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Bold energy reforms needed across major emerging economies to sustain economic growth and tackle sustainability challenges

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Bold energy reforms needed across major emerging economies to sustain economic growth and tackle sustainability challenges

Bold energy reforms needed across major emerging economies to sustain economic growth and tackle sustainability challenges
Image credit: WEF

Major emerging economies should push forward with policies to address high energy intensity and corrosive energy subsidies, and to encourage wider investment, according to the World Economic Forum’s Global Energy Architecture Performance Index Report 2015, which was released on 10 December 2014.

The annual index, designed to help countries address challenges and identify opportunities across their energy systems, benchmarks the energy architecture of 125 countries based on their ability to provide energy access across three dimensions of the energy triangle – affordability, environmental sustainability, and security and access. This year’s report focuses on energy reforms in major emerging economies, drawing on examples from Brazil, China, Colombia, India, Indonesia and Nigeria. The report, written in collaboration with Accenture, is being launched today in Mexico, highlighting the significance of the country’s far-reaching energy reforms in transforming its energy sector.

“2014 has been a turbulent year for the energy sector – geopolitical uncertainties, slowing economic growth and the drop in oil prices are affecting energy systems around the world,” commented Roberto Bocca, Senior Director, Head of Energy Industries, World Economic Forum. “In this context, effective energy reforms are more important than ever to drive economic competitiveness, particularly in major emerging economies – these nations face some of the greatest challenges across the energy triangle.”

The shortlist of top performers – led by Switzerland (1st), Norway (2nd) and France (3rd) – demonstrates that there is no single pathway to a more affordable, sustainable and secure energy system, but that a balanced approach to energy policy across the three dimensions of the energy triangle pays off. All top 10 countries are European and/or OECD countries, with the exception of Colombia (9th).  

Major global economies tend to perform less well on the index as their transitions take longer to unfold, due to the complexity of their energy systems. Of these economies, a number are examined in the report. The impact of the Energiewende in Germany (19th) clearly highlights the risks and benefits associated with the energy transition. In the US (37th), the surge in shale gas production is having a profound impact on national competitiveness and climate policy.

Of the major emerging economies, India (95th) needs to address the growing gap between domestic demand and production, to limit further increases in energy import bills in coming years.China (89th) has taken resolute action to tackle air pollution and meet future energy needs, sparking a renewable energy transition, but much more work remains to control emissions. As growth slows, this will be increasingly difficult.

Energy Reform in Major Emerging Economies: New Models for Sustained Growth

Reforming state-owned enterprises (SOEs) in major emerging economies, which together account for nearly half of global energy consumption and carbon emissions, will help create effective regulatory frameworks, investment signals and public engagement. This will in turn drive the global energy transition, according to the report.

“Energy reforms will typically take years to implement, so strong institutional and regulatory frameworks that transcend shorter political cycles are critical,” said Arthur Hanna, Senior Managing Director, Accenture Strategy, Energy, and a member of the World Economic Forum’s Global Agenda Council on The Future of Oil and Gas. “In the long term, the prize of effective energy reforms in major emerging economies is great, both for the individual nations concerned, and for addressing affordability, sustainability and security challenges across the global energy system.”

The report explores three areas for reforming governments to consider based on lessons learned from other emerging economies:

  • Enacting sound policies in solid institutions: Nations with responsive policy frameworks and governance structures will be better placed to manage change and create competitive energy architectures. Effective reforms will require modernizing and reforming SOEs to increase their effectiveness and ability to adapt to fast-changing conditions.

  • Signalling market readiness: Effective investment signals are required to attract the levels of capital needed to build more efficient energy systems. This includes rebalancing the risk and reward ratio for investors, and demonstrating visible leadership commitment to reforms. In Colombia, amendments made to the fiscal regime more than a decade ago helped change the incentives for oil and gas investors. These have had impressive results for the oil and gas sector, including increased flows of foreign direct investment.

  • Mastering public engagement: The complexity of the energy sector and its central role in the wider economy means that serious reform will involve negotiation and interplay between numerous interlocking interests. Progress can appear slow-paced, but this should not be a barrier to serious reform. Engagement with stakeholders across the energy value chain will be essential to sustain momentum for reforms. China’s swift response to public pressure on air quality, which included a range of measures at local and national levels, demonstrates how effective the interplay among different parties can be.

Ultimately, there is no universally applicable formula for energy reform. Difficult choices and trade-offs will therefore need to be made at a country level in order to advance the energy transition globally.

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