Affordable and Clean Energy: How to Achieve?

In a special report, the International Energy Agency notes that accelerated clean energy deployment will bring more affordable and clean energy to the masses. However, according to the agency, this process won’t be straightforward. Governments need to ensure adequate support for the regions that might struggle with upfront clean energy technology costs. Through various policy approaches and strategies, governments can safeguard the affordability and fairness of the distribution of the clean energy transition’s gains, ensuring that low-income households also have equal access.

IEA: Rapid Clean Energy Technology Rollout to Reduce Energy Costs and Relieve Economic Pressures

In a special report titled Strategies for Affordable and Fair Clean Energy Transitions, the IEA reveals that accelerating the deployment of clean energy technologies will make energy more affordable, not expensive. The agency acknowledges that getting on track with a net-zero emissions by 2050 scenario will require significant investments. However, it also notes that such a move will unlock huge potential returns. For example, it will reduce the operating costs of the global energy system by over 50%, around USD 2 per gigajoule (GJ) of energy, over the next decade. In comparison, the operating cost in a scenario of today’s policy settings is USD 5 per GJ. This effect will filter down directly to consumers, the agency notes. The bottom line would be creating a more affordable and fairer energy system for consumers.

Another added benefit is significantly relieving the economic pressure from the cost-of-living crisis that many regions worldwide have been battling over the past few years. For example, during the global energy crisis in 2022, the world spent USD 10 trillion on energy. This means that every person on Earth spent over USD 1,200 for energy, or 20% more than the average over the previous five years. This figure even includes the subsidies and emergency support provided by governments. The IEA warns that these high power prices hit the most vulnerable the hardest.

Yet, the IEA notes that while the energy transition will bring more predictable power costs due to retail electricity prices being less volatile than oil product prices, today, half of total consumer energy expenditures go to oil products compared to a third to electricity.

“The data makes it clear that the quicker you move on clean energy transitions, the more cost-effective it is for governments, businesses and households,” notes IEA Executive Director Fatih Birol.

Clean Energy Technologies Already More Cost-Competitive than Fossil Fuels

The IEA notes that renewables are proving more cost-competitive than coal, natural gas and oil-based alternatives over their lifespans in many cases and regions worldwide. The agency predicts that by 2035, electricity will overtake oil as the leading fuel source in final consumption as EVs, heat pumps and electric motors increase their shares in industries like transportation, buildings and industry.

Solar and wind power have already established themselves as the cheapest sources for new power generation. In 2023, over 95% of new utility-scale solar PV installations and new onshore wind capacity had lower generation costs than new coal and natural gas plants. The IEA notes that throughout 2023, solar PV module prices declined by 30%. Paired with batteries also becoming cheaper, this opens up huge opportunities for utility-scale projects and residential use. 

The agency notes that the case is no different for electric vehicles. Even though they might have higher upfront costs in some cases, the net result is savings from lower operating expenses.  

Increased Investments Crucial To Unlocking the Gains of the Clean Energy Transition

While renewable technologies demonstrate cost superiority compared to fossil fuels, they require significant upfront investments. Nowhere is this need more evident than in emerging and developing economies. In those markets, perceived project risks and challenging access to financing are present, the agency notes.

“Much more needs to be done to help poorer households, communities, and countries to get a foothold in the new clean energy economy,” said Birol.

Currently, the IEA estimates that the world invests approximately USD 3 trillion annually in the energy sector. Of this, USD 1.9 trillion goes to clean energy technologies and infrastructure. However, these levels remain insufficient to achieve the goals in the organization’s net-zero emissions (NZE) scenario. The agency finds that doing so will require USD 5.3 trillion in annual investments. Of this, USD 5 trillion will have to go to clean energy.

Emerging and developing economies outside China, where project financing costs remain high, require the most significant increase in investments. Currently, 85% of clean energy investment is in advanced economies and China. The IEA notes that a 1.5°C-aligned world requires a sixfold increase for emerging and developing economies outside China by 2035.

The agency stresses that governments and state-owned companies can lead climate financing by example. Currently, governments and state-owned companies account for around USD 1 trillion of annual investment, but most of the money goes to fossil fuels. Addressing the distortions in the global energy system caused by fossil fuel subsidies is a key measure for unlocking the needed financing for the clean energy transition and scaling it up to the levels required for a net zero-aligned world. In 2023, governments spent over USD 620 billion to subsidise fossil fuel projects, the IEA notes. This is over USD 70 billion more than the support provided for consumer-facing clean energy investments.

“If policy-makers and industry leaders put off action and spending today, we will all end up paying more tomorrow,” warned the IEA’s Birol upon the release of the report. 

The IEA’s report notes that the question of who will cover the upfront costs of the energy transition is one for policy-makers to answer. The agency finds that currently, around 45% of energy sector investments worldwide are made by private companies. Around 35% of investments come from governments and state-owned enterprises, and 20% from households. Through adequate policy measures, governments can ensure that the challenges faced by every one of the stakeholders are properly addressed.

Policy Intervention Crucial For Speeding Up the Renewable Energy Transition

Providing incentives and increased policy support for poorer households to adopt clean energy technology are crucial to ensure that the transition’s gains are fairly and equally distributed. The measures are also imperative to support efforts to achieve global climate and energy goals. 

According to the IEA, appropriate policy interventions for making clean technologies more accessible to all that should be considered by governments are as follows.

More Readily Available, Highly Efficient Energy Appliances 

Countries like Mexico, for example, are already making progress by introducing minimum energy performance standards. Others like Ghana and Senegal are financing high-efficiency appliances to make the best models cost-competitive with less efficient ones.

Among the best-working measures include bulk procurement of efficient appliances and devices, such as LED bulbs, to drive down costs or on-bill or on-wage financing mechanisms to spread out the upfront investment costs over time or cover costs with energy savings. Targeted or income-based subsidies for more efficient expensive devices, such as refrigerators, air conditioners and washing machines, and rebates on the purchase of efficient appliances, often in exchange for old or inefficient models, are other working mechanisms.

More Efficient Buildings Through Energy Efficiency Retrofits For Low-income Households

The IEA estimates that the poorest 10% of households in advanced economies today spend up to 22% of their disposable income on energy, even though they consume less than 50% of what the wealthiest 10% do. Aside from bringing costs down through clean energy deployment, one efficient way to address this glaring disparity is by making buildings more energy-efficient.

This can be achieved in two ways: introducing higher standards for new construction and retrofits to improve the energy performance of existing buildings. The latter measure is especially important for the needs of lower-income households. Such programs are already proving successful in Europe. Countries like France, the United Kingdom and Ireland are helping vulnerable households cover the upfront costs of such projects.

Mechanisms to help on that front include grants and subsidies for energy efficiency retrofits, low-interest loans for energy efficiency investments in buildings and grants and subsidies for clean heating systems to replace fossil fuels, such as heat pumps or biomass boilers.

Other working solutions include shifting the energy efficiency obligations to energy utilities and suppliers, obliging them to improve efficiency among low-income households, providing affordable financing options or implementing energy performance in buildings. These mechanisms shift upfront expenditures away from vulnerable households. The IEA notes that over 30 countries have some form of energy efficiency obligation in place.

More Affordable Clean Transportation Options Through Increased Support for Public Transport and Secondhand EV Markets

While low-income households can rarely afford a new electric vehicle, through policy support, electrified transportation can become more widespread. China and India are already making leaps on that front by accelerating public transport electrification and assisting in the purchase of electric two and three-wheelers. Other countries are introducing measures to support the secondhand EV market.

Policy mechanisms that have proven to work include scaling financial support for cities to expand public transit networks and subsidising public transport for end users. The buildup of public charging infrastructure and the issuance of grants for residential EV charging infrastructure installations are also useful mechanisms. Other measures include providing subsidies, affordable leasing options and trade-in bonuses for new and secondhand EVs. 

Improving Clean Energy Access and Production to Support the Most Vulnerable

The IEA notes that in emerging and developing economies, in particular, a key measure is the phase-out of inefficient fossil fuel subsidies that don’t address energy poverty as soon as possible, even if this pushes up energy expenses for some wealthier households like the case in Indonesia. Recently, the government made an effort to switch from subsidies to introducing direct cash transfers to low-income households.

Such a move is critical for ensuring that clean energy will have an equal playing field with fossil fuels. The IEA estimates that the net effect in emerging and developing economies is that in its NZE Scenario, the total consumer energy expenditure will be around 25% higher than in the current policy settings over the next 10 years. However, it will then become 20% lower by 2050.

It is also crucial for governments to institute energy bill reform measures. Such include time-of-use tariffs, net metering that factors in system costs and credits self-generation added to the grid and the recycling of revenues from carbon pricing to support households to encourage clean energy adoption. Ensuring financial support for low-income households during times of high energy prices and reallocation of fossil fuel financing support to low-income households for promotion of cleaner options or as direct cash transfers are other useful solutions.

According to the IEA, an efficient practice for markets with working carbon pricing schemes, like in the EU and California in the United States, is redistributing revenue and helping vulnerable households. One way is to cover the upfront investment costs of clean energy installations and address unreliable grid connections to help them advance in the energy transition or overcome social inequalities. Success stories include Bangladesh, China and Nigeria. These markets have all successfully rolled out affordable solar systems through adequate policy design.

According to the IEA, the clean energy project financing challenges can also be overcome by setting up financial institutions to provide concessional loans to households and small and medium sized enterprises. Other working solutions include introducing mechanisms such as on-bill financing or pay-as-you-go programs operated by utilities that help moderate or remove upfront costs. Grants, income-based subsidies, discounts, rebates, tax credits, concessional loans for scaling up solar systems and targeted subsidies for clean cooking solutions have also proved to be effective measures, according to the agency.

Huge Costs of Inaction Make Urgent Policy Intervention Critical

The global net-zero journey equation has two variables. The first is clean energy transition advancement. The IEA urges a comprehensive approach where governments focus not only on renewable energy capacity deployment but also on investments in accompanying grid infrastructure, flexibility and the demand response to ensure that the new energy systems are prepared to withstand existing threats like vulnerability to extreme weather, cyberattacks and more.

The second is fossil fuel phase-out. According to the IEA, in a net-zero scenario, net government income from the energy sector will halve by 2035. As seen from COP28, the world’s top fossil fuel producers will be reluctant to give up their golden goose. Moreover, some are actively working to derail the clean energy transition so that they can safeguard their fossil fuel revenues.

Developed nations led by the G7 should confront these efforts so that the clean energy transition and the fossil fuel phase-out advance simultaneously. The IEA considers these steps imperative for avoiding the huge costs of inaction. While climate change is already affecting lives and ecosystems, these negative impacts will only grow in severity with every day that fossil fuels continue to play a part in our economy.

The agency notes that the combination of increased clean electricity generation, electrified transport, phasing out polluting fuels and access to clean cooking fuels in its NZE Scenario would significantly improve health outcomes, particularly in developing economies. The bottom line will be 40% fewer deaths from air pollution by 2035 compared with the current policy-setting scenario. Considering that the stakes are known and solutions are within reach, it is up to the governments to ensure the welfare of their nations.