The scale and complexity of energy transition
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, and having a combination of technologies, infrastructure and sustainable practices for efficient energy use. 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 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
5.1. 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 describe above, 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. The existing institutional frameworks governing energy systems operate on least‑cost principles to minimize the cost to consumers and on risk aversion, and promote business models that need scale and high levels of consumption for financial viability. Given the long lifetimes and essential nature of energy systems, these attributes are critical to ensuring reliable and affordable energy services, though 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. 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.
5.3. 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 by business owners in fossil fuel‑intensive industries. Owners in these industries, for example, experience greater risks of carbon costs eroding the long‑term value of their business.66 For this reason, effective energy transition policy ought to address the effects on vulnerable 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 centre 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 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
Figure 16: Household and wholesale electricity price trends (by country group), 2010‑2017
Note: kWh = kilowatt hour
Sources: 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]); for wholesale electricity prices – World Bank Group. Doing Business 2019: Training for Reform
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 reskilling 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