Energy transition: Here's why the race to net zero is affordable

The relationship between the cornerstones of the energy trilemma – sustainability, affordability and security – have become strained since Russia’s invasion of Ukraine, with governments becoming increasingly preoccupied with energy independence and affordability.

One year on from UN Secretary-General António Guterres’ warning that the IPCC Working Group 1 report was “code red for humanity”, sustainability can feel like a remote corner of the trilemma given the current shocks to the energy system.

But as we approach COP27, it is important to understand that one of the defining features of the ongoing energy transition is its affordability and achieving net zero carbon emissions is not prohibitively expensive. Green and growing electricity, being the hero of the energy transition, being the main reason.

Since the Industrial Revolution, energy demand, cost and emissions have moved in lockstep with GDP growth.

However, as the world electrifies and societies reap the benefit of the associated energy efficiency improvements, energy demand – along with emissions and cost – will slow whilst global economic growth continues. This historic decoupling means that just 2.1% of global GDP will be spent on energy in 2050 compared to 3.4% today.

The dramatic actions required to limit global warming to 1.5°C by mid-century – including the rapid phasing out of fossil fuels, scaling of clean hydrogen and faster decarbonization by all countries and industries – are not expensive compared to today’s global energy bill.

Even though we will see higher upfront costs of additional renewable installation, premature retirement of fossil plants and large investments in carbon capture and removal, the conclusion is robust that, at comparable metrics, we will still spend a much lower share of GDP on energy than we are today. Factoring in the cost of climate change would make the difference even larger, which would increase year by year.

Even as the consequences of a warming planet become increasingly obvious, it is trite to say that the race to net zero is affordable given governments are spending piles of cash to shield households from soaring energy prices, and many people are accessing community “warm places” as temperatures drop. So, the question is: affordable to whom?

Several social movements such as the gilets jaunes have shown that the acceptability of the transition is far from automatic. Expenditures are not market prices paid by the consumer, which include margins, taxes and/or subsidies.

The gap is especially visible in the current context of high energy prices, with energy producers making exceptional profits while their production costs are not increasing.

Finding a compromise that works for governments, business and consumers is only solvable with the right policy framework.

The transition requires important investments, both from governments (energy infrastructure), industries (new production plants) and individuals (buildings insulation, electric cars, heat pumps).

Although these investments will be profitable over the long-term, upfront costs and lack of visibility on the future regulations and economic situation can favour the status quo.

Again, this is only solvable with policy.

There is a tension between short-term pain and long-term benefits. To take Europe as an example, households will see their energy expenditure rising sharply until the energy supply shocks are alleviated, say around 2025.

By the late 2020s, household energy expenditures in Europe will be around the same levels as in 2021, in nominal terms. The subsequent decades will see stabilization of household energy expenditure at levels 10% less on average than in 2021, and gradually declining to 30% less by mid-century.

In India, increasing electrification, especially residential air-conditioners, and higher household energy consumption, will see its household energy expenditure gradually increasing to 30% above the 2021 level by mid-century. Over the same timeframe, average GDP per capita will more than triple across the Indian Subcontinent.

Corralling political blocs and disparate industries to move in the same direction requires a cohesion of policy which has not been present since the 1990s, when the COP conferences started.

But if heads of state can recognize that transitioning to green energy quicker is affordable and comes with a green prize rather than an overwhelming financial burden, meaningful change will be possible.

All research referenced above is taken from the sixth edition of DNV’s Energy Transition Outlook