Growing global uncertainty is disrupting the energy transition path

Recent years have seen an increase in global uncertainty due to economic, political and technological changes, increasing the complexity of the environment in which countries operate and the trajectories of their energy transition. Geopolitical tensions pose risks to energy security and hamper international cooperation, according to the World Economic Forum (WEF). Ongoing conflicts in the Middle East may increase instability in oil markets, which could result in a sharp increase in oil prices. Despite moderate increases in energy prices, regional disparities persist, limiting economic growth, imposing financial burdens on households and businesses, and hampering efforts to improve electricity access. As the WEF noted, the situation could have been much worse were it not for mild weather conditions around the world. However, there have been cases of accelerated change, especially in Europe, where there has been a rapid reduction in dependence on Russian natural gas and significant improvements in energy efficiency. Global investment in energy efficiency has increased by 45% since 2020, with countries representing three quarters of global energy demand last year strengthening energy efficiency policies or implementing new ones. Disruptions caused by the Covid-19 pandemic and the Russia-Ukraine war have led to a global energy crisis and rising inflation and interest rates in 2022 and 2023. This has caused a cost of living crisis in many countries, raising concerns across industries and economies, especially in developing countries o debt denominated in dollars and imports. Headline inflation has since slowed due to tightening monetary policy in G7 countries, with the International Monetary Fund (IMF) forecasting it to be 5.8% in 2024 (down from 6.9% and 8.7% respectively in 2023 and 2022). However, high interest rates and capital costs remain significant obstacles to the energy transition, especially for emerging and developing economies. This has a direct impact on the ability of companies and countries to finance initial investments to meet energy demand and decarbonize the energy system. Despite lower operating costs, capital-intensive clean energy solutions remain disproportionately affected due to high upfront capital investment requirements. In 2023, clean energy energy sources face challenges, including uncertainty around subsidies and supply chains, combined with high interest rates and significant cost increases. Trade patterns in the energy sector have changed significantly as governments focus on increasing supply chain resilience and strengthening energy security. This change has coincided with an accelerated drive towards cleaner energy sources, including the rapid expansion of renewable capacity and the wider use of technologies such as electric vehicles (EVs) and heat pumps, driven in part by supportive government policies. Despite these positive trends, rising trade protectionism and rising costs are hampering trade, especially for developing countries. Figures from the United Nations Conference on Trade and Development (UNCTAD) indicate a $1 trillion decline in global trade in 2023. Geopolitical tensions continue to impact bilateral trade flows, as evidenced by developments such as the European Union (EU) reducing its trade dependence on Russia and reducing trade interdependence between China and the US. However, some industries, such as the automotive industry, have seen an increase in trade values, driven by rising demand for electric vehicles. This, combined with an improved global economic outlook, could increase trade resilience in the coming year. Uncertainties remain about geopolitical tensions and potential future disruptions to global supply chains, underscoring the need to develop adaptation strategies.