Are we on the edge of a global energy transformation?

The world has never been closer to achieving the dream of a more sustainable and secure energy future. Renewable energy from the wind and sun is becoming competitive with fossil-fuel-based power generation, and oil prices are hitting lows not seen for years. These developments put us at the edge of a global energy transformation – as long as we get the next steps right.

Countries are already seizing the moment. With the oil-price drop that started in mid-2014, the first priority became clear: reform fossil-fuel subsidies before prices go back up. These subsidies have sapped government budgets, encouraged wasteful energy use, and increased pollution and carbon-dioxide emissions. India has lifted controls on the price of diesel. Indonesia has moved away from gasoline subsidies. Others are following suit. Money saved from ending subsidies can be better used to create safety nets that protect the poor when energy prices rise.

But phasing out fossil-fuel subsidies, while critical, is only a first step in the right direction. By taking advantage of new technologies, now widely available at affordable prices, countries can finally move toward long-term energy security and away from the inherent volatility of oil markets.

For low-income countries, this means reducing the use of imported oil to produce electricity. Kenya, for example, depends on heavy fuel oil and diesel for 21% of its electricity; the comparable figure in Senegal is a whopping 85%; and some island states use imported diesel for all of their electricity needs.

For some countries, this is currently the only viable option, but over the long run this dependence can mean higher energy costs and vulnerability to price volatility and supply shocks. With the right policies and international support, these countries can invest in the infrastructure needed to achieve a more diversified energy mix.

For many countries, the next step will be preparing electricity grids to integrate high levels of variable renewable energy like solar and wind. Thanks to the drop in the cost of solar panels and wind turbines, both are expanding at a faster pace than ever expected. According to a new World Bank report, as of 2014, 144 countries had established national plans to expand renewable energy, and almost 100 had set specific targets and incentives. In just seven years, from 2006 to 2013, the world’s installed capacity for wind power quadrupled, while use of photovoltaic systems grew almost 20-fold. And all signs indicate that the pace of adoption is accelerating.

Old concerns about integrating wind and solar into traditional electricity systems are dropping away. In Mexico, ambitious and frequently remote renewable-energy projects – hydropower, solar, and wind – are being connected to the grid. China, which has the world’s largest installed capacity for renewable energy, is studying the requirements and costs of upgrading the grid to bring in higher levels of distributed solar power.

As the World Bank report shows, with the right investments and policies, countries can now meet a large share of their electricity needs from variable renewable energy without compromising the reliability of the grid or the affordability of electricity. These investments include energy storage, improved forecasting systems, and smart grids – all of which have benefited from breakthroughs in technology and falling prices.

Perhaps most important, energy markets must be opened to new players. For poorer rural areas, this means creating a fertile environment for entrepreneurs and small power producers to develop mini-grids – generally powered by solar, small hydro, or solar-diesel hybrids – that can bring electricity to communities that would otherwise wait for years for grid connections. In Tanzania, small power producers are now able to sell to customers without going through a lengthy licensing process. In India, remote cellular towers, which would otherwise have to be powered by diesel generators, are serving as “anchor customers” for new mini-grids.

National power utilities must become nimble – willing to work with independent and individual power producers – and enable smart grids that can better manage supply and demand. This is a challenge even for high-income countries such as Germany and the United States, where some utilities are seeing their business upended as consumers sell power back into the grid. Here, developing countries, with less invested in traditional business models and facing an urgent need for power supplies, may be able to leapfrog the advanced countries, just as they have with mobile phones.

The terms “sustainable energy” and “renewable energy” are often used interchangeably. But perhaps a broader definition is needed. Truly sustainable energy is not only clean, with a minimal impact on pollution and CO2 emissions. It is also affordable for governments and citizens alike; it is reliable, drawing on sources upon which we can depend for decades to come; and it contributes to shared prosperity, by bringing services and benefits to all members of society.
Thanks to lower oil prices, innovation, and economies of scale in the renewable-energy sector, that vision can now be turned into reality.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Anita George is Senior Director of the World Bank’s Energy and Extractives Global Practice.