Globally, energy systems are experiencing unprecedented change, driven by a blend of technological innovation, changes in supply dynamics, consumption patterns and policy shifts.
Innovations in energy technology have reduced costs, created jobs and supported the reduction of CO2 emissions from the energy sector.
In the last decade, technological progress has allowed new forms of producing, storing, transforming and consuming energy, altering the nature of the energy system. Fourth Industrial Revolution technologies, and digitalization in particular, allow for open, real-time, automated communication and operation of a more efficient energy system. In a recent study, McKinsey’s Global Institute estimates the yearly savings potential in the resource industries from these technologies to be $750 to $1,210 million by 2035.7 The cost of renewable energy technologies decreased considerably8 and resulted in the creation of new jobs. In 2016, 9.8 million people were employed in renewable energy industries.9
In the oil and gas sector, the combination of hydraulic fracturing and horizontal drilling resulted in a sharp increase in shale gas and tight oil production in the United States, impacting global energy markets. In addition, a 42% reduction in US domestic gas prices between 2010 and 201610 allowed gas to replace coal in power generation, contributing significantly to emission reductions.11
The electricity system is changing, driven by decentralization, electrification and digitalization.12 Growing decentralized sources offer an alternative to the current grid to deliver power. This is particularly relevant as access to energy increases in remote locations currently outside of the grid.13 Electrification is critical for long-term carbon reduction goals14 and technology innovations allow a greater electrification of transport and heating today.15 The convergence of these trends reinforces and amplifies their individual contributions. For example, the combination of decentralized sources and digitalization has allowed traditional consumers to change their role in the energy system.16 These changes have already impacted the business model in the electricity sector and are playing an important role in the decisions electric utilities are making for the future.
Energy consumption patterns have fundamentally shifted in the last years, resulting in new demand dynamics.
Global energy demand growth has been driven by emerging economies like India and China. From 2005 to 2015, primary energy consumption in non-OECD countries grew at a rate of 3.6% p.a.17, while OECD countries’ consumption decreased 0.3% p.a. Although energy per capita has peaked in most mature economies, on a global level, economic growth and energy consumption are also being decoupled. For example, in 2016, global energy demand grew by 1.1%, while GDP grew 3% in the same period.18 Moreover, countries are pursuing policies to nudge consumer behaviour towards energy-efficient options. For instance, China phased out imports and domestic sales of high-wattage bulbs between 2012 and 2016, resulting in an estimated 48 billion kilowatt hours of power saved per year.19
Policy-makers have started to adapt energy policies, and new coalitions have been formed to address challenges and harness opportunities associated with these developments.
Changes regarding energy policies are being undertaken globally. Examples include the 195 countries signing the Paris Agreement in 2015;20 several countries successfully promoting low-carbon energy generation; India21 and China22 revisiting the planned expansion of their coal-fired power generation fleet; and countries announcing the phaseout of internal combustion engine cars over the next decades.23 In 2016, 90% of new power sector capacity additions in Europe were in renewable energy.24 Furthermore, international efforts have been put in place to address access to energy,25 the transition to renewable energy,26 increased energy productivity27 and tracking progress towards sustainable energy goals.28
The importance of evaluating and adjusting policy environments to meet the demands of the energy transition will be critical. While a long-term vision and objectives are necessary, remaining flexible in a dynamic environment is also important. Many governments have begun implementing policy measures surrounding the shift to sustainable energy29, although fewer are outlining clear and extensive energy transition plans to improve delivery across the three corners of the energy triangle.30
Countries can use these game-changing trends to enhance their energy systems and improve the well-being of their populations.
Understanding the urgency and implications of these trends is critical to businesses, governments and society as a whole. In many cases, responding to them will require fundamental shifts in how businesses are run, policies are set, household choices are made and stakeholders collaborate with one another.
Opportunities from an improved energy system are significant. The UN states that “a well-established energy system supports all sectors [of an economy]: from businesses, medicine and education to agriculture, infrastructure, communications and high-technology. Conversely, lack of access to energy supplies and transformation systems is a constraint to human and economic development.”3132 Energy system improvements should foster economic development for the 1.2 billion people without electricity and 2.7 billion people without clean cooking fuels.33 Anthropogenic climate change (its impact on global GDP of at least 5%)34 can also be addressed, as the energy system is responsible for more than two-thirds of anthropogenic greenhouse gas emissions globally.35
Figure 1: The energy system
Source: World Economic Forum with support from McKinsey & Company
Box 1: What is the energy system?
Energy systems are complex and at the heart of every country’s economy. They comprise diverse stakeholders, various energy sources and all energy-consuming sectors, including industry, buildings and transport.
Energy systems aim to support society in the three dimensions of the energy triangle: 1) inclusive, economic development; 2) environmental sustainability; 3) secure and reliable access to energy.
The boundaries of energy systems have recently started shifting. The stakeholders are diverse, including:
- End consumers
- Industrial consumers, e.g. chemicals, materials, metals and mining, mobility, manufacturing
- Energy companies, e.g. oil and gas, electric utilities, renewables developers, service companies, technology and equipment providers
- Financial sector entities, e.g. commercial banks, private equity, institutional investors, development banks
- Policy-makers, e.g. legislators, ministries of energy, environmental agencies, financial regulators
- Cities, e.g. mayors, city planners, mobility providers
- International organizations, e.g. International Energy Agency (IEA), International Renewable Energy Agency (IRENA), International Energy Forum (IEF), United Nations Framework Convention on Climate Change (UNFCCC), Organization of the Petroleum Exporting Countries (OPEC)
- Civil society, e.g. academia, civil society organizations, philanthropists