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January 20, 2015
Why reforms are imperative to create energy systems fit for the 21st century
By: Arthur Hanna

2014 has seen heightened volatility across the global energy market and the wider economy. With oil prices falling to their lowest levels for six years, the global outlook remains unclear. Questions are even arising around the shale revolution in the US, with concerns mounting about the potential decline in shale investment in 2015 unless oil prices recover. These events are taking place against a background of global economic uncertainty and widely diverging growth rates.

The fact is, energy supply and the economy are intrinsically linked. In many countries, access to energy remains limited, hampering overall growth. A key reason is that most of today’s energy systems were built for the 20th century, with large, centralised, generational capacity linked into complex distribution networks, working ‘from the centre to the edge’.

So, what’s needed? A useful roadmap is provided by a report we produced recently with the World Economic Forum. The Global Energy Architecture Performance Index Report 2015 examines energy reforms enacted across the world, highlighting the lessons learnt for policymakers embarking on reform today. Four interrelated dimensions are of particular importance.

The first dimension is encouraging more diverse supply. We’re beginning to see systems emerge where ‘the edge’ is producing energy in its own right, through micro-grids and local electricity production, particularly from non-fossil fuel sources. At some point, these two grids – centralized and distributed – will converge. Policymakers should recognize the growing role of this distributed grid by supporting more diverse sources of supply.

The second dimension is laying down regulatory frameworks suited to this new world. Many existing regulatory frameworks are built on a historical view of the energy system. This needs to change. Energy reforms must reflect the wider transition underway, with more thinking – for example – on how to integrate the grid now emerging at the ‘edge’ into the existing ‘centre’.

The third dimension is investing in upskilling workforces. Skills in areas like electrical engineering, data analytics, and information and communications technology will play a critical role. And ambitious technology agendas – often based on the Industrial Internet – should go hand-in-hand with this upskilling.

Fourth, energy reforms should engage with the public, and encourage them to become active participants in evolving energy ecosystems. Governments need to recognize this evolution and foster the entrepreneurial instinct that will drive success.

As the report shows, some countries are leading the way with navigating this energy transition. Switzerland topped the EAPI this year, scoring highly across all three points of the ‘energy triangle’ - economic growth and development; environmental sustainability; and energy access and security. Meanwhile, with events from the production surge in the US to China’s commitment to new environmental targets, the new global energy landscape is taking shape.

The energy industry will play a central role in creating the future of the energy system, by pioneering its technological transformation. And by providing the right signals, governments will give industry the confidence to invest in Research & Development and know-how to bring this about. Any lack of certainty from governments will stymie growth. Now more than ever, sustained political efforts are essential for creating an energy system fit for the 21st century.

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