5 key questions about energy

The plummeting price of oil has put energy back in the headlines, with analysts questioning everything from the viability of the American shale-oil project to the stability of the Russian economy. However, what goes down can also go up. We should be looking beyond the price movements of just a few months and taking a longer-term view of how we power the world.

Every country must sometimes choose between three objectives: energy security, affordability and environmental sustainability. For example, fuel mix choices include trade-offs among these dimensions, such as in Japan and other countries where reductions in nuclear energy have been mirrored by an increase in other fuels, with different characteristics and knock-on effects, such as rising costs of energy and greenhouse gas emissions. Likewise, there can be trade-offs between costs and energy security, such as when imported energy offers lower costs but poses a higher risk of supply disruption.

In every case, the trade-offs are different yet share common traits: investors will commit funds to long-term energy schemes only if they have confidence in a country’s planning ability. This depends on the credibility of institutions and wider public support for the national energy strategy, with citizens engaged in an informed debate and aware of the trade-offs.

As we take a global view of the experiences of individual countries, five key questions present themselves. In each case, the challenge is huge, but an optimistic view is justified.

1. Currently, around 1.3 billion people are living without access to modern energy. Can we connect them? While investors have the funds to support the infrastructure needed to bridge the energy divide, they will do so only if they have confidence in stable governance. Ghana’s political environment and institutional framework, compared with those of some of its neighbours, helps explain why the nation has achieved an electrification rate of 72% against an average of 41% for sub-Saharan Africa.
2. Can we use energy more efficiently, substantially reducing the ratio of energy to GDP? Switzerland ranks first of the 125 countries assessed for security, sustainability and affordability in the World Economic Forum’s newly published Energy Architecture Performance Index for 2015, because of its strong performance on several dimensions that characterize a robust energy system. Notably, this includes its performance on energy intensity: it produces $16.35 of GDP for each unit of energy used, compared with an average of $9.64 for advanced economies and $5.80 for the BRICS. Progress depends on existing energy-efficiency technology being rolled out around the world, and more countries achieving growth through less energy-intensive economic sectors.
3. Most of the world’s power still comes from burning carbon. Can we substantially decarbonize? The challenge here is to find ways of “internalizing negative externalities” – in other words, making the price of energy reflect its effect on pollution and climate change. Only through financial incentives can we hope to stimulate the necessary innovation. Norway was ahead of the curve in introducing a significant carbon tax in 1991, and now ranks second in the Forum’s energy index, due in part to its performance on environmental metrics.
4. Can we optimize resources by creating regional electricity grids? Cross-border oil and gas pipelines have existed for many years – the Nordic electricity market already has strong links to Europe – but resources can be optimized more efficiently by creating regional grids. This is especially true as renewable energy from intermittent sources such as solar and wind becomes more significant: the more geographically expansive the grid, the greater the potential to smooth over differences in local conditions. Germany has reached the point where these issues are arising. However, regional grids are conceivable only if investors have confidence in the stability of regional as well as national governance.
5. Can we keep the cost of energy low enough to sustain economic growth? One explanation for high energy prices in recent years is utilities writing off expensive infrastructure that had become obsolete earlier than expected. Notwithstanding the challenges now posed by lower oil prices, shale production in the United States is an example of successful development of resources due to new technology, existing gas infrastructure and a well-functioning gas-market framework. America’s need for imported oil has more than halved since 2005 and the relative price of gas has fallen by 10%, which partly explains why the country’s industrial production has improved relative to the European Union.

When it comes to the energy mix adopted by each country, decision-makers need to avert their gaze from fluctuating oil prices, and even from the tenures of individual ministers and CEOs. Only by engaging the public in the formulation of long-term policy frameworks can leaders guarantee better energy security and accelerate the much-needed transition to a low-carbon future.

The Global Energy Architecture Performance Index 2015 is released today.

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Author: Roberto Bocca, Senior Director, Head of Energy Industries, World Economic Forum

Image: A Massachusetts Water Resources Authority wind turbine turns in front of a 1951 megawatt fossil fuel power plant in Charlestown, Massachusetts September 18, 2013. REUTERS/Brian Snyder