A framework for fostering effective energy transitions

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, with analytical support from McKinsey, aims to fill this gap and explore these issues. It presents a framework that describes the imperatives of an effective energy transition, as well as a set of enabling dimensions (Exhibit 1).

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These are required to support the improvement of countries’ energy systems along these imperatives. The newly developed Energy Transition Index (ETI) allows the assessment of 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.

The full report highlights three major findings from the ETI, which we summarize in the rest of this article. Exhibit 2 shows how countries scored on the index.

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Progress on energy system improvements

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 1.Purchase power adjusted. despite an overall fall in primary fuel prices. These developments increase pressures to improve the affordability of energy.

Three ways to foster greater progress

• Countries 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.

Pathways and obstacles to a low-carbon economy

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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.

Download Fostering effective energy transition: A fact-based framework to support decision-making, the full report on which this article is based (PDF–3.3MB).

This report was originally published on the World Economic Forum website and is republished here by permission.