Energy Transition Hurdles

By Sarthak Sharma

Energy is a critical foundation for attaining economic security and improving living standards for any nation. Advanced economies use energy supplies to maintain a quality of life they have grown accustomed to, secure strategic and national interests, and explore energy alternatives as part of their “transition” to a decarbonized society. The energy needs of low- and middle-income countries (LMICs) prioritize achieving primary development objectives and economic necessities, such as reliable access to electricity or industrialization opportunities. However, amidst the growing need for affordable and reliable energy, the ongoing climate crisis complicates the development process. The world cannot address collective challenges if low-income countries are left behind and their economic ambitions are not realized. Yet, current energy and development policies do not always reflect these hurdles. There is a need to rethink how development and capacity-building assistance are framed for LMICs in the energy domain, especially as current initiatives may fail to comprehend immense energy gaps and differences in transition stages.

Energy Transition: Not a Distinct Step but An Ongoing Process

Energy transition refers to the global energy sector’s transformation from fossil-based energy production and consumption to a zero-carbon energy system. Economic factors, political will, and technological innovation have allowed the energy transition to be underway. For example, global renewable energy investments have skyrocketed from less than $50 billion in 2004 to approximately $300 billion in recent years. In Organization for Economic Cooperation and Development (OECD) countries, coal consumption peaked in 2007 and has declined at an annual rate of 2.8 percent from 2010 to 2020. Additionally, digital technologies and energy efficiency solutions are facilitating decarbonization in the power sector by limiting production and distribution losses while increasing grid flexibility to allow for new electricity generation sources, particularly renewables.

However, when it comes to many LMICs, the energy transition picture is different. By 2050, energy demand in developing economies is estimated to grow by two-thirds – nearly twice that of OECD demand. These countries often turn to coal for power generation to meet their rapidly growing electricity needs. In addition to the rapid rise in electricity demand, recent economic and geopolitical factors have driven up energy prices and made energy transition challenges more acute. For example, the post-covid economic boom, supply chain issues, and events like the Russian invasion of Ukraine have forced countries to reassess their energy investment portfolio. The Covid-19 pandemic has significantly impacted the world’s poor, with the global poverty rate increasing from 7.8 to 9.1 percent in 2021. This is particularly true for low-income economies, where progress in poverty-related measures has been set back by eight to nine years. These issues will force LMICs to reconsider their development priorities toward economic and energy security, impacting climate change mitigation efforts

The energy transition is not a clear-cut step but an ongoing process. Although it is already underway, it is accompanied by a state of vulnerability and uncertainty as countries juggle between the threat of climate change and the drive to break the poverty barrier to achieve decent living standards. Expecting LMICs to jump to a “clean transition” phase before obtaining basic development needs is largely unfeasible. Without the support and collaboration of advanced economies, low-income countries will be slow to shift to clean energy sources. These nations will continue to prioritize convenience, affordability, and reliability to reach a quality of life enjoyed by the industrialized world, which has powered its economic growth and achieved prosperity using hydrocarbons.

Energy Realities Impeding with Climate Goals

The Paris Agreement established a goal to limit average global temperature rise to below 2 degrees Celsius. As part of the agreement, participating countries prepare and communicate a nationally determined contribution (NDC), a foundation for establishing a national climate action plan to meet climate goals. As of October 2021, 70 percent of Paris Agreement signatories have submitted new or updated NDCs, and the number of countries continues to grow. Many LMICs are adopting greenhouse gas (GHG) emissions reduction targets. For example, Ethiopia recognizes the threat climate change poses, including to its economic development, and engages its entire government to strengthen its NDC. Many low- and middle-income countries view clean energy sources as part of their industrialization process as it provides opportunities to generate employment, reduce energy imports, and offer technological capabilities and energy diversity.

Nonetheless, these targets and goals do not always reflect the energy realities many LMICs face. In most growing economies, emissions are rising while clean energy investments are not keeping up. There is little evidence these countries are reducing coal consumption as their energy demand increases because of urbanization, industrialization, and economic and population growth. Coal remains a cheap addition to electricity grids for countries that require reliable baseload power and have limited capacity to deal with the intermittency of renewables. The pervasiveness of and dependence on fossil energy make decarbonization challenging in the power sector and hard-to-decarbonize heavy industries (i.e., steel, cement, plastics, and ammonia). Although new processes and generation capabilities will expand to support the energy transition, limited options could be deployed immediately to displace existing global capacities that sustain critical industries. The challenge for LMICs is more significant as they work towards increasing energy capacity and utilizing materials produced from hard-to-decarbonize sectors to support economic activity.

Conclusion and Recommendations: Framing Development Assistance for Energy

According to J.P. Morgan’s annual energy outlook report, the world needs $1.3 trillion in incremental investment by 2030 in energy output and infrastructure, with demand mainly coming from emerging markets in their efforts to develop and reduce poverty. The report highlights that energy demand growth will exceed supply growth and that new energy investments must include all power generation sources, including renewables, nuclear, oil, and natural gas. It also mentions that current energy sources are transitional to “safer, cleaner, and cheaper” alternatives. Estimates indicate that $131 trillion is required to achieve carbon neutrality by 2050, and LMICs lack access to financing and technologies for an energy shift of this scale.

First, foreign assistance and capacity-building projects must reflect the proliferating energy demand, economic discrepancies, and the need for exorbitant funding to support a transition that does not thwart the development ambitions of LMICs. Many of these countries face financial concerns that disincentivize clean energy investment, such as high debt and equity costs, depleted public finances, currency instability, and weak local banking and capital markets. However, development finance institutions (DFIs), national governments, and the private sector can prioritize efforts toward replicating successful initiatives “across clean power, efficiency and electrification, as well as transitions for fuels and emissions-intensive sectors” from economies where financial systems are often dysfunctional. The World Bank expresses support for countries seeking to move to low-carbon energy sources and energy-efficient systems. These institutions and government assistance programs must further expand investments covering “transmission infrastructure, smart grids, data management systems, storage capacity, electric vehicles, clean cooking, and distributed energy systems.” LMICs need the financial and technical support of advanced economies and multilateral institutions to have any chance of transitioning to low-carbon energy systems.

Second, governments and policymakers must realize that different energy sources are not entirely fungible. For some low-income countries, renewables provide an avenue to reduce energy imports and are a highly convenient and carbon-free source of cheap indigenous energy. However, renewables cannot completely replace fossil fuels, especially in hard-to-decarbonize industries like steel, cement, plastics, and ammonia, which require energy-intensive activities and chemical processes that could only be facilitated by hydrocarbons. Moreover, renewables suffer from intermittency and reliability issues unless a robust battery storage infrastructure is established. LMICs, which are working toward developing reliability in their grids, require cheap, readily available, and baseload power. Many policymakers in Western nations are failing to realize this need. In 2021, the United States and several European countries implemented a blanket ban on fossil-fuel financing. This policy will do little to reduce emissions and worsen energy scarcity in countries that desperately need funding for energy infrastructure. Development assistance must be adaptable and accommodating to these inconsistencies in energy requirements. This means understanding the economic makeup, climate and regional variations, and strategic and economic value of different energy sources suited for specific countries. 

Third, the U.S. and other advanced like-minded nations must work toward establishing an industrial base that facilitates the expansion of diverse low-carbon energy sources and technologies for LMICs. For example, exporting small modular nuclear reactors (SMRs) can significantly benefit growing economies. Unlike traditional nuclear power facilities, SMRs offer shorter build times, deployment flexibility, simplified design, lower capital requirements, high capacity factors, and suitability for countries with limited grid capacity. Clean hydrogen, which has no carbon emissions if produced using clean energy sources, could support the decarbonization of heavy industries by replacing fossil fuels and powering energy-intensive processes.

Additionally, carbon capture and storage technologies must be prioritized. Coal is still a vital fuel for low-income states, with non-OECD countries accounting for 80 percent of the coal consumption in 2019. Natural gas is expected to play a considerable role in the global energy sector for years to come. The export of carbon capture and storage capabilities benefit LMICs that cannot wean off fossil energy. Advanced economies are better positioned to develop these technologies and offer them in assistance packages. The Build Back Better World (B3W) Initiative aims to mobilize G7 partners and multilateral tools to fulfill the infrastructure needs of LMICs in accordance with the goals of the Paris Climate Agreement. It provides a solid foundation to enable the transfer of energy alternatives, promotes energy diversity, and improves economic and technological partnerships with LMICs.

Nigerian Vice President Yemi Osinbajo accurately wrote, “…different countries will follow different paths in the energy transition.” At the same time, efforts toward global energy transition will be insufficient without aligning the interests of advanced and low-income economies. Solutions for an equitable transition necessitate “pragmatism, political will, and an inclusive global approach with concrete mechanisms and real financial incentives.” LMICs need financial and technical support from industrialized countries and various multilateral tools to substantially impact climate and development goals. Recognizing energy and economic complexities and adapting to them is critical in framing an effective development assistance policy in the energy domain.

Sarthak Sharma was a previous intern with the Project on Prosperity and Development.