Growing uncertainties complicate the energy transition trajectory, underscoring the need for adaptive and decisive action.

Recent years have witnessed an increase in global uncertainties, driven by economic, political and technological shifts, adding complexity to the environment in which countries operate and their energy transition trajectory (Figure 1).

Geopolitical tensions pose risks to energy security and hinder international cooperation. Ongoing conflicts in the Middle East risk exacerbating volatility in oil markets, potentially resulting in an oil price spike. Despite a moderation in energy prices, regional disparities persist, constraining economic growth, imposing financial burdens on households and businesses, and hindering efforts to enhance electricity access.⁶ This situation could have been much worse if not for the mild weather conditions globally. However, there have been instances of accelerated change, notably in Europe, where there has been a rapid reduction in dependence on Russian natural gas and significant improvements in energy efficiency. Global investments in efficiency increased by 45% since 2020, with countries representing three-quarters of global energy demand strengthening energy efficiency policies or implementing new ones in the past year.⁷

The disruptions caused by the COVID-19 pandemic and the Russia-Ukraine war led to a global energy crisis and a surge in inflation and interest rates during 2022 and 2023. This created a cost-of-living crisis in many countries, raising concerns across industries and economies, especially those in developing countries with dollar-denominated debt and imports. Headline inflation has since slowed down due to tighter monetary policy in G7 nations, with the International Monetary Fund (IMF) projecting a rate of 5.8% for 2024 (down from 6.9% and 8.7% in 2023 and 2022, respectively).⁸ However, persistently high interest rates and capital costs remain significant obstacles in the energy transition, particularly for emerging and developing economies. This directly impacts the ability of firms and countries to finance the upfront investments to meet energy demand and decarbonize the
energy system. Despite lower operational costs, capital-intensive clean energy solutions remain disproportionately affected due to high upfront capital investment requirements.⁹

In 2023, clean energy sources faced challenges, including uncertainties in subsidies and supply chains, coupled with high interest rates and significant cost increases. These factors reduced returns for developers, deterring much-needed investments in projects. The cancellation of major offshore wind projects in the United States (US) resulted in a temporary slowdown in the wind industry.¹⁰ In parallel, global coal demand saw a 1.4% increase in 2023. However, despite these setbacks, global additions to renewable energy capacity surged by 50% compared to 2022.¹¹ This uptick was partly due to supportive policies such as the revision of the European Commission’s Renewable Energy Directive which introduced “fast-tracking” of permitting procedures to accelerate the deployment of renewables and grids. Falling prices for renewables and rising electricity prices from fossil fuels further boosted the financial attractiveness of renewable energy.¹²

Trade patterns in the energy sector have shifted significantly as governments focus on enhancing supply chain resilience and strengthening energy security. This shift has coincided with accelerated momentum towards cleaner energy sources, including the rapid expansion of renewable power capacity and increased adoption of technologies such as electric vehicles (EVs) and heat pumps, driven partly by supportive government policies.¹³ Despite these positive trends, growing trade protectionism and costs create headwinds, especially for developing nations. United Nations Conference on Trade and Development (UNCTAD) data indicates a $1 trillion contraction in global trade in 2023, largely due to reduced demand in developed countries and decreased trade within East Asia and Latin America.¹⁴ Geopolitical tensions have continued to impact bilateral trade flows, evidenced by shifts such as the European Union (EU) reducing its trade dependence on Russia and decreasing trade interdependence between China and the US. However, certain industries, such as motor vehicles, saw growth in trade value, driven by growing demand for EVs.¹⁵ This, coupled with an improved global economic outlook, could bolster trade resilience in the coming year. Uncertainties remain regarding geopolitical tensions and potential future disruptions to global supply chains,¹⁶ underscoring the need for adaptive strategies.

Innovation and technology ecosystems experienced significant volatility. A Crunchbase article states that “total global start-up investment in 2023 plummeted to $285 billion, marking a 38% decline year over year from the $462 billion invested in 2022”.¹⁷ These challenges prompted cost-cutting measures, a focus on profitability and a rise in tech layoffs. Investors responded by exercising greater caution, deploying capital more selectively and raising standards for investment at each stage.¹⁸ Despite overall downturns, BloombergNEF found that “global investments in the energy transition hit a record $1.8 trillion in 2023, climbing 17% from a year earlier”. Most of this investment was in electrified transport, with China as the largest market, accounting for over one-third of the total investment, followed by Europe and the US.¹⁹ The artificial intelligence (AI) sector was one of the few that saw growth, with global funding to start-ups reaching nearly $50 billion.²⁰ While AI and generative AI integration require substantial adaptation and investment, it also offers opportunities and value for industry (estimated at $0.3-0.5 trillion annually)²¹ and the energy transition. Yet, increased uptake of generative AI may lead to a rapid surge in demand and power consumption from data centres, creating competition for available electric power and requiring additional capacity increases, which must be balanced by gaps in innovation and opportunity.

While global clean energy investment has surged by 40% since 2020, this recent growth has primarily been concentrated in advanced economies and China. In contrast, other emerging and developing economies received less than 15% of the total investment despite accounting for 65% of the world’s population and generating about a third of global gross domestic product (GDP).²² This disparity highlights a concerning trend in financing the energy transition in emerging and developing economies. To align with efforts to limit global warming to 1.5°C, “clean energy investment in these economies outside China must increase more than six-fold, from $270 billion currently to $1.6 trillion by the early 2030s”.²³ This investment should prioritize utility-scale solar and wind projects, enhancing electricity networks, and spending on energy-efficient building designs and appliances.²⁴

Key energy targets were announced at 28th Conference of the Parties (COP28). These include the “Global Renewables and Energy Efficiency Pledge”, which calls for tripling the rate of renewables capacity and doubling the rate of energy efficiency by 2030. Another goal is to transition away from fossil fuels in energy systems in a just, orderly and equitable manner, to achieve net zero by 2050 and limit global warming to 1.5oC.²⁵ These targets provide additional clarity on the direction of the energy transition journey, despite uncertain implementation pathways. Achieving these targets requires reforms and investments in the energy system. While governments have initiated targeted measures, more decisive action is needed. The importance of tailored policy approaches aligned with local priorities and challenges is increasingly evident. These pathways can accelerate the transition by directing resources to areas with the greatest impact, thereby facilitating a smoother and more effective transition process.

In a landscape marked by complexities and uncertainties, the path forward remains clear: now is the time for all stakeholders across the value chain, spanning supply, demand and distribution, and including both public and private sectors, to take decisive action. This means ramping up efforts to transform their energy systems by implementing innovative solutions, mobilizing investment and driving bold policy reforms. By harnessing the momentum of the energy transition, stakeholders can chart the course towards an equitable, secure and sustainable energy future.

Figure 1: Volatile period in the energy transition, 2020-2023