency measures that reduce the overall energy needs.

The impending surge of economies’ electrification from the rise of renewables is expected to bring in a different set of security-related challenges. Crucial among them would be ensuring the reliability and efficiency of national and cross-border electricity grids. In particular, as the share of wind and solar increases in countries’ energy mix, electricity grids will require systemic upgrades to accommodate these variable renewable energy sources. But going forward, countries will also need to think strategically about the technology mix and geographical spread,65 aside from upgrading and redesigning their grid infrastructure. As a result, grid modernization is also emerging as a key priority for policy-makers and is one of the focus areas of new policy packages, such as in the United States66 and EU,67 for both energy security and energy transition imperatives.

The transition to a decarbonized future energy system lowers the security risks from geopolitics of fossil fuels but can also create new potential concerns. Declining fossil fuel demand may further concentrate the remaining supply as higher cost producers exit the market. Additionally, the transition to clean energy depends heavily on access to minerals, such as lithium, cobalt, nickel, copper, etc., to manufacture solar panels, wind turbines and batteries. While the demand of these minerals is expected to grow six-fold for a transition to net zero by 2050 according to the IEA,68 the production of transition minerals, such as cobalt, lithium and graphite, is more concentrated than that of fossil fuels oil and gas (Figure 6). While a complete phase-out of fossil fuels would reduce countries’ energy mix diversification, an increased reliance on renewable power, battery storage and other low-carbon sources could also pose new energy security risks.69

Figure 6: Production concentration of energy commodities

bp’s Statistical Review of World Energy 2021, https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html
Source: bp’s Statistical Review of World Energy 2021, https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

Furthermore, as an increasing number of countries, including the United Kingdom,70 the United States,71 Japan,72 India73 and China,74 reconsider the role of nuclear energy due to its low emissions and baseload operational profile, security risks from design specifications75 and nuclear fuel supply chains can arise.76

As the transition remakes the energy system, energy security concerns also require upfront risk mitigation measures. Investment in contingency measures, such as strategic reserves for petroleum and storage infrastructure for natural gas, can reduce the impact of disruptions in the supply of these fuels through the transition period. Similarly, considering the criticality of transition minerals’ supply to support the manufacturing of the renewable energy components necessary for the energy transition, investing sufficiently in responsible mining, diversifying sources of supply and strategically stockpiling minerals in some cases can ensure a resilient minerals supply chain.77 Furthermore, considering the energy security premium, maintaining some legacy assets through market mechanisms that support reserve capacity might be required to address supply demand imbalances during the transition.

"Maintaining some legacy assets through market mechanisms that support reserve capacity might be required to address supply demand imbalances during the transition."

While governments across the globe continue to focus on the critical aspects of their countries’ energy security, it is vital that they sustain ongoing efforts to provide energy access to those in need. Even before the pandemic arrived, the world was lagging in providing universal access to electricity and clean cooking fuel.78 As of 2019, 759 million people do not have access to electricity and over 2.6 billion people do not have access to clean cooking fuels.79 The rate of progress reveals that the world is not on track to achieve the targets for universal access, and the impact is more acute for the most vulnerable countries that were already lagging.

Emerging and developing economies are likely to suffer longer and more severely from the economic impacts of the Covid-19 pandemic, exacerbating hunger, poverty and inequality worldwide.80 Early evidence indicates that the pandemic might also have dismantled some of the steady progress towards universal energy access. In 2021, the number of people without access to electricity increased by 2% to 768 million.81 The lack of access to energy is a constraint in delivering timely and adequate healthcare and vaccination programmes. Only 28% of healthcare facilities in Sub-Saharan Africa have access to reliable electricity,82 making basic health services in some rural communities inaccessible.

Delivering universal energy access by 2030 remains a key UN Sustainable Development Goal (SDG) with the potential to better the lives of millions. However, the COVID-19 pandemic has significantly damaged ongoing efforts as companies working on providing off-grid solutions continue to suffer from supply chain disruptions.83 Achieving the UN’s seventh SDG also requires large investments, to the tune of $20 billion84 annually to 2030 in Africa alone, yet fiscal implications of economic recovery programmes tend to indicate that valuable resources are instead being diverted from energy access programmes in the current context.

1.3 Environmental sustainability

Energy affordability and security challenges reinforce the need to supercharge the transition by accelerating investments in the “new” (decarbonized) energy system and embedding more efficient energy consumption habits in post-pandemic societies. The strengthening of governments’ and companies’ efforts to reduce their reliance on fossil fuels is key, but individuals’ “civic duty” towards energy use must also intensify.

The momentum on environmental sustainability has been strong throughout the past decade. Enabled by policies, investments and innovations, renewable energy technologies, such as solar photovoltaics and wind power, are cost-competitive with fossil-fuel-based power generation alternatives in countries around the world.85 Although low at absolute levels, the market share of electric vehicles has steadily increased, doubling in 2021.86 Costs of energy storage solutions, such as lithium-ion batteries, critical for providing flexibility services to a decarbonized grid, are rapidly approaching cost competitiveness.87 Despite COVID-19 pandemic restrictions, periods of lockdowns, supply chain bottlenecks and the increasing turmoil in energy markets, the past two years accelerated the global momentum in the transition towards more sustainable energy systems, with record capacity expansion of solar photovoltaics and wind power. Wind and solar energy combined now generate 10% of global electricity for the first time ever (Figure 7).88 In addition, low-carbon power sources including solar, wind, hydro, nuclear and bioenergy combined generated 38% of the world’s electricity in 2021, overtaking coal, with Europe leading the way and China and Japan making over a tenth of their electricity from wind and solar for the first time.89 An analysis of historical trends from the ETI supports this trend, with the global average score on the environmental sustainability dimension of the index increasing in seven of the past 10 years (Figure 3), with more than 70% of countries showing growth on this dimension. Energy security challenges arising from fossil fuel dependency have intensified due to the ongoing war in Ukraine, strengthening political and popular resolve to accelerate the pace of the clean energy transition.

Figure 7: Share of global electricity generation by source, 2000 - 2021

Ember’s Global Electricity Review 2022, https://ember-climate.org/insights/research/global-electricity-review-2022/#global-trends-1-wind-and-solar-surpass-10
Source: Ember’s Global Electricity Review 2022, https://ember-climate.org/insights/research/global-electricity-review-2022/#global-trends-1-wind-and-solar-surpass-10

Nevertheless, the ground to cover remains considerable. The latest IPCC assessment indicates that average annual GHG emissions between 2010 and 2019 were higher than in any previous decade.90 Emission reductions in carbon dioxide from fossil fuels and industrial processes were insufficient to offset the increase from rising global activity in industry, energy supply, transport, agriculture and buildings.91 While the drop in energy demand in 2020 from COVID-19 pandemic restrictions led to reduced global CO2 emissions by almost 6%,92 emissions sharply rebounded in 2021 above pre-pandemic levels to their highest level in history on account of the rapid restoration and rebound of economic and industrial activity levels, and energy market volatilities. To contain the average temperature increase to below 1.5°C, the global GHG emissions must peak before 2025 and be reduced by 43% by 2030.93 At the same time, methane, the second fastest-growing GHG emissions behind CO2,94 would also need to be reduced by about a third by 2030. According to IEA’s net zero by 2050 report, annual capacity additions of solar and wind need to be higher than 1,000 GW, four times the record installation levels achieved in recent years.95 Additionally, annual sales of electric vehicles would need to scale up eighteen-fold by 2030. Achieving a transformation of this magnitude and complexity necessitates long-term and ambitious policies, enabling infrastructure and investments, as well as supporting consumption behaviour changes.

At COP26, governments and businesses demonstrated strong commitment to address the climate emergency, with 197 countries signing the Glasgow Climate Pact, formalizing their commitments and pledges to net-zero targets.96 As of the end of 2021, countries responsible for 90% of global emissions have announced or are considering net-zero targets.97 In addition, over 100 countries have joined the Global Methane Pledge, which aims to cut global methane emissions by 30% by 2030.98 However, current ambitions still fall short of fulfilling the targets set in the Paris Agreement on climate change in 2015. Despite the momentum at COP26, analyses by the IEA and Climate Action Tracker show that even if all climate pledges are met, the world would still not be on track to limit global warming to 1.5°C by the end of this century.99,100 Additionally, pledges must be turned into concrete policies and actions that make a difference on the ground in the few remaining years to 2030; the widening gap between pledges and implementation effort is a growing concern.

"Pledges must be turned into concrete policies and actions that make a difference on the ground in the few remaining years to 2030."

The demand for electricity grew at a record pace101 in 2021, equivalent to adding the demand of India to the world’s grid.102 Lack of requisite natural gas supply led to a record increase in the use of coal in power generation, including in regions where coal had been in structural decline, such as the United States and the EU. Considering potential energy security implications in the medium term, China, India, Indonesia, Japan and Vietnam plan to build more than 600 coal power plants, which accounts for 80% of new coal power investment.103 According to the IPCC, unabated emissions from existing or planned fossil fuel infrastructure until the end of their lifetime is equivalent to the emissions allowance from all sectors in pathways to limit global warming to 1.5°C.104 Phasing out coal requires the accelerated capacity expansion of not just proven alternatives like solar and wind, but also of other low-carbon sources of energy, such as hydro, bioenergy, hydrogen-based geothermal technologies and infrastructure to capture and store carbon dioxide.

Carbon capture and sequestration, while a mature yet costly abatement technology for gas processing and enhanced oil recovery, remains unproven in the power sector, highlighting the need for investment in research and development, and policy measures to support demonstrations and deployment. Additionally, clean energy investments would have to triple by 2030 to meet demand in a sustainable way, according to the IEA.105 While investments in energy transition have approximately doubled over the last decade, China, the United States and the EU account for more than 80%106 of the investments. Africa, which has 39%107 of global renewable energy potential, attracted only 2% of global investment in renewable energy over the last decade.108 Geographical disparities in global climate finance aside, investments in fossil fuel assets remain higher than low-carbon assets, also reflecting a mismatch between pledges and actions.109

"Current paradigms with heightened energy security risks indicate the need to further harness the synergistic potential of energy efficiency."

Overall, the macroeconomic challenges that came with the 2021 economic recovery as well as the energy affordability and energy security concerns for many countries exacerbated by the Russian invasion of Ukraine reinforce the rationale to supercharge the energy transition.

Apart from supply-side measures, energy efficiency is regarded as the world’s “first fuel” and is the strongest lever in the transition to net zero, according to the IEA.110 While the energy intensity of GDP has been declining, the rate of decline needs to double to meet the levels for net zero emissions by 2050. Given the energy footprints across economic sectors, this highlights the importance of improving energy productivity of such end-consuming sectors as industry and transport, as well as economic diversification to decouple growth from energy consumption. An analysis of G20 countries indicates an inverse relationship between their level of national economic output from the industrial sector (including energy-intensive sectors such as manufacturing, mining, construction and energy producing activities) and their scores on the ETI. Fostering an innovative business environment and human capital development can support the growth of higher value added sectors, enabling necessary economic diversification.

In addition to supporting sustainability ambitions, integrated demand-side measures to improve energy efficiency can also offer security dividends. For example, Japan, a major energy importer, was able to reduce its import burden of oil and gas by 20% in 2016, as a result of energy efficiency improvements since 2000.111 Current paradigms with heightened energy security risks indicate the need to further harness the synergistic potential of energy efficiency. Effective demand-side management can offset supply-side additions as well as the need for carbon capture and storage solutions for emissions management. A combination of the right policies, infrastructure and efficient end-use technologies for demand-side mitigation can lead to a 40-70%112 reduction in GHG emissions by 2050 across the three primary end-use segments: transport, buildings and industry. The expansion of transport electrification infrastructure with incentives to purchase electric vehicles, utilizing remote work arrangements
to restrict business air travel, and providing affordable and reliable public transportation where possible can significantly reduce emissions from transportation. Optimizing residential energy consumption through the electrification of heating and cooking, and adopting simple lifestyle changes such as shorter showers or adjusting the setpoint for heating and cooling on thermostats, coupled with sustainable urban design can reduce residential emissions by more than 50%.113

Active consumer engagement and participation are pivotal for effective demand-side management.

While behavioural and cognitive barriers have been persistent in energy efficiency initiatives, the experience from the COVID-19 pandemic demonstrated that social behaviour adaptation is possible in the short term. Lessons from the management of the pandemic highlight the importance of transparent information dissemination campaigns and of the trust in institutions. Additionally, as the pandemic restrictions disproportionately affected low-income households, it also highlights the distributional considerations of lifestyle and behaviour change programmes, emphasizing the need for equity measures to enhance social acceptance.

1.4 Transition readiness enablers

The window of opportunity to prevent the worst consequences of climate change is closing fast. It is essential to make the energy transition robust by building the necessary enablers that will keep the transition going if the economic and energy security context deteriorates. This includes making legally binding commitments, designing long-term visions for domestic energy systems, building an attractive investment landscape for private capital and promoting consumer participation as well as building the local workforce required for the transition.

As outlined in the ETI framework, the readiness of a country to transition its current energy system towards one that enables the development of a sustainable low-emission economy depends on a multitude of factors that can be measured and analysed along a country’s energy system structure, regulation and political commitment, investment climate, human capital and consumer participation, infrastructure and business environment, and the robustness of institutions (Figure 1). Progress on these dimensions is critical for countries to increase their support of the energy transition and accelerate their efforts.

However, improving these dimensions is gradual as the path to institutional, socio-economic and systemic transformations depends on established processes and systems. Given the disruptive environmental, macroeconomic and geopolitical events of the last two years and their implications for the energy transition, this section outlines four measures that countries can take to support their transition journey.

1) Anchoring climate commitments in legally binding frameworks that can endure political cycles and enforce the long-term implementation of national transition objectives.

The long-term structural changes required for the energy transition will take longer than the usual 4 to 5-year political cycles of many countries so they must be made resilient to political changes in the executive, legislative and judicial branches of government. Turning climate commitments into laws (e.g. France attempted a change in constitutional law in 2021114) can support the transition effort in the long run. Climate-related laws then overarch the policies to promote energy efficiency, renewable energy and electricity access, the participation in international climate diplomacy, the evolution of GHG reduction targets (both 2030 nationally determined contributions and longer-term net zero targets), as well as the policy stability required for long-term energy system transformation.

Countries, cities and businesses have vowed to achieve net zero emissions in the coming decades. In 2021, a wave of pledges were made, raising the number of countries committed to net-zero targets, covering 88%115 of global emissions. Particularly, prior to COP26, several large economies submitted more ambitious 2030 emission reduction targets, notably China, the EU and the United States. But, although these new targets can reduce GHG emissions by 7.5% this decade, 55% is needed by 2030 to align with the Paris Agreement goal of keeping the global temperature rise below 1.5°C.116

To help political ambitions translate into on-the-ground action, introducing net zero commitments into a legal institutional framework and complementing them with binding policies could help strengthen the urge for action of future governments regardless of other existing priorities. To date, 13 countries have made their net-zero targets legally binding and 33 countries have put their net-zero targets in policy documents.117 Figure 8 shows the status of countries’ net-zero targets in 2021. The 2050 climate goals require more countries to transition their commitment into legally binding frameworks to enforce long-term on-the-ground climate action.

Figure 8: Status of countries’ net-zero targets, 2021

Energy and Climate Intelligence Unit; International Energy Agency; World Bank
Disclaimer: The boundaries shown in this map do not imply official acceptance or endorsement by the World Economic Forum.
Source: Energy and Climate Intelligence Unit; International Energy Agency; World Bank

2) Taking and holding long-term decisions with regard to the decarbonization of the national energy system structure

A country’s existing energy system structure significantly influences transition readiness as the path depends on legacy infrastructure and resource endowments. Technological lock-in, economies of scale, the long lifetimes of current energy infrastructure and end-use behaviour patterns create barriers to entry for disruptive technologies. Creating a new energy system that can gradually complement and eventually supplant the legacy infrastructure requires enhancing the flexibility of electricity system, improving end-use efficiency and increasing the share of renewable energy in power generation, among other measures.

As an example, coal is generally the most polluting source of power generation today. It emits nearly twice the amount of CO2 when combusted compared to natural gas at most power plants where it is used,118 yet it still represents a major share of many countries’ energy mix.

Long-term commitments for the future of the national energy system structure can ensure countries make fundamental and irreversible changes in line with their energy transition goals. The emergency returns to coal witnessed in recent months should also make countries rethink how they can build resilience and contingency plans for their energy systems that do not rely on coal.119 Multinational partnerships can play a crucial role in ensuring long-term visions and structural changes are implemented. For instance, the Just Energy Transition Partnership120 between South Africa and France, Germany, the United Kingdom, the United States and the EU will provide support to transform South Africa’s economy away from coal and towards a low-emission climate resilient economy.

3) Building an attractive investment landscape for private capital, both foreign and domestic, to finance energy transition projects, especially in emerging and developing countries

A country’s ability to attract capital depends on a multitude of factors, including supportive policy and legal frameworks, stability of the currency and exchange rates, a secure and safe environment, the quality of infrastructure and the availability of the latest technologies. Adopting and promoting these factors can create strong momentum for capital to flow into the transformation of the energy system.

While advanced economies continue to attract capital under favourable terms, including for higher-risk new low-emission technology industrial projects, developing and emerging countries are still struggling to attract both foreign and domestic private investments essential for the financing of large energy projects and infrastructure. Even though the last decade saw record investment in new renewable power capacity ($2.6 trillion globally121), most of these investments were made in countries with stable and favourable investment landscapes, such as China, the United States, Japan and Germany (Figure 9). Additionally,
the effects of the COVID-19 pandemic were felt differently across regions, with emerging and developing countries facing acute challenges given the fiscal impacts of the pandemic on their national budgets. Owing to the continued reluctance of a number of financial institutions to fund the transition in emerging and developing countries,122 it is worth stressing that climate goals cannot be reached without a global transition; solutions must be found to rally the financial sector. Technical and financial support to emerging and developing economies, leveraging a mix of public and private investment instruments, grants, concessional finance and market-based capital could help keep the transition on track. International collaboration, not only on finance flows but also on policies, regulatory practices, best technical practices and new business models is critical.

Figure 9: Renewable energy capacity investment, top 20 countries, from 2010 to first half of 2019 ($ billion)

UNEP, Global Trends in Renewable Energy Investment 2019, 11 September 2019, https://www.unep.org/resources/report/global-trends-renewable- energy-investment-2019
Source: UNEP, Global Trends in Renewable Energy Investment 2019, 11 September 2019, https://www.unep.org/resources/report/global-trends-renewable- energy-investment-2019

While governments continue to put in place the necessary enablers to build private investors’ confidence, investing entities such as multilateral development banks, philanthropic funds, specialized branches of sovereign wealth funds and commercial banks can play a role in bridging the gap and invest in countries where higher financial risks are involved.

4) Promoting consumer participation and building the local workforce required for the transition, paying particular attention to the livelihoods of vulnerable populations

Consumer participation involves increasing customer awareness of the stakes of climate change, of carbon footprints and of individual actions that can be taken to support national climate change ambitions. The energy transition will likely create a significant number of new jobs and require a trained workforce with very different skill sets than a country has historically developed (e.g. petrotechnical professionals in oil producing countries). Developing the consumers and workers of the future can be a key enabler of a long-term sustainable energy transition.

When empowered, environmentally conscious consumers can achieve substantial emission reductions, as shown by a recent study123 that researched household preferences for reducing GHG emissions in cities in France, Germany, Norway and Sweden. These consumers can drive distributed grid networks, apply energy efficiency measures and reduce their overall carbon footprint. Policies raising the awareness of consumers’ energy consumption, such as mandating energy labels on products and providing peer-to-peer comparative energy consumption reports to households, or providing monetary incentives like variable power rates and feed-in tariffs can be used to drive long-lasting behavioural changes in consumers.

While moving to clean energy can create new jobs in the clean energy industry, it can also lead to job losses in other industries and can be detrimental to the livelihood of dependent communities. In addition, the transition can negatively affect low-income households, which might struggle to keep up with the rising costs and consumption changes brought about by the transition. Governments can partner with private institutions to reskill, cross-skill or upskill the existing workforce, particularly within jobs at risk, such as those in the fossil fuel industries. They can also adapt the education system to stay abreast of the technologies in the renewables and digital space. Similarly, policies that develop or expand social protection benefits to accompany energy transition reforms can be used to mitigate the negative effects on low-income households.

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