Can emerging economies leapfrog the energy transition?

Around half of current total global carbon emissions are a result of electricity and heat production. At the same time, there are still more 860 million people across the globe that lack access to energy. As countries strive to grow their economies, how can we effectively and efficiently balance people’s need for access to reliable and affordable energy while ensuring that we continue to reduce global emissions?

As the signatory states of the Paris agreement seek to meet their emission-reduction targets, the integration of renewable energy sources will continue to increase; the nationally determined contributions (NDC) pledged at Paris have proven inadequate to meet climate goals, and the updated targets will require 3.3 times the current global capacity. A decarbonized grid in the near future seems very possible, especially with the falling costs of solar PV and wind energy, coupled with the rapid advancements in energy-storage technologies.

And as the spread of decentralized renewable energy sources increases, the role and responsibility of utility companies are also bound to transform in a myriad of ways; they could switch from being primarily distributors of energy to becoming energy aggregators, for example. With the introduction of Fourth Industrial Revolution technologies, we will be able to build smarter and more efficient grids. Smart meters coupled with IoT (Internet of Things) technology can assist grid balancing, demand-side management and load forecasting. Moreover, as the penetration and stability of smart grids increases, technologies like machine learning and artificial intelligence (AI) can further enhance the management and distribution of energy. The burgeoning electricity demand, especially in fast-growing developing countries like India and China, presents an opportunity to design new business and operational models that will leverage data to build the utilities of the future.

But how did this all start? In the aftermath of the Chernobyl disaster, a handful of citizens in the German town of Schönau launched an initiative against nuclear power and simultaneously spearheaded Germany’s earliest grassroots initiatives to cut energy consumption and grow renewable energy. The initiative that the Schönau “energy rebels” kickstarted in the 1980s went on to become the cornerstone for the historic switch from fossil fuels and nuclear power to sustainable energy in Germany, the “Energiewende” (energy transition).

While there is room for speculation on how successful Germany has been in implementing the energy transition, developing countries in the Global South have taken up the baton and have been enabling energy access through a range of innovative technologies and business models.

A little over a decade ago, this story began with a simple lamp. Kerosene and paraffin have long been the primary source of lighting in many rural and peri-urban off-grid homes across the globe. The toxicity of kerosene and its harmful side effects are today well-documented, but in the early 2000s there were very few alternatives to this volatile and dangerous chemical. Turning adversity into opportunity, social enterprises began designing solutions with the ambition to bring safe, bright, clean lighting and power to people around the globe.

They began with a basic consumer product - a solar lantern. These lamps have low upfront costs, need little maintenance, and do not pose the management problems typically associated with national grids. However, soon this single product wasn’t enough. Over the past decade, as more people have been able to access cleaner energy sources, more start-ups have emerged globally to design new solutions that can cater to rising demand and help people move up the energy ladder. Next came the relatively more expensive solar home systems (SHSs), which could generate more power, offer multiple light points and power a variety of appliances. Solar lanterns were now limiting and insufficient for some, and yet SHSs were too expensive. The solution was a financial innovation in the form of pay-as-you-go solar systems that operated on a lease-to-own model, leveraging micro-credit loans and mobile money to enable people to access this technology.

Over the past couple of years there has been a growing interest in mini-grids, which offer further increased capacity to support larger appliances and micro-enterprises at lower operational costs. Decentralized mini-grid companies have also innovated on the energy-as-a-service model by powering larger anchor businesses in order to help drive down the energy tariffs paid by people in the community.

Fossil fuels are geographically-concentrated resources and have historically been the core of geopolitical power for those countries that own, extract and market them. The present-day energy system thrives on scarcity and the concentration of power. Today, we stand on the brink of transitioning to an energy system of potential abundance. The World Economic Forum's 2019 Energy Transition Index provides a framework that has defined security and access, environmental sustainability and economic development and growth as the three pillars that can help foster the next energy transition.

The first energy transition focused on promoting renewable energy by requiring utilities to generate a small portion of their power from renewable sources. This is actively ongoing in some developing countries. Other countries, such as Denmark and Germany, have already begun the second transition, where a significant portion of their energy is from renewables. An increased renewables mix also results in large-scale intermittency, which necessitates frequent intervention to keep the grid in balance. The third transition focuses on decentralization, which simplifies energy management. This phase is likely to nudge the electricity supply industry from centralized infrastructures towards private businesses that leverage the shared economy to create more circular energy systems that build customized solutions for end users.

Larger developed economies have a different set of challenges. While they are enjoying the strong momentum of economic growth, they will need to cope with legacy systems and political leadership that can be resistant to change. Adopting renewables provides a larger degree of independence to developing nations, giving them the opportunity to leapfrog the previous energy transitions and jump straight to the third energy transition - just as they have leapfrogged in telecommunication terms by skipping landlines and jumping straight to cell phones.