Strategies for Affordable and Fair Clean Energy Transitions

Exploring affordable energy transitions

Setting the scene

  • Price spikes for natural gas and other fossil fuels during the global energy crisis in 2022 were a stark reminder of the importance of affordable energy. Consumers around the world spent USD 9.9 trillion on energy in 2022, which is nearly 20% more than the average over the previous five years. The fossil fuel price spikes affected lower-income households more than others.
  • The crisis has raised awareness of risks that could arise in energy transitions, in particular if poorer households, communities and countries are excluded from the clean energy economy because they cannot pay the upfront costs of the switch to a cleaner and more affordable energy system. The benefits of energy transitions need to be widely felt if the process is to secure social acceptance.
  • Cost reductions for clean energy technologies are making them an increasingly affordable choice, especially when lifetime costs are considered. Solar is the cheapest source of new generation; pairing it with storage adds costs but also brings value to power systems. In major markets, EVs – both cars and two-wheelers – are competitive with their fossil fuel counterparts, and heat pumps are increasingly competitive over their lifetime with gas boilers in key markets.
  • However, there are various barriers that hinder greater adoption of clean energy technologies, including upfront investment costs and a regulatory landscape that often favours carbon-intensive technologies, including via large fossil fuel subsidies. Clean energy projects in many emerging and developing countries face particular barriers, notably a high cost of capital. For the moment, 85% of clean energy investment currently takes place in advanced economies and in China. Limiting the rise in global average temperatures to 1.5 °C requires a sixfold rise in clean energy investment in emerging and developing economies outside China by 2035.
  • Capital investment is only one part of the picture. Running today’s energy system – including paying off investments and financing costs, and operating expenditure – costs over USD 7 trillion annually. These energy delivery costs rise in all scenarios to deliver energy services to a larger global economy and population, but costs are lower in the NZE Scenario than in the STEPS.
  • Overall, our analysis finds that clean energy transitions deliver a lower-cost and more affordable energy system over time. However, in addition to the investments required, they also involve major reallocations in today’s energy-related capital flows away from fossil fuel producers, and they have distributional implications within countries as well. The changes involved have to be managed as fairly as possible.
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