The transition journey is far from finished. Substantial change is required on several fronts:
- Increasing sustainable sources in the composition of the primary energy supply
- Reaching near‑universal access to affordable and reliable energy,
- Minimizing carbon emissions and pollutants that result from energy production
- Having a combination of technologies, infrastructure and sustainable practices for efficient energy use.
Needed everywhere: Increasing energy efficiency, reducing carbon intensity in the electricity sector through lower-carbon alternatives, and greater electrification of the economy.
Recommendations for the Netherlands were:
- Use optimizing long-term value for the country as the main criterion for the transition roadmap
- When tackling decarbonization, develop specific plans per demand sector; a fact-based plan translates longterm goals into clear short- and medium-term decisions and targets
- Establish incentives, including tax policies, that consider the longer-term challenge ahead; remain agile to encourage citizens and major energy consumers to participate in the energy market overhaul.
The study found that an accelerated but flexible approach to reducing greenhouse gas emissions will yield value in terms of GDP and employment. It was estimated that investing €10 billion per year between 2020 and 2040 in a low-carbon energy system (equivalent to 3% of GDP) would generate a positive GDP impact and potentially create tens of thousands of jobs in the long run, with a minimum of 45,000 installation jobs in the near term. Positive growth was deemed possible through four main investment themes:
1. Creating nationwide economies of scale through large-scale, planned programmes for technologies that would benefit from central rollout. Attractive areas could include improving building insulation, expanding renewable energy supply and electric-vehicle charging
2. Avoiding investment in less efficient equipment that may need to be replaced with low- or zero-carbon equipment before reaching its economical or technical end-of-life in order to meet targets; leapfrogging to low-carbon or carbon-neutral technologies
3. Attracting and stimulating new economic activity in target sectors, increasing investment in those sectors and developing capabilities to competitively differentiate in these areas
4. Transforming adjacent economic sectors: an accelerated energy transition could spur more investment and innovation in supporting fields; this will require changes in technology, business models and financing, and could make the economy more competitive as a whole.
The study estimates that investment and spending on goods and services required for the energy transition will generate GDP growth of 2% in the short to medium term. In the longer term, further upsides can be created. For example, a shift in economic activity away from sectors with lower economic multipliers (like large plants) towards sectors with higher economic and employment multipliers (like construction) will provide a further net boost to GDP. Trade balance could be affected positively as the country will need to import less fossil fuel. The biggest and longest-lasting economic benefits are likely to come from investment in sectors that may generate substantial economic growth and jobs.
Overall worldwide findings:
- Air pollution remains a major challenge, with PM2.5 emissions worsening for 67 countries, causing around 6 million premature deaths per year globally51.
- Carbon intensity scores stayed flat and even countries in the top performance quartile have potential for further improvement.
- Energy intensity improvement has been driving progress in environmental sustainability.
- Decreasing energy intensity and improving efficiency are two of the key levers to achieve the goals of the Paris Agreement. However, the current energy productivity improvement rate of 1.8% p.a. is falling short. The Energy Transitions Commission estimates that a reduction rate of 3% p.a. is required to limit global warming to below 2°C.52,53
Electricity and heat account for approximately 40% of global carbon emissions, followed by about 25% from transportation, 25% from industrial activity, and 10% from the residential and public services sector.55,56 The carbon intensity of energy systems around the world varies depending on the nature of primary energy supply, economic activity, climate, etc., and ranges from coal-heavy energy systems to systems with a mainly low-carbon energy supply.57 The sectorial breakdown of carbon emissions also varies widely among countries. For instance, with a carbon-free electricity system, Paraguay’s carbon emissions are almost exclusively from transport (>90%), while over two-thirds of Estonia and Bahrain’s carbon emissions are from electricity and heat generation.
China and Vietnam have a relatively high share of emissions from industry (>30%), while a comparatively large share of Switzerland and France’s emissions are from residential and public buildings (>30%). Hence, countries will have varying strategies and a different mix of methods to reduce emissions – such as increasing energy efficiency, reducing carbon intensity in the electricity sector through lower-carbon alternatives, greater electrification of the economy, carbon capture utilization storage and lower-carbon alternatives in industrial processes.58 Several countries with already low-carbon-intensive electricity sectors are now pursuing transport electrification. Norway, the Netherlands, Switzerland, Sweden and France are among the front runners on e-mobility.59 China is also among the leading countries in e-mobility but has work to do on renewables in its electricity mix.
Two mutually reinforcing challenges in energy transition – complexity and scale – determine the speed of energy transition. The complexity of energy transition results from the diverse components within the system itself, as well as their interdependencies with components outside the energy sector. The energy system’s boundaries include different fuel sources, extraction and conversion processes, and infrastructure, workers, investors, innovators and different end‑use sectors. Beyond the boundaries, energy is a commodity traded between countries and a key component of public policy within them. The volatility of energy markets and trade flows influences countries’ fiscal and monetary policies. The energy system also enables economic growth by fuelling industrial activity, providing employment and creating national income through exports. Universal access to energy is important to alleviating poverty and improving outcomes on social objectives, such as education, health and gender equality. The large scale of the energy transition is evident by the size of the installed base, the volume of invested capital, the vast expanse of the supply chain, and the fragmented decision‑making landscape across global, national, local and individual levels.
(The financial, economic and political power of the sector), the intersection of technological systems with economic fundamentals, geopolitical and security considerations, individual and collective behavioural patterns, and political sensitivities contributes to the transition’s slow pace. The steering of the current system towards a sustainable future cannot afford the luxury of decades, given the state of the energy system and the urgency of climate change warnings. At the same time, the transition will need to avoid creating economic disruptions or social inequalities.
To accelerate energy transition, countries must take a balanced approach across the three imperatives of the energy triangle while leveraging the potential of the Fourth Industrial Revolution and enhanced public‑private collaboration. Prioritizing one of these imperatives at the expense of the others could reverse some of the progress made towards a fully transitioned system. Energy transition has complex implications that go beyond first‑order shifts in fuel supply mix or dominant technology used to extract energy from nature.
The dominant discourse and public policy tend to emphasize changes in energy technologies or fuel source as an objective of the transition, instead of lasting changes in the energy system that reflect across the balance between established economic, social and political systems. The need for greater speed in energy transition may also be due to limited awareness, political will, investment or the availability of technologies. A comprehensive understanding of the scale and complexity of energy transition is required to make informed and efficient decisions that can accelerate the transition.
Subsequent sections of this report explore the different dimensions, narratives and perspectives to help foster a greater understanding of what determines the speed of energy transition. This includes borrowing from recent academic literature that breaks the energy system into three co‑evolving and interacting systems.60 Each has its own scope, key players, priorities and challenges (Figure 12). Grand energy transition is the result of significant changes within each of those systems and their interactions. Energy transition can thus be viewed as a change on the scale of a “system of systems”.
Figure 12: The energy system: three co‑evolving and interacting systems
Source: World Economic Forum
The energy–economy system
The energy–economy system operates through market forces that determine the volume, direction and distribution of energy flows. At any given point in time, energy supply and demand are in a global and national equilibrium through production, consumption and trade activity. Increases in energy demand are balanced with supply increases and, recently, with alternative energy sources that compete with incumbent fuels and technologies.
In addition to market forces of supply and demand, energy transition is driven by resource depletion, income levels, population, geopolitical considerations and environmental externalities. Hence, the economic definition of energy transition tracks progress in quantitative terms, such as shifts in fuel supply mix, energy intensity of the economy, energy consumption per capita, emissions intensity of energy supply, costs of energy production, trade balance and levels of investment.
Policies tend to promote a particular fuel or technology, primarily by addressing market failures through incentives or technology mandates. The economic effects of energy transition are evident in recent events, including the cost competitiveness of renewable sources of energy, the rapid growth of shale exploration to produce oil and gas in the United States, and oil supply adjustments from OPEC and Russia.
This perspective of energy transition tends to dominate current discourse because it is tangible and measurable. It views the primary goal of a country’s energy transition as the dual challenge of addressing rising energy demand and environmental sustainability while maintaining economic growth. The economic perspective of energy transition, however, does not consider system inertia and lock‑in effects from dominant carbon‑based technology systems, which limit the scale and speed of diffusion of innovations in the energy system. The economic perspective also does not consider politically driven changes, such as rural electrification or the provision of cheaper energy through subsidies, and the distributional and equity considerations arising from sharing the costs and benefits of energy transition.
As described above (according to the World Economic Forum), the key challenge for energy transition in the energy–economy system is for countries to decouple economic growth from energy consumption and to manage rising energy demand while ensuring growth and environmental sustainability. The extent to which energy consumption can be decoupled from economic growth depends on the stage of an economy’s growth and its development pathway.
Recent trends in energy consumption and real GDP in different country groups can be shown using ratios between the yearly aggregate values of all countries in the respective groups and the aggregate values in the year 2000 (Figure 13). The trends highlight that total energy consumption in Advanced Economies has declined since 2000 even as the total real GDP for this group increased. This trend, consistent across high‑income countries, is an effect of the combination of investment in technological and economic efficiency and the larger contribution to the economy from the less‑energy‑intensive services sector.
Figure 13: Evolution of total GDP and total primary energy supply across country groups, 2000‑2016
Note: The figure shows yearly ratios of quantities to their values in 2000.
Sources: For GDP: Constant 2010 US$, World Bank, 2017, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD?page= ; for total primary energy supply: IEA, World Energy Balances, 2018
However, in country groups with faster economic growth, such as Emerging and Developing Asia, Sub‑Saharan Africa, and the Middle East and North Africa, energy consumption has increased considerably since 2000. As countries move up the development curve towards higher income levels. early stages of economic growth are typically associated with increased levels of energy consumption and carbon emissions.61
Given the urgency of the climate challenge, an important question is how governments of Advanced Economies can work with developing countries to promote sustainable growth in emerging economies. Technology transfer has always been one important element, though success stories in this sphere are limited. Successful technology transfer goes beyond transferring the hardware; it entails enabling the recipient country to replicate and innovate this technology. This requires tackling technology diffusion inhibitors, which range from diversity in the recipient nation’s objectives for technology development to concerns over intellectual property rights, weak domestic demand, high levels of subsidies and a weak investment climate.62
5.2. The energy–technology system
The current energy architecture evolved to serve social needs such as lighting, mobility, heating and safety, and to fuel economic growth. Ensuring a secure, affordable and reliable energy supply to meet these socio‑economic objectives requires a vast array of technologies for energy extraction, conversion and end use, and an enabling infrastructure to integrate these activities. From a technology perspective, energy transition is driven by innovating across different technological areas and adopting this innovation in the energy value chain. The key objective of energy transition, from the technology perspective, is to substitute the prevalent fossil fuel‑based technologies dominating the energy system with more efficient and low‑carbon alternatives. One important avenue to achieve this is through developing and quickly diffusing innovative technologies and solutions.
Innovations in the energy system are either incremental or breakthrough. Incremental innovations, such as those benefiting from digitalization, artificial intelligence and machine learning, have helped the energy system become more efficient and productive. In addition to optimizing processes and the use of assets, they have also enabled new business models that have significantly altered the landscape of the energy system.
But accelerating the speed of energy transition requires breakthrough innovations. In contrast to incremental ones, breakthrough innovations cannot materialize in shorter timescales with less upfront capital; they are inherently time‑ and capital‑intensive and are vulnerable to the uncertainties of energy markets and the political climate. According to the IEA,63 only four of 38 energy technology areas were on track in 2018 to meet its Sustainable Development Scenario, which the agency describes as “a major transformation of the global energy system, showing how the world can change course to deliver on the three main energy‑related SDGs simultaneously”.64 From a technology perspective, a broader set of technology options will need to mature for widespread adoption at an accelerated pace. This includes breakthrough innovation not just in power generation or energy extraction, but also in carriers, such as hydrogen, biofuels and energy storage, and in carbon removal options, such as carbon capture, utilization and storage and deep decarbonization of hard‑to‑abate end‑use sectors (for example, aviation, shipping, cement and steel production) (Figure 14).
Figure 14: IEA radar of energy technology areas
Note: CCUS = carbon capture, utilization and storage.
Sources: IEA, Energy Technology Perspectives 2018; KPMG International Cooperative, https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/10/radar‑of‑ieas‑clean‑energy‑technologies‑and‑sectors‑infographic.pdf
Technology areas advance through different stages of innovation, from idea or product identification to commercial diffusion (Figure 15). Accelerated progression of a technology area through successive stages of innovation relies largely on the presence of a vibrant innovation ecosystem, an entrepreneurial culture and timely access to finance. It also needs a mix of policies that balance supply push (such as R&D incentives, collaborative research between universities and the private sector, test beds for demonstration) and demand pull (including public procurement, technology mandates, consumer preferences and early‑adopter incentives). The barriers to technological diffusion, however, are not restricted to the lack of access to capital or enabling policies. For example, even after a decade of sustained capital investment and a policy environment conducive to renewable energy sources and electric vehicles, renewable energy supply (solar photovoltaic and onshore wind) amounts to only 1.6% of global primary energy supply. Moreover, the stock of electric vehicles in 2017 was only 0.2% of light duty vehicles on the road. Innovative technologies interact with existing energy systems; they face path‑dependency from technological lock‑in and from existing institutional frameworks and end‑use behaviours that evolved in sync with the technological system.65
Figure 15: Stages of Innovation
Note: “Valley of Death” refers to the barriers innovations face before they are commercialized. Source: Adapted from Sims Gallagher, K., Holdren, J.P. and Sagar, A.D. “Energy‑Technology Innovation”, Annual Review of Environment and Resources, Vol. 31, November 2006, pp. 193‑237 http://seg.fsu.edu/Library/Energy‑Technology%20Innovation.pdf
The technological lock‑in is created by the high fixed costs of the installed base, long lifetimes of physical infrastructure, and economies of scale that encourage maintaining the current course rather than pursuing other technology options. Furthermore, the inertia is aggravated through network effects that increase the existing system’s value through interconnected physical infrastructure, uniform technology standards, interoperability features, standardized training modules and regulatory structures. Additionally, the existing technological system is deeply embedded in institutional structures that were designed to ensure the security, reliability and affordability of energy supply (and profit for existing entrenched economic, social, and political interests).
The existing institutional frameworks governing energy systems operate on least‑cost principles to minimize the cost to consumers and on risk aversion (especially for these entrenched/advantaged interests), and promote business models that need scale and high levels of consumption for financial viability. (and)…they create strong barriers to entry for disruptive technologies through institutional lock‑in.
Lastly, the extent to which innovation diffuses in the system depends on the level of end‑user adoption. The behavioural lock‑in is a consequence of established individual lifestyle preferences, habits and routines, social norms, and cultural values (and again the interests of those in economic and political control — fossil fuel companies, utilities, and the legislators they support). Moreover, given the large scale of the energy system, shifts in individual consumption patterns do not significantly affect the systemic level, leading to the problem of collective action. That is, the impacts of energy reforms on consumers are spread over billions of people around the world, while the supply‑side effects are concentrated on a much smaller number of influential stakeholders, such as industries, multinationals and producers.
The above‑mentioned phenomena demonstrate a strong path dependency in favour of the existing energy system, which significantly limits the pace of diffusion of innovative energy technologies and solutions. Established technological, institutional and behavioural components are interdependent; thus, a mix of policy interventions are required that can simultaneously target them and the coordination between political, economic and social actors to foster energy transition through accelerated innovation and deployment of low‑carbon technologies.
The energy–society system
Energy policies are not formulated in isolation but rather are strongly interdependent with what occurs in the energy‑economy and energy‑technology systems. What happens in any of these determines the course of energy policies, and vice versa.
In the energy–economy system, for example, energy policies frequently attempt to optimize the fuel and technology mix to promote greater energy security and economic growth. In the energy–technology system, energy policies are instrumental in furthering innovation and an environment that allows for disseminating technologies. Effective design and formulation of energy policy needs to do these things while pursuing equity and justice when distributing socio‑economic costs.
The road to achieving energy transition comes with collective action challenges, such as when transitioning to a lower‑carbon system. The benefits from carbon reduction, in the form of avoided climate change on the general population, are diffused relative to the concentrated costs borne (and profits made) by business owners in fossil fuel‑intensive industries. Owners in these industries, for example, experience greater risks of carbon costs (and profits) eroding the long‑term value of their business.66 For this reason, effective energy transition policy ought to address the effects on vulnerable (and unduly profiting?) sectors of the economy.
The role of civil society is particularly important to achieving a just and equitable transition. Throughout the process, the question of who wins, who loses, how and why should be at the center of the dialogue. This includes those who live with the side effects of energy extraction, production and generation, and who will bear the social costs of decarbonizing energy sources and economies.67
Failure to adequately address negative impacts and provide support for individuals adversely affected can lead to political resistance and social unrest. The recent Yellow Vest movement in France, which started in response to multiple increases in fuel taxes (la contribution climat énergie), exemplifies the need for inclusiveness and equity in energy transition.
Simply answering the question by identifying winners and losers is not enough. Policy design and implementation should extend to answering the question of what to do with those who are adversely affected; effective policies can only be implemented by answering this. Unless policy design addresses the potential negative socio‑economic effects of the low‑carbon transition, society will continue to face fierce opposition from fossil fuel‑dependent communities that could hinder the energy system’s decarbonization.68 Recent resistance from the Australian government to abandoning coal, along with calls by the US administration to revise the previous administration’s clean power plan, sheds light on the complexity of developing stable policies. Both governments have presented counterarguments to abandoning coal that are linked primarily to the effect on localized economies or communities.
In addition to considerations on equitable distribution of costs and the benefit of energy transition, policies need to promote inclusive growth. Given the essential nature of energy services, affordability of energy supply directly affects households’ well‑being. The gap between wholesale and household electricity prices has been increasing in almost all country groups (Figure 16), signalling concerns about affordability and inequality. Moreover, on average across countries at different income levels, real average household electricity prices increased in more than 60% of the countries monitored. Energy poverty, defined as the inability of households “to consume adequate amounts of energy to maintain a decent standard of living at a reasonable cost”,69 is a concern not restricted to developing countries. The effect of the costs of energy transition, as reflected by rising energy bills, is increasingly being felt in high‑income countries, which are generally considered further advanced in the energy transition process. For example, one in three US households struggled to pay energy bills in 2015, according to a survey by the U.S. Energy Information Administration.70 ( U.S. Energy Information Administration. “One in three U.S. households faced challenges in paying energy bills in 2015”, https://www.eia.gov/consumption/residential/reports/2015/energybills/ ) In the United Kingdom, household energy debt rose by 24% in 2018 alone because of multiple revisions to energy prices during the year.71 Across countries in the European Union, 16.3% of households reported disproportionately high expenditures on energy services in 2016.72 ( Thomson, H. and Bouzarovski, S. Addressing Energy Poverty in the European Union: State of Play and Action, EU Energy Poverty Observatory and European Commission, Aug 2018, https://www.energypoverty.eu/sites/default/files/downloads/publications/18-08/paneureport2018_final_v3.pdf)
In the United Kingdom, household energy debt rose by 24% in 2018 alone because of multiple revisions to energy prices during the year.71 Across countries in the European Union, 16.3% of households reported disproportionately high expenditures on energy services in 2016.72 ( Thomson, H. and Bouzarovski, S. Addressing Energy Poverty in the European Union: State of Play and Action, EU Energy Poverty Observatory and European Commission, Aug 2018, https://www.energypoverty.eu/sites/default/files/downloads/publications/18-08/paneureport2018_final_v3.pdf)
Figure 16: Household and wholesale electricity price trends (by country group), 2010‑2017
Note: kWh = kilowatt hour. Sources: For wholesale electricity prices – World Bank Group. Doing Business 2019: Training for Reform. For household electricity prices – Enerdata (normalized using price level ratio of purchasing power parity conversion factor [GDP] to market exchange rate [World Bank, International Comparison Program database, https://data.worldbank.org/indicator/pa.nus.pppc.rf])
The challenges of equity and justice on energy transition require close scrutiny of the distribution aspects of the disruptive effects – in terms of cost sharing and the effects on local communities. To foster inclusiveness, energy transition policies will need to be tailored according to income and spatial distributions. This requires re-skilling of workers at risk of losing livelihoods, and transparency in environmental or carbon taxes. Environmental taxes have been more effective when the tax burden is proportional to the individual consumption levels, and when the taxation is revenue‑neutral overall.73 ( Khan, M. and Senshaw, D. “Aborted Fuel Tax Initiative in France: Its Ramifications for Green Growth”, Inter Press Service, 27 December 2018, http://www.ipsnews.net/2018/12/aborted-fuel-tax-initiative-france-ramifications-green-growth/.)
The way forward
The results of the Energy Transition Index 2019 establish the need for speed in energy transition. Given the scale and complexity of the challenge and the urgency of collective action, it is not a trivial task. Energy transition is not restricted to shifts in the fuel mix or dominant technologies used in energy extraction, conversion or consumption. A fundamental transformation in the way the world harnesses and consumes energy has far reaching economic, technological and political implications across multiple systems. Accelerating energy transition will require coordinated efforts that address the interconnections of the energy system with different elements of the economy and society.
Analysis of peer‑economy groups highlights the differences in strengths and priorities for energy transition across countries. Multiple pathways, driven by country‑specific circumstances, can lead to a future energy system that is secure, sustainable, affordable and inclusive. Leveraging the potential of the Fourth Industrial Revolution and enhanced public‑private collaboration will be critical to these efforts.
Through this effort, the World Economic Forum intends to increase the transparency on energy transition. The Energy Transition Index offers a fact‑based framework that can help decision‑makers in prioritizing measures for an effective energy transition in their countries. Making fast progress on energy transition requires common understanding among all stakeholder groups in a given country, and a long‑term roadmap that identifies the vision, destination and major milestones for energy transition. Figure 17 offers a framework for pursuing long‑term energy transition roadmaps through multistakeholder collaboration.
Figure 17: Seven‑step framework for effective energy transition
Source: World Economic Forum. Fostering Effective Energy Transition: A Fact‑Based Framework to Support Decision‑Making, 2018
Globally, energy systems are experiencing significant and fast change, driven by forces such as technological innovation, changes in consumption patterns, supply dynamics, and policy shifts. These forces offer opportunities to resolve the challenges that the global energy system faces today, namely: providing energy access to the more than one billion people who lack it, and meeting demand for an additional two billion people by 2050, while also delivering that energy at an affordable cost and with a declining carbon and emissions footprint.
This poses two key questions for decision makers: what is required for an accelerated improvement in countries’ energy systems, and how can the right conditions be put in place that will allow these systems to seize the opportunities from this energy transition? No stakeholder in the energy system can drive such improvement alone. Many actors in businesses, government, and society will need to come together, bringing their different viewpoints, priorities, and sentiments. To facilitate effective dialogue between those parties, a common fact base and understanding of the challenges are required.
A new report from the World Economic Forum (WEF), Fostering effective energy transition: A fact-based framework to support decision-making,
It presents a framework that describes the imperatives of an effective energy transition, as well as a set of enabling dimensions (Exhibit 1).
These are required to support the improvement of countries’ energy systems along these imperatives. McKinsey’s Energy Transition Index (ETI) assesses 114 countries’ energy systems within this framework, by providing benchmarks across two broad areas:
- System performance. This measures current performance, based on the delivery of the energy system on the imperatives of the “energy triangle,” namely promoting an energy system that supports inclusive economic development and growth, secure and reliable access to energy, and environmental sustainability.
- Transition readiness. This measures the future preparedness of countries’ systems. Transition readiness is defined using six dimensions, which support effective and timely progress in system performance. They are the availability of investment and capital, effective regulation and political commitment, stable institutions and governance, supportive infrastructure and an innovative business environment, human capital, and the ability of the current energy system to accommodate change.
Over the past five years, more than 80 percent of countries improved their energy systems, but further effort is needed to resolve the world’s energy-related challenges:
- Current performance and recent improvement in environmental sustainability has been the lowest among the three triangle dimensions. Particle emission levels deteriorated in more than 50 percent of countries, carbon intensity stayed flat, and energy productivity improved by 1.8 percent per annum, falling short of the 3 percent per annum threshold believed to be required to meet the Paris climate change agreement.
- Security and access remains the area with the biggest gap between the highest- and lowest-performing countries. Almost all countries without universal electricity access have seen progress. However, at the global level, the absolute number of people without access still exceeds one billion.
- Household electricity prices have been rising in real terms since 2013 in more than half of countries globally,1 despite an overall fall in primary fuel prices. These developments increase pressures to improve the affordability of energy.
Three ways to foster greater progressCountries can foster progress in three ways: by establishing favorable conditions for energy system stakeholders, targeting improvement across all three triangle dimensions, and pursuing improvement levers with synergistic impact across the system:
The presence of enablers (transition readiness in the ETI) is a strong indicator of the increased performance of countries’ energy systems. The countries with the highest readiness scores lead the performance ranking. Without these enablers in place, countries’ performance would be average at best. Since transition readiness is multidimensional, countries need to establish favorable conditions in all six readiness dimensions to fully capture the opportunities from the energy transition.
Countries that have not pursued a balanced approach to improve the energy triangle across its three imperatives showed below-average performance improvements. On the other hand, countries that managed to develop high performance levels show more balanced improvement across the three dimensions.
Removal of fossil fuel subsidies and the reduction of energy intensity are important improvement levers as they showed synergistic impact on other dimensions of the energy triangle. Countries making progress in these two dimensions showed proportionately greater improvement in the other dimensions across the energy triangle.
Transition paths and opportunities for improvement
Countries follow different transition paths and need to develop country-specific road maps. Comparative analysis among peers can highlight opportunities for improvement:
- Countries with high performance and most enablers in place have led the improvement in environmental sustainability, while countries with relatively low performance or readiness narrowed the gap in security and access, and economic development and growth.
- Countries are encouraged to benchmark themselves against comparable peer groups (for example, geographies, development status, or energy trade balance) to identify good-practice examples and develop suitable improvement levers applicable to their circumstances.
- Energy-importing economies showed higher transition-readiness levels and benefited more from the lower energy prices of the last five years. Out of these countries, some of those with lower performance levels established a working ecosystem of enablers, including strong regulations, infrastructure, and an innovative business environment, which helped them attract investment for future improvements.
The ETI can serve as a tool to track countries’ performance and readiness as well as to identify energy systems’ strengths and improvement areas, business opportunities, and threats. In addition to global benchmarking and peer comparisons against countries with similar structural backgrounds and starting positions, the ETI enables identification of relevant reference points. It also supports the development of a vision of energy transition, and ultimately a road map. Such a country road map needs to take into consideration that energy transition does not happen overnight and that there are high levels of uncertainty in the energy sector (such as the pace of technology development, price volatility, and so on). Reflecting this, after developing a plan, countries must remain flexible in an ever-changing environment.
Previous country-specific energy transition work shows the complexity of the task ahead, as well as the benefits that such transition road maps can offer. All stakeholders—and policy makers in particular—are encouraged to use long-term value for a country as the main criterion to optimize a transition road map, develop specific plans for each demand sector, and align incentives with the longer-term perspective.
The assessment of system performance and transition readiness scores as well as the recent trajectory between 2013 and 2018 provide three major takeaways:47 – Countries are moving in the right direction, yet the pace of progress is not sufficient to address the challenges of the global energy system. – Transition pathways differ among countries, but lessons can be learned from improving and well-performing countries. – Peer group analysis and a country-level indicator assessment can contribute to countries’ transition vision and roadmaps. Recent performance trajectory Globally, countries improved in all three dimensions of the triangle between 2013 and 2018. The improvement was primarily driven by higher performance in economic development and growth, followed by security and access, and environmental sustainability (Figure 5). On a more detailed level, improvement has had various causes, with 10 out of 12 indicator categories showing positive changes (Figure 6). Of the 114 countries covered in this index, 93 have experienced improved performance. Out of those 93, 45 countries have improved their energy systems in all three dimensions of the energy triangle. This indicates an overall positive trajectory. However, accelerated improvement is required to capture opportunities and address the challenges of energy transition.
Economic development and growth
Progress in economic development and growth, the dimension with the biggest change, has been driven by fossil fuel subsidy removal. Countries in the third performance quartile48 showed the highest average improvement, which allowed them to narrow the gap with the top half of the ranking. Generally, countries benefitted from lower commodity prices, which can be described as non-structural improvement, driven by external factors. Assuming 2016 commodity prices for 2013, the improvement rate in the economic development and growth dimension would be smaller by two-thirds (Figure 5).
Security and access
Improvement in security and access was driven by increased electrification and better quality of supply, especially for countries in the bottom half of the performance ranking. These countries also narrowed the gap with the top performance quartile and made strides towards the goal of universal access to modern forms of energy. Almost all countries without universal electricity access improved in this dimension. In absolute terms, however, the number of people without access to electricity is not declining quickly enough to meet the UN objective of universal electrification by 2030, and still exceeds 1 billion people globally.49 The gap between security and access scores of the top and bottom performers remains the largest within the three dimensions of the triangle.50
Among the three dimensions of the triangle, environmental sustainability poses the biggest challenges, with the lowest performance and improvement rates. The numbers indicate a complex journey towards an energy system that supports the targets of local air pollution and greenhouse gas emissions in line with the Paris Agreement. Between 2013 and 2018, 45 countries saw decreasing scores in this dimension. Also, air pollution remains a major challenge, with PM2.5 emissions worsening for 67 countries, causing around 6 million premature deaths per year globally51. Carbon intensity scores stayed flat and even countries in the top performance quartile have potential for further improvement. Energy intensity improvement has been driving progress in environmental sustainability. Decreasing energy intensity and improving efficiency are two of the key levers to achieve the goals of the Paris Agreement. However, the current energy productivity improvement rate of 1.8% p.a. is falling short. The Energy Transitions Commission estimates that a reduction rate of 3% p.a. is required to limit global warming to below 2°C.52,53
After decades of continuous growth, global energy related emissions began stagnating in the last three years.54 To build on this trend and reduce carbon emissions in line with the Paris Agreement, a sector specific approach is required. Electricity and heat account for approximately 40% of global carbon emissions, followed by about 25% from transportation, 25% from industrial activity, and 10% from the residential and public services sector.55,56 The carbon intensity of energy systems around the world varies depending on the nature of primary energy supply, economic activity, climate, etc., and ranges from coal-heavy energy systems to systems with a mainly low-carbon energy supply.57 The sectorial breakdown of carbon emissions also varies widely among countries. For instance, with a carbon-free electricity system, Paraguay’s carbon emissions are almost exclusively from transport (>90%), while over two-thirds of Estonia and Bahrain’s carbon emissions are from electricity and heat generation.
China and Vietnam have a relatively high share of emissions from industry (>30%), while a comparatively large share of Switzerland and France’s emissions are from residential and public buildings (>30%). Hence, countries will have varying strategies and a different mix of methods to reduce emissions – such as increasing energy efficiency, reducing carbon intensity in the electricity sector through lower-carbon alternatives, greater electrification of the economy, carbon capture utilization storage and lower-carbon alternatives in industrial processes.58 Several countries with already low-carbon-intensive electricity sectors are now pursuing transport electrification. Norway, the Netherlands, Switzerland, Sweden and France are among the front runners on e-mobility.59 China – also among the leading countries in e-mobility – may not capture the same emission reduction benefits of the electrification of transport due to a high share of coal in its power generation mix, although e-mobility will help reduce inner-city air pollution.60 India, another country with air pollution challenges, announced the ambition of ensuring that all new cars sold from 2030 will be electric cars.61 Japan, with comparatively high carbon emissions from the power sector, is pursuing another strategy to reduce emissions. It plans to make hydrogen fuel (expected to be produced from clean energy in the long run) a pillar of its energy system. A potential additional benefit would be the reduction of import dependency (if produced domestically) and the diversification of supply risks.
Energy subsidies 79
Globally, more than $600 billion p.a.80 is allocated to energy subsidies, affecting the fiscal balances and policy behaviours of both energy consumers and producers. The reform or elimination of this type of policy is frequently referred to, particularly in low-price environments, as a win-win course of action that has the potential to positively impact the three corners of the energy triangle: sustainability, economic growth, and security and access. In practice, however, policies to eliminate subsidies face strong opposition from the groups that benefit from them, and experiences with subsidy reform are mixed. In addition to purely economic merits, proper consideration needs to be given to the political economy realities of reforming/eliminating subsidies. Recipients of energy subsidies frequently carry political weight and suppliers usually find that providing subsidies is politically cost-effective. Furthermore, once an energy subsidy is in place, economic and political actors concerned galvanize around it, making reform challenging.
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This report was originally published on the World Economic Forum website and is republished here by permission.