Climate and Energy Outlook: Policy challenges and choices that will shape our common future

Now that the preparatory negotiations for the UN Paris conference are entering their final stages, attention is turning to financing the low-carbon transition without imposing unnecessary costs on private and business consumers and without endangering different countries’ energy security. The International Energy Agency has put the world’s total energy supply and energy efficiency investment needs by 2035 at a massive $53tn if the 2oC climate change target is to be met, a third of that amount needed to finance the development of low-carbon technologies. Yet so far there are few signs that today’s policies and market signals will make the existing energy investment trends more sustainable with the necessary speed and scale. Will the new global climate agreement force businesses to shift their investment decisions? What is the outlook for the fossil fuel divestment movement and would it necessarily lead to increased investment in clean energy? Which policies, ranging from emissions trading to taxation or subsidising energy sources, have proved most effective in leveraging private sector low-carbon investment? What innovative financing mechanisms and business models, such as green bonds or yieldcos, could help tap new sources of capital? How can industrialised countries work with less developed ones to embrace sustainable growth and shift away from the most carbon-intensive energy sources? And how should the new Paris agreement be to allay competitiveness concerns, should it aim for truly international solutions, like the linking of carbon markets or a global carbon tax?

The ongoing shifts in geostrategic power balances, successive revolutions in energy supply-and-demand, and volatile energy prices that are turning energy markets into casinos, are making the future course of energy markets hard to predict. But whatever the future holds, technological advances in the energy sector, combined with the political momentum for climate change, are certain to shake up the energy landscape as we know it today. What policies and which countries will drive global innovation in the energy sector, and where will Europe fit into this race? What new and unsuspected business actors could emerge, perhaps to take the lead? What disruptive technologies are likely to have the greatest impact on the world energy picture, and what elements will alter the competitive environment over the next 15 years? With electricity storage and battery technologies widely seen as imminent game-changers, what breakthroughs should be expected in the power and transport sectors? How different will the global energy mix be in 2030, and where will gas, oil and coal fit into the low-carbon future that is becoming a global goal? What are the unintended but potentially adverse consequences that switching to renewable energy sources and ’green’ technologies might bring; can it lead to a new minerals import dependency trap? And how could the current deadlocks barring the way to greater energy efficiency be overcome?

Europe’s electricity sector urgently needs to be redesigned. The EU’s self-imposed deadline for completing the internal energy market expired last year, leaving Europe still with 28 electricity markets that are fragmented by divergent national energy policies, not properly connected to their neighbours and hit by weak competition. Consumers have too little control over their energy use, and Europe’s energy infrastructure, meanwhile, is ageing and has not been adequately adapted to the low-carbon transition. Mismatches between power shortages and oversupply, together with continuing regulatory uncertainties, mean there has been an EU-wide standstill in vitally important energy investment. What reforms are now needed to fix these problems and why are the policies that could provide the right price signals to encourage the necessary investment still lacking? What new market design would enable the integration of low-carbon generation technologies? How should policymakers secure generation adequacy while ensuring that markets and fair competition are not distorted and that heavier financial burdens aren’t placed on consumers? Is there a need for capacity mechanisms, or can security of supply be reached through cross-border interconnectivity, trading arrangements and storage capacity? How best can the EU’s 15% interconnection target be met and will it end up with ‘energy islands’? How can consumers be empowered to manage their energy use? Where is the EU’s Energy Union now heading, and how can it be used to encourage a greater coordination of national energy strategies?