ISLAMABAD: A report of the World Economic Forum (WEF), released on Wednesday, says electricity prices remain high across several regions, including advanced economies, emerging and developing Europe, the Middle East, North Africa and Pakistan.
To alleviate the effects of high electricity prices, many countries introduced legislation and measures such as the regulation of wholesale and retail prices, revenue caps on renewables, nuclear and coal plants, reduction in energy taxes, and energy subsidies, says the WEF’s report Fostering Effective Energy Transition 2023.
While these market interventions can help mitigate the effects of the energy crisis, minimising uncertainty in the investment landscape is required to ensure that these measures do not deter much-needed investment.
Estimates suggest that around 75 million people who gained access to electricity recently will likely lose the ability to pay for it, and 100 million people may go back to using traditional biomass for cooking.
Around 75m new consumers will likely lose the ability to pay for power
Global demand and prices for electricity and oil surpassed pre-pandemic levels in 2021 because of the strong correlation between economic growth and energy consumption. Natural gas prices also climbed to their highest in a decade in Europe, the United States and major Asian markets, owing to a combination of demand- and supply-side factors. These imbalances carried over to 2022 with energy prices sustaining record-high levels due to the Russia-Ukraine war.
As the global energy crisis persists, the surge in energy prices continues to fuel inflationary pressures that deter investments in countries already dealing with high-interest rates and greater volatility.
As a result, energy access investments dwindle while the affordability of energy services also becomes severely constrained, adding to concerns about the equity and justice of the energy transition.
The Energy Transition Index (ETI) trends further show that following an initial decline in the last few years, energy subsidies have been reintroduced rapidly and at much higher levels. Fossil fuel consumption subsidies worldwide soared in 2022; oil subsidies increased by approximately 85 per cent, and natural gas and electricity consumption subsidies more than doubled.
Even though these subsidies are meant to protect consumers from volatile energy prices, they create an additional burden on governments amid tightening fiscal space and spending pressures on other priorities and reduce incentives for consumers to adapt energy consumption to price levels.
In the face of persisting price pressures and crisis conditions, these measures require significant cumulative resources, which pose serious risks for the energy sector particularly in emerging and developing economies.
The risk now is a harmful subsidy race where advanced economies with greater fiscal power might emerge as winners, and emerging and developing economies with scarcer fiscal resources would find it difficult to compete with them for investments. This could also hinder the transfer of technology to these nations, ultimately raising the cost of the energy transition.
Trends from the ETI show that energy diversification is more advanced than electricity diversification, with progress being uneven; while the electricity mix is progressing, the energy mix remains stable. Some countries that have successfully diversified their energy and electricity mixes may now focus on improving quality and reliability and reducing energy costs.
Many countries in Sub-Saharan Africa and the Middle East, North Africa and Pakistan regions, however, may need to first address energy access challenges before tackling grid infrastructure improvements and subsequent diversification efforts.
Policies also have an important role in driving innovation and expansion and in shaping energy systems to accommodate new technologies.
The 2022 energy crisis incentivised renewable energy over gas in the medium term. More incentives may be needed to shift energy demand permanently towards clean energy and to accelerate electrification.
The Energy Transition Index of WEF says a majority of countries show progress, with developing nations taking centre stage in a shifting global landscape. Global average ETI scores increased by 10 per cent since 2014, but showed only marginal growth in the past three years. Only 18 per cent of countries in 2023 have balanced the imperatives of the energy triangle.
The scores for the Middle East and North Africa and Pakistan grew by 8 per cent in the last decade and have been flat for the past three years, where the heavy reliance on oil revenues continues to pose challenges on the path to a sustainable energy transition.
Even though subsidy scores improved by 200p — the maximum for any group — they plunged 33pc in the last year alone. This group needs to catch up on sustainable scores by reducing energy intensity and share of GHG emissions. Pakistan is placed 107th in the index out of 120 countries.
Published in Dawn, June 29th, 2023