Sub-index and dimension trends
4.1 System performance
Energy is a critical enabler of modern economy and society. Regardless of the economic structure and socio‑economic priorities of countries, the domestic energy sector has strong forward and backward linkages in a nation’s economy. The energy sector uses outputs from a variety of industries, spurring demand for products and services such as capital equipment, metals and mining, manufacturing, procurement, construction, and engineering and design. At the same time, energy is an intermediate input for most industrial sectors and services,24 in addition to addressing final demand for lighting, heating, cooking and transportation. Hence, it is critical for countries to ensure an abundant and secure provision of modern forms of energy at affordable prices to maintain an optimal level of economic activity and provide better quality of life to their citizens. The system performance component of the ETI measures the extent to which the energy system in a country contributes towards the three key priorities: economic development and growth, energy access and security, and environmental sustainability.
Over the past six years, 75% of the countries have increased their scores on the system performance dimension. The global average scores for system performance increased successively each year from 2015 to 2019, before declining year‑on‑year between 2019 and 2020 (Figure 4). The year‑on‑year decline is primarily driven by rising natural gas prices for importing countries leading up to 2019, and the emerging evidence on externalities as associated with energy‑sector activities. Figure 6 shows scores for the system performance dimensions, with country scores sorted from minimum to maximum for the years 2015 and 2020.
The global average score for environmental sustainability in 2020 remains the lowest among the three dimensions. However, 75% of the countries have improved on this dimension between 2015 and 2020, by approaching the challenge from multiple angles, including technology mandates and equipment labelling, carbon pricing, retiring coal plants ahead of schedule, and redesigning electricity markets to integrate renewable energy sources. Progress on the environmental sustainability of the energy system has been particularly challenging among fossil fuel exporting countries.
Figure 6: System performance dimension scores, 2015 and 2020
Source: World Economic Forum
The energy access and security dimension continues to exhibit the highest global average score, with 80% of the countries having achieved progress between 2015 and 2020. Large‑scale programmes targeting access to electricity in South and South‑East Asia and the further diversification of import counterparts among energy importing countries have been primary contributors to strong global progress on energy access and security. However, as the dimension’s profile in Figure 6 shows, the gap between the top and bottom performers on this dimension is the highest of the three dimensions.
Figure 7: Scores on system performance sub‑index indicators, Energy Transition Index 2020
(scaled from 0 to 100)
PM2.5 – Fine particulate matter air pollutant
Source: World Economic Forum
4.1.1 Economic development and growth
Global GDP increased from $50 trillion in 2000 to $82 trillion in 2018 (constant 2010 $),25 representing a 60% increase. Keeping pace with economic growth, global energy demand increased by 40%, from 10,000 million tonnes of oil equivalent (Mtoe) to 14,000 Mtoe26 over the same period. At the same time, the per capita consumption of energy rose steadily, even as the population increased from 6 billion people worldwide in 2000 to more than 7.5 billion in 2018.27 To support economic growth and maximize social welfare, it is essential for countries to ensure access to abundant and diverse forms of energy at affordable prices.
The economic development and growth dimension indicates the energy sector’s overall contribution to a country’s economy, and how well the energy system is positioned to ensure the cost competitiveness of the industry as an intermediate input, and the affordability to households in final consumption. The global average score for this dimension has declined over the past year, effectively erasing the gains made since 2015 (Figure 6).
Until the recent systemic shocks from factors such as trade tensions, military interventions and the COVID‑19 pandemic, the past decade saw one of the longest economic expansions in history. However, the results were mixed for fuel exporting countries, which remained sensitive to energy market volatilities, the evolving policy landscape in fuel importing countries, and technology‑enabled energy productivity gains. Over the past six years, the fuel exporting countries saw a greater decrease in scores on the economic development and growth dimension of the ETI than the importing countries.
The affordability of energy services for households depends upon not just energy tariffs, but also per capita consumption levels, household expenditures and disposable income. Focusing on the cost of electricity, Figure 8 shows that Advanced Economies and Emerging and Developing Europe countries have high per capita electricity consumption, which is expected to further increase with the rising share of electricity in final demand. While household electricity tariffs in these countries are comparable to those in the rest of the world (in purchasing power parity (PPP) terms), the affordability challenge remains severe as high consumption levels imply a higher share of utility bills in domestic expenditure. Figure 9 indicates the disproportionately higher share of electricity bills28 (annual, PPP) in household final consumption expenditure for Advanced Economies and countries from Emerging and Developing Europe. Emerging economies from Sub‑Saharan Africa and South Asia face an affordability challenge of a different nature. While per capita consumption levels are low due to limited access to electricity, the retail electricity tariffs are among the highest in the world (in PPP terms). For these countries, the affordability challenge is exacerbated as fixed costs are spread across a narrower consumer base, given commercial losses and less than universal electrification. The affordability constraint is a risk to the energy transition, as it affects the relative competitiveness of fuels and technologies and may lead to sub-optimal decision-making, by locking in fuels that might be more competitive but less environmentally sustainable.
Figure 8: Household electricity tariffs (US¢ 2018, PPP) vs per capita* electricity consumption (kWh)
*Based on total electricity consumption (does not consider segmentation by final demand category).
Sources: World Economic Forum with data on 2018 household electricity tariffs from Enerdata, and on per capita electricity consumption from IEA, “Data and statistics” 2017
Figure 9: Average household electricity bills* as percentage of private final consumption expenditure per capita, 2018 (current international $, PPP)
*Calculated based on overall energy consumption (does not consider segmentation by final demand category)
Sources: World Economic Forum with data on 2018 electricity tariffs from Enerdata; on per capita energy consumption from IEA, “Data and statistics” 2017; and on private final consumption expenditure from the World Bank, “Households and NPISHs [Non‑profit institutions serving households] final consumption expenditure, PPP (current international $)”, https://data.worldbank.org/indicator/NE.CON.PRVT.PP.CD
Global energy demand increased by 2.9% in 2018, with natural gas contributing to 40% of this growth.29 Prior to the price and demand shock resulting from the COVID‑19 pandemic in 2020, wholesale natural gas prices had increased across the world except in North America30 over the past two years (Figure 10). The cost competitiveness of natural gas is critical for industrial growth, as well as to replace more carbon‑intensive fuels in power generation. As shown in Figure 7, the global average score (scaled from 0 to 100) for the indicator on wholesale gas prices is the lowest among the indicators of the economic development and growth dimension, which indicates high variability in the landing costs of natural gas across countries. Different price determination mechanisms, energy subsidy levels, underinvestment in mid‑stream infrastructure and high costs along the LNG supply chain31 are limiting factors in the cost competitiveness and security of gas supply. Given the recent oil market volatilities, the uncertain supply and demand outlook for 2020 presents an opportunity for importing countries to improve their industrial competitiveness and increase price transparency.
Policy‑makers frequently use energy subsidies to address social and distributional objectives for households and the competitiveness of industries. However, evidence suggests poorly targeted energy subsidies end up benefiting wealthy consumers, incentivizing overconsumption, distorting price signals, and inhibiting investment in renewable energy and energy efficiency.32 Pre‑tax energy subsidies, which indicate the difference between the actual price paid by consumers and the full cost of supply, have progressively declined over the years. Sustained low oil price environments (as compared to a decade earlier) and efforts on fuel price reform in many countries are contributing factors. This trend is supported by the ETI analysis, as 82% of countries that have improved their ETI scores over the past six years have also decreased their pre‑tax energy subsidy levels.33 However, consumption subsidies are only a small fraction of total post‑tax subsidies, which include such externalities as air pollution, global warming, health risks, traffic congestion and accidents. Between 2013 and 2017, the unpriced externalities associated with global warming, local air pollution and road congestion steadily increased (Figure 11), especially in emerging economies.34
Figure 10: Wholesale natural gas prices, 2013‑2018
Source: International Gas Union, Wholesale Gas Price Survey 2019 edition
Figure 11: Pre‑tax and post‑tax energy subsidy components, 2013, 2015 and 2017 (percentage of nominal GDP)
Source: World Economic Forum based on International Monetary Fund, “Global Fossil Fuel Subsidies Remain Large: An Update Based on Country‑Level Estimates”, 2019
4.1.2 Environmental sustainability
The environmental sustainability dimension of the ETI focuses on emissions footprints of energy supply as well as demand. The past year can be considered as a critical landmark in the energy transition. The social pressures for accelerated decarbonization intensified, as evidenced by widespread youth climate protests. Many countries announced net‑zero emissions ambitions, and critical policy instruments such as the European Green Deal gathered momentum. Central banks echoed similar ambitions, citing the systemic risk to financial systems from climate change,35 and an increasing number of financial‑sector organizations declared goals to divest from carbon‑intensive investments. Between 2015 and 2020, more than 70% of the countries have improved their score on this dimension, with 30% improving it by more than 5 percentage points. The top 10 countries in the ETI rankings have improved on both per capita energy consumption as well as per capita CO2 emissions over the years. However, Figure 6 shows that this dimension has the lowest global average scores and the minimum spread between high and low performers of the three dimensions. This suggests that while progress has been made on environmental sustainability, improvement remains contingent on addressing the economic and social priorities of the energy system.
Global energy‑related CO2 emissions plateaued in 2019 after two years of consecutive growth,36 in part due to a decrease in energy intensity of GDP in advanced economies, and slower energy demand growth in China and India. From a sectoral lens, electricity generation led the emissions reductions, as renewable energy capacity and utilization increased across countries, and natural gas replaced coal as the primary fuel.37 While the United States has led emissions reductions from power generation by switching from coal to natural gas, the transition has been accompanied by high levels of methane emissions. More than half of global methane emissions last year came from North American shale oil and gas production.38 Given the high global warming potential of methane as compared to CO2, it threatens to erode the gains made on environmental sustainability over the years. In view of the importance of natural gas in the energy transition, technologies and regulations to mitigate methane emissions should be deployed urgently.
The environmental sustainability of energy systems is highly sensitive to recent developments, with the possibility of lingering effects of oil price volatility and the COVID‑19 pandemic in the medium term. While annual emissions might decline due to the slowdown in industrial activity, aviation and surface transportation, they should not be mistaken for gains made from structural transformation or policy measures. As governments act to maintain economic growth and employment, and companies reallocate investments to ensure business continuity, the environmental sustainability agenda could lose momentum. Potential consequences include delays and capital constraints in renewable energy projects, the lack of incentives to pursue energy efficient alternatives, a targeted fiscal stimulus to carbon‑intensive sectors, among others. Countries’ economic growth priorities have been a contentious issue in the energy transition, and these fault lines could be harder to navigate in a slow or declining economic growth scenario. Stakeholders need to be conscious of the long‑term objectives of the energy transition and adjust short‑term priorities accordingly.
4.1.3 Energy access and security
Global average scores and improvement over time remain highest for the energy access and security dimension. More than 80% of the countries have improved on this dimension since 2015. While Advanced Economies and fuel exporting countries display high scores due to existing infrastructure and domestic reserves, respectively, the highest improvements on this dimension come from countries in Emerging and Developing Asia and to a lesser extent in Sub-Saharan Africa, due to large‑scale and sustained electrification programmes and improved economics of decentralized electricity systems.39 However, evidence is mounting that although measuring energy poverty through a binary definition of access to electricity or clean cooking fuels might be easy to track and communicate, it does not necessarily capture its true extent.40 Electricity is considered as a proxy for all forms of energy, which may not be fungible. Energy input for services such as lighting, heating and refrigeration, mobility, process heating and mechanized agriculture are different. Energy access programmes need to be redesigned, prioritizing considerations such as the diversity of energy services available to households for productive use, access to energy‑enabled community services, the distribution of energy consumption within countries, and the quality and reliability of supply.
Figure 12: (left) Energy consumption vs population, (right) Energy consumption per capita vs population, 2000 and 2017
Sources: IEA, World Energy Balances 2019; World Bank population data
While energy poverty might be an infrastructure or “access” issue in developing countries, it is an affordability concern41 in developed countries, which is exacerbated by pervasive economic inequality.42 Consensus is lacking over the definition of energy poverty, including the basket of basic energy services and the minimum amount of each service needed. Consequently, energy poverty manifests in diverse forms, unique to country‑specific circumstances. Globally, the inequality in energy consumption between countries appears to be decreasing, but large gaps remain. Specifically, the changes in energy consumption per capita for countries at the upper and lower ends of the scale have been marginal (Figure 12). Across all countries, the top 10% income group consumes 20 times more energy than the bottom 10%.43 To some extent, the inequality in energy consumption levels between countries might be natural, due to the distribution of conventional energy resources. Given the more uniform distribution of renewable sources, particularly solar and wind energy, orienting economies towards renewable energy can help bridge inequality in energy consumption per capita and improve energy security.44
4.2 Transition readiness
The energy system’s ability to deliver on the imperatives described in the preceding sections depends on the presence of an enabling environment for the energy transition, measured in the ETI framework by the transition readiness sub‑index. Energy transition readiness is captured by the stability of the policy environment and the level of political commitment, the investment climate and access to capital, the level of consumer engagement, the development and adoption of new technologies, etc. Some of these factors are beyond the scope of the energy system but nevertheless determine the effectiveness and future trajectory of energy transition in a country. As shown in Figure 4, the global average transition readiness score has increased each year since 2015, indicating a gradual improvement in the enabling environment across countries.
Figure 13: Transition readiness dimension scores, 2015 and 2020
Source: World Economic Forum
Despite the overall improvement in the global average score for transition readiness, progress is not proportionate across the different enabling dimensions. Enablers such as the robustness of the institutional framework, human capital preparedness and an innovative business environment require structural changes and are inherently slow moving due to inertia in social and technological systems. A majority of the countries have improved their energy transition readiness by targeting better access to capital and investment and increasing the level of political commitment (Figure 13). Countries with a robust enabling environment are more likely to sustain well performing energy systems. The ETI data corroborates this, as advanced economies score highly on both the system performance and transition readiness sub‑indices. Moreover, a robust enabling environment also allows countries to better navigate the complexities of the energy transition. Figure 14 shows 10 countries that have made substantial progress on transition readiness between 2015 and 2020. While these countries have adopted diverse pathways to improve their readiness, they have simultaneously improved on multiple enablers, underscoring the importance of a systemic approach to energy transition.
Figure 14: Shift in Energy Transition Index scores for select countries, 2015 and 2020
Source: World Economic Forum
Overall, the capital and investment and regulations and political commitment enablers show maximum improvement, increasing by 12% and 6%, respectively, over the past six years, supported by technological improvements and public engagement, and capitalizing on the economic expansion leading up to 2019. However, the environment has shifted fast in the wake of compounded disruptions from the COVID‑19 pandemic, potentially straining the bandwidth of investors and policy‑makers to pursue long‑term plans for energy transition with the same sense of urgency. The energy system has withstood recurring disruptions over the past few decades. While some of these conditions, such as extreme weather events like wildfires and tropical storms, and mixed reactions to carbon prices or environmental legislation, have been localized to countries or industry sectors, the current environment constitutes a perfect storm of compounded disruptions, touching every corner of the planet. The cascading effects of the COVID‑19 pandemic, immediately following prolonged international trade disputes, have brought the global economy to a grinding halt – sending shockwaves through the energy markets. As countries and companies rapidly reallocate resources to protect lives and livelihoods, their immediate priorities may shift away from energy transition and climate change. The era of compounded disruptions is a litmus test for the energy transition, asserting the importance of the twin objectives of robustness and resilience. Robustness in policy design implies institutional and political characteristics remaining functional at a desired level during external shocks, and resilience indicates the need for systems and processes to identify “black swan” events and to be prepared to address them when they occur.45