Strategies for Affordable and Fair Clean Energy Transitions

Price shocks and affordability

Preparing for the unexpected

  • This chapter addresses risks to affordability from sudden shocks to the energy system, considers how the causes of such price shocks might evolve as the world moves through energy transitions, and asks what lessons on policy responses can be drawn from the recent global energy crisis.
  • Energy history has been marked by sporadic oil price shocks. Since 1973 there have been 13 episodes of sharp or sustained oil price rises, with their incidence increasing slightly since 2000. Rapid demand growth, disruptions to supply or geopolitical events can quickly lead to price escalation if spare capacity is thin.
  • European gas markets have been considerably more volatile than oil markets over the last ten years. High transportation costs mean that global gas markets are more regionally fragmented than in the case of oil, even if they are increasingly linked by LNG. As recent years have shown, gas markets are prone to geopolitical disruption. They are also sensitive to weather and closely tied to electricity markets.
  • The transition to a more electrified, efficient, renewables-rich energy system will reduce overall exposure to fossil fuel price volatility. Risks remain, however, and will increasingly fall on emerging and developing economies, which are set to account for a higher share of global oil and gas use. Lower revenues for major producers meanwhile increase the possibility of geopolitical instability affecting supply.
  • The transformation of the power sector brings multiple benefits, but there are risks if the process of change is poorly sequenced, especially if investments in grids, flexibility, demand response and resilience fall behind. Many power systems are vulnerable to an increase in extreme weather events and cyberattacks.
  • Pressures on clean energy supply chains could push up inflation and the overall cost of transitions. Mineral prices are falling, but if they had remained at the high levels seen in 2022, EV battery pack costs in 2023 would have been 13% higher. The risk of future spikes points to the need for action to build diverse, resilient supply chains.
  • During the recent global energy crisis, governments spent USD 900 billion to help consumers manage sky-high energy prices. Three-quarters of this support consisted of retail price interventions benefiting all consumers that, while quick to administer, were an inefficient and costly way to protect the vulnerable, and that also muted or distorted demand responses.
  • Alongside measures to promote orderly transitions, governments need to increase their readiness for future price shocks by designing emergency support mechanisms that can be time-limited and targeted towards consumers that most need assistance, and by stepping up investments in climate and cyber resilience.