The global energy crisis has brought the need for affordable energy into sharp focus. While affordability has always been a concern for consumers and policymakers, recent price spikes in fossil fuels have amplified this concern.
In 2022, consumers spent nearly USD 10 trillion on energy, a significant increase from previous years. This has disproportionately affected low-income households and vulnerable communities.
The Affordability Debate in Clean Energy Transitions
The affordability of clean energy transitions is a central topic of debate. However, two common misconceptions often cloud this discussion: the belief that clean energy is responsible for current high energy costs and the assumption that clean energy technologies are always more expensive than fossil fuels.
While these claims are not supported by evidence, legitimate questions about the affordability of energy transitions remain. This report addresses these concerns, offering an evidence-based perspective on strategies and policies to ensure affordable and fair energy transitions.
The Current Energy System’s Inequities
The current energy system is marked by several inequities, with affordable energy out of reach for many. Approximately 750 million people lack access to electricity, and over 2 billion lack access to clean cooking technologies.
Additionally, significant disparities exist in energy use and affordability across income groups. A key question for successful transitions is how policies can ensure equitable access to the clean energy economy for lower-income countries, communities, and households.
The Affordability of Clean Energy Technologies
Contrary to popular belief, many clean energy technologies are already the most affordable options, especially when considering lifetime costs. This cost reduction has been driven by a combination of innovation, increased deployment, economies of scale, and policy support.
Notably, solar PV and onshore wind power are now cheaper than new coal and natural gas plants. Moreover, electric vehicles, efficient appliances, and heat pumps often offer significant savings over their lifespans.
A Clean Energy System: More Efficient and Cost-Effective
Transitioning to a more electrified, renewables-rich, and efficient energy system can lead to significant cost savings. In fact, the Net Zero Emissions by 2050 (NZE) Scenario shows that such a system is less costly to operate globally than the current Stated Policies Scenario (STEPS).
This is primarily due to the reduced need to purchase fuels. Moreover, electrification improves efficiency through electric motors and heat pumps, which are more efficient than internal combustion engines and gas-fired boilers, respectively.
The High Costs of Inaction
The impacts of climate change, such as extreme weather events and rising sea levels, are already imposing significant costs on societies, particularly affecting vulnerable communities. The costs of inaction on climate change far outweigh the costs of transitioning to clean energy.
Furthermore, clean energy transitions offer various co-benefits, including improved health outcomes due to reduced air pollution.
The Investment Journey to Affordable Energy
Achieving the benefits of clean energy transitions requires significant upfront investments. While the required investments are substantial, particularly in emerging and developing economies, the long-term benefits in terms of affordability, health, and environmental sustainability are undeniable.
The high cost of financing clean energy projects poses a key challenge, especially for developing economies. This issue necessitates enhanced international cooperation to increase the availability and lower the cost of capital for these countries.
Additionally, addressing distortions in the current energy system, such as fossil fuel subsidies, is crucial for facilitating a smooth transition to clean energy.
How Will Energy Bills Change?
The litmus test for affordability in energy transitions is the impact on consumer energy bills. Consumers ultimately foot the bill for transforming the energy system, either directly through bills or indirectly via taxes or higher prices for goods and services.
While these investment costs are spread over time, the distribution of these costs across industries and households is heavily influenced by national policies, making this a crucial decision for policymakers.
Projections indicate that swift clean energy transitions result in lower consumer bills compared to maintaining current policies. In advanced economies, total energy expenditure in the Net Zero Emissions (NZE) Scenario by 2035 is already 20% lower than in the Stated Policies Scenario (STEPS).
Conversely, in emerging and developing economies, phasing out inefficient fossil fuel subsidies is key for energy transitions. This might initially increase energy costs for some households, necessitating targeted support mechanisms for those in need.
However, by 2050, the NZE Scenario projects nearly 20% lower total consumer energy expenditure in these economies compared to the STEPS.
Who Bears the Upfront Costs of Fair and Affordable Transitions?
The distribution of upfront costs in energy transitions is a political question with diverse answers across countries. Currently, private companies, governments and state-owned enterprises, and households contribute to investments, with private and commercial sources providing the majority of financing. However, challenges exist for each actor.
Governments face fiscal constraints, large energy-intensive industries face international competition, and most household clean energy investments are made by higher-income households. Without policy interventions, household adoption of clean energy technologies will be slower than needed for rapid transitions.
Solutions Exist: Policy Examples for Clean Energy Access
Several countries have implemented successful policies to bring clean energy technologies to underserved households and communities. These policies include:
- Adapting grant programs for energy efficiency retrofits to target lower-income households.
- Shifting upfront costs from poorer households by obligating energy utilities to fund efficient systems or through leasing and pay-as-you-go schemes.
- Utilizing minimum energy performance standards and top-up financing to increase access to high-efficiency appliances.
- Promoting affordable clean transport options like public transport electrification and incentives for electric two- and three-wheelers.
- Replacing fossil fuel subsidies with targeted support for vulnerable households.
- Using carbon pricing revenues for social aspects of energy transitions.
Transitions and Energy-Related Revenue Flows
Energy transitions will lead to significant shifts in energy-related revenue flows, impacting governments, especially current producer economies. Taxes on energy production and use are substantial revenue sources for governments, primarily from oil.
However, in rapid transitions, declining fossil fuel revenues will be partly offset by increased carbon pricing revenue. Governments will need to explore alternative revenue sources without penalizing electricity use and manage distributional impacts.
This transition will also significantly affect oil and gas exporters, potentially straining their economies.
Energy Transitions, Price Shocks, and Preparedness
While energy transitions offer a path to cheaper energy, price shocks remain a possibility. Geopolitical tensions and extreme weather events can trigger volatility in both traditional fuel markets and clean energy supply chains. Investing in grid resilience and digital security is crucial.
Governments need to be prepared to respond to price shocks with targeted measures to protect vulnerable populations. The recent global energy crisis emphasized the need for well-designed, time-limited, and targeted support mechanisms.
Guidance for Fair and Affordable Clean Energy Transitions
- Inclusivity is key: Ensure all parts of society participate in and benefit from the transition to a clean energy system.
- Policy design matters: Fair distribution of costs and benefits requires intentional policy design, impact assessment, and ongoing evaluation.
- Leverage cost-competitive clean technologies: Many clean technologies are already cost-competitive, requiring wider availability and recognition of their lifetime benefits.
- Value the wider benefits: Consider the positive impacts of clean energy on air quality, housing, and health.
- Understand consumer needs: Tailor policies and programs to different segments of society, utilizing trusted intermediaries and simple procedures.
- Foster private sector investment: Encourage large-scale private investment and finance through strategic use of public funds.
- Minimize price shocks: Implement clear and well-sequenced policies, invest in infrastructure, flexibility, and demand-side measures to reduce market imbalances.
- Balance long-term goals with short-term risks: Maintain clarity on long-term objectives while addressing immediate threats to security and affordability through emergency preparedness, market monitoring, and resilience measures.
For more detailed insights, read the full report here.