The Energy Transition and the Extractives Sector


2. Energy transition pathways 

The climate problem is a global one, that is very complex and difficult to solve. Therefore, it is necessary for all countries to participate in this common goal by adapting their energy policies. In this journey towards a carbon constrained society however, an important lesson is that one size does not fit all. In fact, there is no single energy transition – rather, there are several transitions, often taking different forms and proceeding at different speeds. The success of this transformation will be dependent on setting appropriate national and regional priorities and adopting policies that are in line with global best practices. The Energy Transitions Commission recommends that governments employ four interdependent energy transitions strategies simultaneously.

The World Bank Regulatory Indicators for Sustainable Energy (RISE) project assesses countries’ policy and regulatory support for three pillars of sustainable energy; access to modern energy, energy efficiency, and renewable energy. RISE is the first global policy scorecard of its kind, ranking 111 countries and representing 96 percent of the world population.

The RISE project uses 27 indicators including existence, scope and monitoring of an electrification plan, mini grids, affordability of electricity, national energy efficiency plans and incentives, carbon pricing, legal framework for renewable energy, financial incentives and regulatory support, network connection and carbon pricing. Each indicator targets an element of the policy or regulatory regime important for mobilising investment, such as planning processes and institutions, introducing dedicated incentives or support programs, and ensuring financially sound utilities. RISE provides a reference point to help policymakers benchmark their sector policy and regulatory framework against those of regional and global peers, and a powerful tool to help develop policies and regulations that advance sustainable energy goals.

Country specific experience

France

In 2015, the French Parliament adopted the Energy Transition for Green Growth Law. This law set out ambitious qualitative and quantitative targets for GHG reduction to be implemented by 2030. An important reform is the decentralisation of energy and climate policy by the distribution of the powers to local authorities. Local authorities are to position themselves in market offers for their own needs and engage in the following activities, under French Local Energy Planning (LEP):

  • Analysis and mapping of energy consumption, production and networks;
  • Defining targets for energy demand and the supply of local renewable energy on the basis of medium- and long-term projections;
  • Specifying development needs, strengthening coexistence and energy networks in these studies.
  • Designing a roadmap to define the means (technical, financial, economic) to achieve these goals with all stakeholders of the territory.

Empowering local authorities is an important policy as it enables diversity in the energy system. For instance, renewable energy potential will be very different from one area to another, depending on the energy sources available (wind, water, solar PV, solar heating, geothermal, biomass, biogas, waste heat). However, the planning and implementation of these policies should involve informed consultations with local citizens.

Another innovative provision of the French Law is that it has forced the issues of environmental and social and governance (ESG) integration and climate risk onto the agendas of all investors in France. Accordingly, institutional investors, including insurance companies and pension funds with a balance sheet above €500 million, are required to report on their exposure to both physical climate impacts and to ‘transition risks’ – their exposure to the changes caused by the transition to a low-carbon economy.

The law provides guidance on risk exposure analysis and the portfolio’s contribution to a low-carbon economy transition. Company reporting should cover the consequences of climate change and extreme weather events, changes in the availability and price of natural resources, and policy risks related to the implementation of national and international climate targets, amongst other things. Institutional investors are still given some leeway, as the law is built upon a comply-or-explain basis.  This means that companies must provide an explanation should their organisation not comply with the law’s requirements. Disclosing their climate risk exposure should allow investors to better prepare to meet the challenges posed by climate change. Mandatory and voluntary carbon reporting policies are becoming widespread. This paper presents an overview of international initiatives aimed to increase transparency in the energy sector. 

The Energy Transitions Law of France is generally perceived as an inspirational and innovative law that will enable better-informed choices and pave the way to driving investments towards more sustainable patterns.  

Mexico

In the past, the energy sector has been the driving force behind Mexico’s economic development. However, Mexican oil production has declined over recent decades as the sector has been unproductively managed for a long time, lacking technological and technical expertise, as well as financial resources. In 2013, the Government launched an ambitious Energy Reform through constitutional amendments to break the monopoly of the National Oil Company Pemex. The purpose of the Energy Reform was to allow modernisation of the industry, improving competitiveness and fostering social and economic development.

The Energy Reform also raised the importance of sustainability and climate change considerations in Mexico’s energy policy. Mexico was in fact among the first nations to submit a climate pledge in the run-up to the Paris Agreement.

In order accelerate implementation of the Paris Agreement, Mexico passed a new Energy Transition Law (Ley de Transición Energética) in December 2015. The Energy Transition Law aims to regulate the sustainable use of energy and articulate the electric industry's obligations regarding the country's need to transition to clean energies and cut GHG emissions, while at the same time maintaining Mexico's productivity and competitiveness on the world stage. The Energy Transition Law creates the legal basis for the reduction of the carbon footprint of processes of exploration, extraction, transformation, distribution, and commercialisation of energy.

The law also establishes the National Commission for the Efficient Use of Energy, tasked with promoting energy efficiency, providing scientific advice in matters of clean energy, and drafting the Energy Strategy that sets medium- and long-term goals (over a 15 and 30 year horizon respectively) as well as the National Programme for Sustainable Use of Energy. The law further establishes a Smart Grid Programme to promote grid modernisation to maintain a reliable and secure infrastructure that meets electricity demand in an economically efficient and sustainable manner.

Mexico’s Energy Transition Law presents a strong commitment to implement the Paris Agreement and sets an important example of detailed policies to carry out a national energy sector reform, including opening up the market and introducing competitiveness and long-term sustainability objectives. Mexico has introduced various policy instruments alongside this legislation such as clean energy certificates and competitive auctions for renewable energy. This type of sector reform is crucial for achieving energy transitions. In a 2017 auction, significantly low prices for wind and solar power investments attracted global interest. It can be expected that wind and solar technologies will lead transformation in Mexico’s energy sector.

Kenya & Ethiopia

Developing countries, particularly in the African region are highly vulnerable to climate change. For instance, climate change is a significant concern in Kenya as it has already resulted in prolonged droughts, unreliable weather patterns, and the emergence of new pests and diseases. Kenya committed to cut its GHG emissions by 30% by 2030 under the Paris Agreement, and become a newly industrialised middle-income country in the same period.

Kenya passed a Climate Change Act in 2016 which made it the first African country to allow citizens to sue private and public entities that frustrate efforts to reduce the impact of climate change. The Climate Change Act provides a framework for promoting climate resilient low carbon economic development through expansion of wind, hydro and geothermal energy sources. There are multiple potential energy pathways that could help Kenya achieve its ambitious goals.

Kenya is among the countries with the lowest rate of access to modern energy services in Africa and the world. In order to tackle the energy access challenge and given limited grid-connectivity, Kenya’s regulatory environment welcomes distributed energy systems, particularly in rural areas. As a result, Kenya, has been a hub of innovation for off-grid solutions. Despite significant potential for the expansion of off-grid solutions, lack of locally available capital finance at an affordable price is still a major constraint for businesses in the off-grid sector in Kenya. The magnitude of energy access challenge requires investments in electricity sources from both renewable and conventional resources, such as oil and gas.

Ethiopia has ambitious electrification targets and abundant potential for generating renewable and clean energy from hydro, wind, geothermal, solar, bio-mass, and others. Until 2017, there was limited private sector involvement in the sector. However, this is changing gradually as Government opens up the energy sector to international investors. The growth and Transformation Plan II (2015/16-2019/20) provides strategic direction for the development of renewable energy, expansion of energy infrastructure, and capacity building for efficient management of the energy sector. Unlike Kenya, Ethiopia’s renewable energy development has been focused on centralised, large-scale, grid-integrated systems instead of off-grid solutions.

South Africa

In South Africa more than 90% of domestic power is sourced from coal, which results in high per capita emission levels. The country was ranked second to last in the World Economic Forum’s 2018 Energy Transitions Index. There is an urgent need in South Africa to speed up the transition toward more sustainable energy production. Globally, the cost of some renewable-energy technologies has fallen dramatically and this presents an outstanding opportunity for South Africa as wind and solar PV could make its energy intensive industries much cheaper, cleaner and more employment-intensive than any of the alternatives.

As a result, South Africa is preparing to introduce climate change legislation by 2018, as part of its commitments under the Paris Agreement. The purpose of the draft Climate Change Bill is to build an effective climate change response and ensure the long-term, just transition to a climate resilient and lower carbon economy and society. The Climate Change Bill aligns well with the draft Integrated Resource Plan, 2018 which promotes renewable energy, while at the same time it foresees development of new coal generation capacity.

Wind and solar power have already started to impact development of new coal plants. As a result, the renewable energy deployment faces resistance from trade unions over the loss of mining jobs. On the other hand, the use of renewable sources of energy has the potential to be an opportunity for mining corporations to reduce long-term electricity costs, diversify energy supply, be less affected by fuel price volatility, decrease greenhouse gas emissions, and show 'green leadership’.