By Anish De, Partner, Global Sector Head, Power & Utilities, KPMG; National Head, Energy Natural Resources & Chemicals, KPMG in India
In 2015, the United Nations General Assembly set 17 Sustainable Development Goals (SDGs) intended to be achieved by the year 2030. A short six years on, we are at an inflection point where some of the goals laid down stand seriously challenged. Most of the goals are deeply interlinked. Slipping on one often leads to losing ground on others. In the aftermath of Covid-19, the world has witnessed substantial losses on the ground on key themes such as poverty alleviation (SDG 1) and gender equality (SDG 5). Inequality (SDG 10) has also increased1.
A large number of SDGs are linked closely to the sphere of energy and natural resources (SDG 6-7, 11-15). As climate change effects have accelerated, the world is now susceptible to even greater challenges on these counts. Despite some significant positive developments in clean energy, including better accessibility and affordability, it is now apparent that the world is facing irreversible climate change impacts. Without sharply accelerated actions, these changes would become even more severe, setting off a domino effect that could well go beyond control.
Decarbonisation efforts on a very large scale and at exceptional speed are the need of our times, if at all we have to give ourselves a reasonable chance of self-preservation. And therein emerge the contradictions. Decarbonisation will be disruptive because for the past 300 years our energy systems have been built on a very different fossil fuels and network systems paradigm. These energy systems have become massive and changes to the juggernaut have correspondingly become exceedingly difficult. This is especially so because we are fundamentally changing the design principles of the energy systems from one based on fossil fuels where the fuel was stored to one based on renewables where the energy generated has to be stored instead. This rejig of the energy systems will have massive deployment and cost implications.
It will come at a cost that consumers will be loath to bear. Globally, the linkages between energy and the political economy have been very tight. Energy prices have always been a sensitive matter for consumers. In countries like India, energy has come to be a key election issue, often ignoring the commercial fundamentals that are needed to underpin a viable energy sector. Size and governance structures also matter. At one level, the federal polity binds large and diverse countries like India, and lets democracy play out. However, it also causes competitive politics that fundamentally affect the operating tenets of a technically and commercially viable energy sector.
Fortunately, the oil sector in India has largely been able to come out of competitive populism, and distortionary and unwarranted subsidy structures have been unwound. The electricity sector, in contrast, has seen accelerated political activity with active competition among political entities on extending sops. Hence, even if delivery systems have improved over time, the commercial architecture has remained very fragile, affecting investments, resisting changes and witnessing efficiency and service gains at a pace much slower than required or warranted. This is a major concern, given that commercial energy delivery in the future will be largely through electricity2. Electricity delivery systems will have to be rapidly modernised, “hardened” to withstand the weather or related events (including fires), and made more resilient than before to enable prompt restoration. Thus, utility modernisation has to be an integral part of the climate event response. This will involve costs, efforts and new competencies, which have to be acquired.
Changing the status quo in the energy systems also forebodes other complex economic challenges. Such transitions portend very significant implications for other SDGs not directly related to energy and resources. For example, the costs related to moving away from coal and crude, building new delivery mechanisms for renewables, and new methods of consumption through, say, hydrogen, could be very significant. At an aggregate level, the costs could be daunting for exchequers, which derive very substantial tax revenues from fossil fuels that may be difficult to match from clean energy resources3. The global fossil fuel economy has a size of $4.4 trillion per annum4.
The indirect and induced effects of the energy economy are also very large. Stakeholders of the new and old energy systems will often not be the same. For those who are left out, the impacts will be very significant, even if it is for the cause of saving the planet. For those on the margins, who are badly affected by the change and not covered by safety nets, the economic effects can be severe. Given the large-scale impacts, establishing large safety nets that afford reasonable protection will be a major challenge.
Even higher can be the financial costs of shortages and outages, which could well occur as a consequence of rapid transition. As recent trends show5, global energy prices have become very susceptible to reduction in investments in traditional fuels, and to the change in renewable energy production patterns owing to their inherent variability. Those costs tend to be highest for those on the margins of society. Such rising costs affect them severely both directly (energy prices) and indirectly (food and other commodity inflation and/or shortages). There is a serious risk to SDG 1-3 (no poverty, zero hunger, good health and well-being) due to scarcities and runaway prices that energy disruptions can cause.
Collective and collaborative action will be needed to deal with the effects, but are we really ready? Inherent in the Paris Agreement of 2015 was a commitment of a minimum of $100 billion of annual transfers from the developed world to the developing by 2020. In practice, only a very small fraction has materialised6. While this must change if real climate action is to be taken up in earnest in the developing world, it is amply evident that the developing world needs to take up action in its own interest irrespective of the scale of support that materialises. Climate effects would not wait for the transfers and the countries must develop independent strategies to deal with them. It is equally important to note that the developed world would be amiss in expecting rapid climate action beyond what the economic systems of developing countries can absorb because it is for common good. If actions for common good indeed need a further scale-up, then the economic capabilities for the same must be correspondingly created.
1www.weforum.org; 2BP Energy Outlook, 2019; 3www.prayaspune.org; 4www.instituteforenergyresearch.org; 5www.cnbc.com; 6Delivering On The $100 Billion Climate Finance Commitment And Transforming Climate Finance