The new energy architecture

The ability for countries to provide affordable, secure and sustainable energy supply is key to their development.

When Roberto Bocca, Head of Energy Industries at the World Economic Forum, asked energy industry CEOs, policymakers and members of academia at Davos in 2011 what they thought about the current global energy situation, 90 percent said that the energy systems were undergoing fundamental changes. Following the session, the Energy Industries team at the World Economic Forum decided to delve deeper and, in collaboration with Accenture, launched the new energy architecture initiative. An outcome of the initiative is the New Energy Architecture framework and the 2014 global Energy Architecture Performance Index (EAPI) report. We caught up with Bocca recently to learn more about the findings.

Why is coming up with the Energy Architecture Performance Index so critical for the world and for the future of the energy system?

It is clear that pace, scale and complexity of the changes taking place across the energy sector are significantly different from those of the past, posing a new set of challenges and opportunities for governments and stakeholders. These changing dynamics are putting increased pressure on countries and companies to understand, adapt and respond to sometimes opposing dynamics such as rising energy demand, rising energy prices and climate change. The push for structural, wider-ranging change in our energy systems is undeniable. The energy paradigm has shifted from one with limited choices based around few energy sources to a broad range of sources, each with individual trade-offs and potential. Furthermore, climate change pressures are expanding energy-related technologies, pushing forward both supply and demand-side management solutions to improve efficient, considerate use of energy.

The complexity of these factors, coupled with the increased pace of change, is creating a need to continuously update knowledge on emerging energy issues for all stakeholders to enable the energy debate to take place, and for appropriate decisions to be made. One example is the recent experience with the US shale gas revolution, which over the past five years has had a significant effect on the energy debate in the United States and globally. As the trend for unconventional developments in the United States continues, it will be crucial to have a common understanding of the opportunities and trade-offs this presents.

In developing the EAPI, we wanted to better understand how a country’s energy system promotes economic development and growth, impacts the environment and ensures energy access and security—what we call the “energy triangle.” Using strategic tools such as this index can help governments and others along the energy value chain to identify and prioritize areas for improvement for the future of the energy systems.

What does the index look at?

The index assesses 124 countries according to how their energy systems support economic growth, how environmentally sustainability the energy system is and how the country performs in energy security and access. Our published report uses the index to analyze the complex trade-offs and dependencies that countries face in transitioning to a more balanced energy architecture. The report identifies the best-performing countries and regions to extract common patterns in the leading practices of those countries, highlighting how best-in-class enabling environments have already helped some high-ranking countries begin transitions to more balanced energy architectures.

Based on the country-level data, we were able to carry out regional analysis to identify common challenges and opportunities across clusters of countries defined by similar geographic and economic constraints.

What were some of the key findings of the report?

In looking at the top performers, we find that there is no single pathway to achieving a balanced energy system. That being said, the results do underline the bearing economic development has over performance. This year, Norway tops the rankings. In addition, all of the top 10 performing countries are European Union and/or Organisation for Economic Co-operation and Development (OECD) economies, with the exception of Costa Rica and Colombia. We also found that 41 percent of energy supply in the top 10 countries comes from low carbon energy sources. For comparison, the global average is 28 percent.

Norway’s success in this year’s rankings comes mainly from its vast natural resource endowment and focus on developing renewable, sustainable energy. Europe’s dominance on the leaderboard is in part due to concerted regional action on environmental sustainability and better energy efficiency across the value chain. High electrification rates, excellent quality of supply also work in Europe's favor compared to global counterparts. While import dependence and spend are still challenges in the region, the EU’s environmental agenda is also working to address these concerns through demand management solutions and deployment of renewable energy sources.

In some regions, we find that more basic work is still needed to improve performance on the index. The lowest scorers face challenges around energy access, efficiency and sustainability, and tend to be located in Sub-Saharan Africa, developing countries in Asia or the highly resource-endowed countries of the Middle East.

How can countries use the index’s rankings?

Plotting a course for transition to a new energy architecture means developing a long-term strategy that takes into account the trade-offs and complementarities surrounding the core imperatives of every energy system: managing risks to energy supplies while ensuring a country’s economic, social and environmental well-being.

Governments and stakeholders across the energy sector can use the index as they look to understand what the shift to a new energy architecture means for their operations and strategy. As countries continue to deal with the challenges within the energy triangle or “trilemma,” we believe the index will prove a useful addition to the global dialogue on the transition to a new energy architecture and a practical tool for energy decision makers.

The index shows how some high-ranking countries have already begun their transition to better performing energy systems by focusing on all three sides of the energy triangle. The report also highlights where new opportunities lie to better adapt and create vibrant energy systems at the local, national and regional level to speed up and make the transition to a better-performing global energy architecture more efficient.

What are the most important aspects of the index that countries need to be aware of as they move forward?

Rich, high gross-domestic-product-per-capita countries are more likely to be able to score well against one or more objectives of the energy triangle. These types of countries have the economic flexibility to engage in concerted action on environmental sustainability and the adoption of more efficient, cleaner technologies involving upgrading legacy infrastructure and incorporating renewables into the energy mix. However, resource wealth or economic development alone does not guarantee a high ranking. For an effective energy system, countries need to focus on all three sides of the energy triangle.

For developing countries, the report finds that many still struggle to supply the majority of its people with basic energy access. For example, the average electrification rate for assessed countries in sub-Saharan Africa in 39 percent, compared with about 100 percent in OECD economies. It also highlights the overdependence of many energy systems—with more than 30 percent of countries dependent on imports to meet more than half of their energy needs. While energy trade can have a positive impact for importing and exporting countries, it also can pose some economic and energy security risks when trade is not diversified or spread across numerous partners.

Receiving a high ranking today is important, and shows progress being made in addressing the challenges facing the evolving energy systems. However, more needs to be done by all countries—even the top ones—to improve and respond to the energy needs of the 21st century. In this year’s EAPI, no country scores perfectly or achieves a top score against any dimension of the energy triangle. While some countries score relatively highly in select areas and balance the requirements of the energy triangle, no country has managed to do all that can and should be done.

This is especially true of the scores in the environmental sustainability basket. For high-income economies with the highest impact energy sectors, performance against this imperative of the energy triangle is far lower than the other two. For example, while the United States and Canada perform well in the area of energy security, they face increasing pressure to improve environmental sustainability. Both receive their lowest scores across the energy triangle in this area: the United States is still negatively impacted by the predominance of coal in power generation and emissions from the transportation sector; conversely, Canada’s score is impacted by the high per capita emission intensity.

What do countries need to do to transition to a new energy architecture?

This won’t be an easy or quick transition. The imperatives of the energy triangle of security, affordability and sustainability may reinforce or act in tension with one another, requiring difficult trade-offs to be made and, in some cases, meaning that decisions made have unintended consequences. Global events also affect energy systems at a country level. A recent example is the US shale gas revolution, which has contributed to lowering the price of coal in Europe below the price of natural gas, thus seeing a displacement of natural gas in favor of more emission-intensive coal in power generation. As a result, this is working against the emission-abatement measures being applied throughout the EU.

Security and growth have long been on the energy agenda, while sustainability—at the scale of history—is a relatively recent side of the triangle and may need particular attention to be integrated in the overall context of growth and security.

In terms of improving performance on the energy triangle, the diversity of the energy systems of the top 10 performers draws attention to the fact that there is no “silver bullet” in energy transitions; each country has to operate within its unique set of constraints. However, looking at energy efficiency presents a clear opportunity for countries to simultaneously address all three objectives of the energy system. This is certainly one area which all countries should seek to prioritize as they address affordability of energy, reduce emissions and ensure the long-term supply for their country.

What surprised you in the findings?

A number of surprising results have emerged from the EAPI analysis. For example, European countries score very high in the global rankings although the financial crisis, coupled with high investments in renewable energy sources, is having a strong effect on EU energy pricing. I believe this is because our index is not looking at short-term contingency but the structural issues of energy systems, and Europe as a whole is pretty well positioned to face the future. However, critical decisions will have to be taken in the coming months and years.

Another surprising result is the performance of Costa Rica, which is one of two upper-middle income countries ranking in the top 10. Costa Rica has made a strategic decision to invest in and promote the deployment of renewable energy sources. This transition pathway sets the country apart from most of its central- American counterparts, which remain fossil-fuel dependent either because of domestic resources or through import dependence.

Why are you so passionate about the future of energy?

The New Energy Architecture initiative has brought to life the complexity and the pace of change in the energy systems today compared to the past. I am extremely interested in understanding how countries will respond to the pressures of the energy transition, and see which countries and regions will be able to make the most appropriate choices and establish new energy systems fitting the needs of their individual economies and societies.

I believe the real winners will be regions rather than countries. The regional analysis from this year’s report points to regional cooperation as an effective tool in addressing some of the most pressing common challenges. It will be interesting to see if and how countries will work together to achieve common objectives.