The previous chapter showed that despite growing momentum, progress in the energy transition requires further acceleration. For this reason, and considering the impact of the COVID-19 pandemic, it is critical to focus on the resilience of the energy transition. As the risk landscape evolves, the transition will fail to deliver the step-change required without building in greater resilience.
Resilience is a holistic concept that embraces the enablers of transition readiness and cuts across the following dimensions:
In this chapter, we look at how each of these dimensions is impacted by heightened or new risks, we examine the implications for the energy transition, and we analyse key considerations and case studies for those seeking to embed resilience in the energy transition.
A definition for the resilience of the energy transition
Energy transition resilience dimensions and illustrative mechanisms
As demonstrated by the COVID-19 pandemic, the negative impacts of major socio-economic disruptions fall hardest on the most marginalized members of society. Climate change is no different. Inequality has been increasing across the world, both between and within countries, and climate change is one of the contributing factors41. To be resilient, the energy transition will require the active participation of all sections of society. It must be rooted in every country’s laws, politics, societies and patterns of consumer behaviour.
Costs. The energy transition will not come without costs. Carbon taxes, removal of fossil fuel subsidies and levies on electricity bills could all add to the cost of electricity and fuels, leading to affordability challenges for some. Significant infrastructure investments will be required. The pandemic-related recovery packages drafted by governments around the world provide a one-off opportunity to fund some of these investments. However, research from Vivid Economics and the Climate Action Tracker suggests that recovery measures announced to date across the G20 may have a regressive environmental impact42.
Workers. An additional challenge comes from the potential impact of the transition on existing workforces. While it is estimated that renewable energy could employ more than 100 million people in the energy sector by 2050—boosting global GDP by 2.5%—these gains are not evenly distributed. Some countries and communities, especially those that rely heavily on fossil fuels, will lose out as a result.
Consumer behaviour. Household consumption – through, for example, heating, lighting, cooking and commuting – accounts for around two-thirds of global greenhouse gas (GHG) emissions43. Changes in behaviour – especially on measures relating to energy efficiency, transportation, diet and responsible consumption – are proving increasingly challenging to lock in, given the varying consumer preferences and abilities to act that we see across different countries.
International cooperation. Energy transition requires collective commitment and international cooperation, but trust in the ability of countries to act collectively for the common good has been steadily eroded. This was highlighted by the COVID-19 crisis, when many countries became more inwardly focused in their approaches. Examples of vaccine nationalism44, ranging from conditional subsidies through to export controls, demonstrated the tension between international cooperation and competition when near-term national interests are at stake.
International cooperation is also needed to create viable carbon markets. The effects of carbon taxes on trade and competitiveness require cooperation between governments and between companies and governments, to ensure efficient and fair pricing of carbon across the global economy45. However, the acceleration of climate action and the shifting of trade flows away from fossil fuels to cleaner technologies could disrupt existing geopolitical alliances and reshape global power dynamics. An uncoordinated transition is inherently more uncertain than one underpinned by stability and agreed rules of engagement.
Just transition. A prerequisite for resilience is to build a just transition – one that not only addresses environmental sustainability but also provides decent work, enhances social inclusion and helps eradicate poverty46. Policy-makers should prioritize policies and incentives to support economies, workforces and wider society as countries shift to low-carbon energy systems. This may take the form of fiscal transfers, expanded welfare and social protection, and labour market schemes such as reskilling and training to support affected communities. The EU’s Just Transition Mechanism47 is one example of how governments are looking to support affected communities and businesses, and encourage them to take an active role in preparing for the new jobs and opportunities that will arise from the energy transition.
System value framework. Building resilience must also start with business leaders and policymakers concurrently evaluating the economic, environmental, social and energy system outcomes of potential energy solutions. One example of a framework to guide this approach is the system value framework developed by the World Economic Forum in partnership with Accenture and others. This quantitative approach shifts the political and commercial focus beyond cost to include value creation and provides a common agenda for stakeholder decision-making.
Case study: A system value framework approach to evaluating policy and investment decisions
Laws and policies to back ambitions. Long-term ambitions alone are insufficient to achieve the energy transition. To turn decarbonization ambitions into climate action that is resilient to political cycles, countries such as the UK have embedded net-zero emissions targets into law49. This legal foundation and the UK’s stable climate policy framework have the effect of stimulating the investments required to convert commitment into action. The UK, for example, reduced its emissions by 44% from 1990 to 2019, while its economy grew by two-thirds. This is 1.8 times faster than the EU average since 1990 and significantly faster than the US, which saw its emissions rise slightly over the same period50. The financial sector has become an increasingly strong voice stressing the need for a stable policy framework to build investor confidence.
Stronger international cooperation. Governments must align to define a common set of rules to ensure players have a level playing field in the market. Tools such as a common international carbon market or carbon border-adjustment mechanisms can be considered. International cooperation on energy transition will once again come under the spotlight during the delayed COP26, expected in November 2021. Global trade will also play a key role. Reforms of global trade agreements – including the reduction of trade barriers, reduction of fossil fuel subsidies and the facilitation of global technology transfers – will help ensure that emerging markets can access new energy technologies in an equitable and affordable way. For example, the EU called for greater focus on clean energy transition and sustainable development as part of its proposed World Trade Organization reforms in February 202151.
Incentives for consumers. Consumers need incentives to change their behaviour and embrace the energy transition. The right economic, legal and infrastructure policies, plus fiscal interventions, can change consumption patterns and incentivize sustainable behaviour. Countries will not all follow the same path, but it is critical to identify ways to make change at the individual level more attractive and accessible. One example is Norway’s drive to adopt electric vehicles (EVs). The government has adopted a mix of measures: mandates to phase out internal combustion engines by 2025, incentives for the purchase of zero-emission vehicles (e.g. 0% VAT), urban road-toll exemptions for EVs, and the installation of accessible, efficient charging infrastructure. By starting early with incentives and adapting infrastructure and technology to fit demand, Norway has fostered an eco-conscious society that sees EVs as a preferred choice52.
The shifts within and across the energy supply chain, alongside the greater need for flexibility across increasingly diversified energy sources, will present new challenges and requirements for change.
Market reforms. A recent analysis on the European electricity market, completed by the World Economic Forum, shows that Europe could reach 60% annual penetration of wind and solar by 2030. At such levels, power market reforms, increased demand-side participation and significant changes to how the network operates will be needed as the grid transforms towards variable generation.
Cybersecurity. Energy companies, particularly in the power sector, are increasingly digitalizing their operations to optimize the end-to-end value chain. More digitalization means higher exposure to cyberattacks. The number of identified groups targeting the energy sector has risen from 87 in early 2015 to 155 by the end of 201968. Grid infrastructure, nuclear plants, gas pipelines and safety systems for oil production operations have all been the target of cyber-attacks in the past five years.
Rare minerals. The production of minerals such as graphite, lithium and cobalt could increase by nearly 500% by 205069 to meet the growing demand for clean energy technologies. These materials are generally produced in developing countries, and sometimes in challenging environmental and social conditions. The scramble to acquire these minerals has resulted in a high concentration of resources in the hands of a few countries, increasing potential risks to timely supply.
Deep decarbonization. For industries that require higher energy density to function, such as heavy industries or heavy transportation, progress to significantly reduce carbon emissions has been slower to date. For example, despite the Paris Agreement taking effect in 2016, there was no emissions-related commitment from the shipping industry until 2018, when the International Maritime Organization (IMO) committed to a 50% reduction in emissions by 2050 (compared to 2008)70.
Innovation risk. Within the fossil fuel industry, low-carbon technologies – including hydrogen and carbon capture, utilization and storage (CCUS) – provide a potential path forward. The ability to scale each of the technologies depends on collaboration across sectors (and with policy-makers and financial institutions) as no sector alone can fund and take on the risk of scaling these technologies. The increasing investment into industrial clusters, where these solutions can be scaled up, suggests a path ahead and speaks to the types of partnership required for success.
Building resilience in the transformation of our energy systems and its technologies will require increased flexibility, greater collaboration among and across stakeholders, and a change in behaviour.
Regional interconnections and interoperable markets. Cross-border, connected infrastructure can provide flexibility in demand/supply balancing. In 2020, 38% of the EU’s electricity was supplied from renewables, making renewables a higher source of Europe’s energy mix than fossil fuels71. Interconnections and increased interoperability of market design across Europe’s national electricity markets have been central in enabling the continent to achieve this high share of wind and solar penetration while maintaining grid resilience and flexibility. ENTSO-E – the European Network of Transmission System Operators for Electricity that represents 42 electricity transmission system operators (TSOs) from 35 countries across Europe – is tasked with continuously coordinating and evolving the EU’s electricity grid system operations as the continent accelerates its clean energy transition and prepares for more distributed and variable resources to be added to the electricity network.
Optimize non-build solutions. An estimated 185 GW of electricity could be freed up by system flexibility and digitally enabled smart demand response – roughly equivalent to the installed capacity of Australia and Italy combined. This would obviate the need for around $270 billion of investment in new electricity infrastructure – funding that could be redirected towards transition-linked opportunities instead72.
Weather-proof infrastructure. The energy transition journey is not fully predictable and, as experienced in Texas with the February 2021 winter storm, increasingly volatile climate events can lead to exceptional demand in combination with failures of supply. Subsequent diversions of funding for repairs and maintenance could starve investment in cleaner energy sources and lead to questions regarding short-term versus long-term priorities. Resilience of the transition may therefore require legacy energy assets to to play a critical bridging role as the overall system transitions.
Low-intensity oil and gas. Reducing the carbon intensity of oil and gas industry core operations is needed to achieve shorter-term objectives, while providing the platform for longer-term, more structural shifts. The largest share of the potential emissions improvement between now and 2050 will be due to actions that improve the performance of current core energy supply and demand assets.
Three sets of actions to achieve the decarbonization transition
Scale-up through collaboration. New models of cross-industry collaboration can create the necessary solutions to support investment in low-carbon technologies and extend the possibility frontier for the transition. The Northern Lights project73, part of the Norwegian full-scale carbon capture and sequestration project, is a collaboration between Equinor, Shell and Total in partnership with heavy industries in the Oslofjord region. Northern Lights captures CO2 from the production of cement and waste-to-energy, transports it and stores it offshore under the North Sea.
Public-private sector collaboration and international cooperation will be crucial in the scaling up of hydrogen. Chile, for example, has set an ambition to become a leading green hydrogen exporter, with at least 5 GW of electrolysis capacity by 2025. Its National Green Hydrogen Strategy74 identified cross-sector collaboration and international cooperation—especially in common standard-setting and infrastructure planning – as crucial pillars for success. The imperative is to kick-start domestic production through public-private sector collaboration, particularly in areas such as ammonia, oil refining and mining.
Focus on cities. Urban areas account for twothirds of global final energy demand and 70% of global GHG emissions75. Today, 55% of the world’s population lives in urban areas and this is expected to grow to 68% by 2050. Consequently, cities are a primary focus for the energy transition. Building resilience into the transition of urban energy demand requires both technological and behavioural change. Best-practice examples include electrified mass-transit systems, intelligent power, smart meters, and smart buildings that feature automated systems for lighting- and climate-control along with micro-generation and solar heating.
The absence of sufficient capital and investment supporting the transition remains one of the greater risk areas. Hastening progress and rooting the energy transition for the long term will require a critical transformation in how and where investments are allocated.
Global investment in clean energy grew from $60 billion in 2004 to an average of $311 billion per year over the past decade86. Finance institutions are increasingly aligning their objectives to the Paris Agreement. Asset managers representing more than $9 trillion of assets under management (AUM) have launched the Net Zero Asset Managers Initiative, in which they commit to support investing aligned with net-zero emissions by 2050. While welcome, the IPCC estimates that annual investments in clean energy and energy efficiency would need to increase by a factor of six by 2050, compared with 2015 levels, to limit warming to 1.5˚C above pre-industrial levels87. At the same time, IEA estimates show that investment trends are failing to lead to a large enough reallocation of capital to support the energy transition88.
Beyond power. Investments are concentrated in the power sector. Even though electrification will play a leading role in the transition, it is imperative to attract clean energy investment into sectors such as steel and cement, heavy transport and HVAC to achieve our climate objectives. Part of the reason that finance to non-power sectors has lagged is the lack of scale in technologies and the difficulty in abating some industrial emissions. It is also due to the “crowding-out” effect created by headline wind and solar PV opportunities. However, the increase in net-zero commitments in Europe, China and Japan will force countries to put policies in place to support investments that address emissions outside the power sector.
Emerging markets. Insufficient investments are flowing into emerging markets. Despite making strides, far greater resources are needed in those regions where most of the growth in economies, populations, energy demand and emissions is expected. This year’s ETI results continue to highlight the structural gap in carbon-related metrics, with CO2 intensity rising in regions such as emerging Asia and Sub-Saharan Africa, where energy demand is growing. This trend is driven by continued growth in coal power sector emissions.
Carbon lock-in. Capital is still being channeled into energy assets that have long operating lifetimes, locking in future emissions. Breaking the carbon lock-in will require a new approach to investment in fossil fuels and, in some cases, the early decommissioning of existing assets. Limiting global temperature increase to 1.5˚C implies that a significant share of existing oil, gas and coal assets and reserves are outside the carbon budget89.
More diverse finance. To date most of the finance for the energy transition has been attracted by tariffs and premium guarantees awarded by governments directly to project developers or through regulated bodies. Innovation in financial products and arrangements is required to increase the diversity of available finance and to stimulate investment in clean energy.
Corporate power purchase agreements (PPAs) are long-term procurement contracts that give project developers and banks revenue certainty to invest in clean energy. The corporate PPA market is growing rapidly, although it is still primarily concentrated in the US and Europe. Recently, however, it has started to gain traction globally, in particular with large power consumers.
Green bonds and sustainability-linked bonds. Green debt issuance linked to sustainability has grown from around $1 billion in 2009 to $270 billion in 2020.90 The Climate Finance Leadership Initiative suggests that sustainability bonds are useful to fund the transition, particularly in more carbon-intensive sectors91. For example, in 2019, the international energy group Enel was the first company92 to launch sustainability-linked bonds in US and European markets. Enel linked its sustainability strategy to the terms of general corporate debt, using a pricing mechanism that incentivizes the achievement of ambitious sustainability targets within a pre-determined timeline. These instruments have since been recognized internationally, including by the International Capital Market Association93 and the European Central Bank94.
Public sector role. Governments can also take the lead in deploying innovative financing solutions, such as “climate auctions”, and through regulatory standards mandating cuts in emissions. The World Bank’s climate auction model, for example, is a performance-based mechanism to stimulate investment in projects that reduce GHGs. This model of climate auction was trailed by the Bank’s Pilot Auction Facility, which hosted three auctions between 2015 and 2017, allocating nearly $54 million in climate finance with the potential to abate over 20 million tons of CO295.
Public sector finance will also have to take the lead in developing new technologies whose long R&D cycles are difficult to support on corporate timescales. Public budgets will be needed to support the commercialization of technologies through subsidies or risk-sharing mechanisms like loan guarantees.
Bankable projects. In emerging economies, the key to increasing capital flows is to improve the bankability of infrastructure projects by allocating the risks fairly across all parties. The Asia Pacific Risk Centre96 has created a set of bankability guidelines critical to unlocking international finance in emerging markets. These include appropriate covenants and funding structures, the presence of legal and economic recourse, thorough due diligence, a robust right to payment, and well-structured concession rights. Standardizing contracts so they reflect international leading practice on key bankability dimensions can reduce transaction costs, ease due diligence for investors and banks, and shorten investment cycles.
Case study: Investing in homegrown energy transition champions
Concessional finance. Development Finance Institutions (DFIs) can unlock private capital by partnering with banks and asset managers to finance projects. Concessional finance provided by DFIs can reduce the time needed for low-carbon technologies to become more cost-competitive than their carbon-intensive counterparts.
Securitization of stranded assets. A financial framework can be applied to accelerate the shift away from coal power into renewables and mitigate the risk of stranded assets. An example of this is securitization, where the regulated returns of the asset owner are collateralized as part of new debt issuance. Proceeds from the debt issuance to retire the asset can be used to reinvest in renewables, and even support communities impacted by the closure. Some US states such as Colorado, New Mexico and Montana have proposed legislation to authorize securitization97.
Stakeholder capitalism metrics. Accelerating the adoption of a minimum set of common metrics to report progress on sustainability performance will catalyse greater cooperation and alignment among business leaders, investors and policy-makers. The World Economic Forum, in collaboration with Bank of America, Deloitte, EY, KPMG and PwC, has curated a set of 21 core and 34 expanded metrics over the past two years, with the support of more than 140 stakeholders. The metrics comprise non-financial disclosures resting on the four pillars of people, planet, prosperity and principles of governance. Intentionally drawing on existing standards, the pillars include metrics such as GHG emissions, pay equality and board diversity among others.