In May 2024, American Economist Michael Spence wrote in Project Syndicate about how the power sector across countries faces a monumental challenge: reducing greenhouse gas emissions while maintaining a stable and growing energy supply.
This transition is desirable and critical for our economy and environment. However, the path forward is fraught with complexities and requires significant investment.
The power sector system’s backbone – generation, transmission, and distribution – is under pressure from multiple fronts. Renewable energy sources, while cleaner, operate differently from traditional fossil fuels, necessitating a transformation of the entire power infrastructure.
Simultaneously, electricity demand is projected to surge due to the rise of electric vehicles, data centres, and cloud computing. Integrating smart grids managed by digital systems is paramount to meeting these challenges.
Note that the International Energy Agency (IEA) estimates that annual investment in smart grids must double to $600 billion globally by 2030 to achieve net-zero emissions by 2050. This represents a significant portion of the $4-6 trillion annual investment needed for the overall energy transition.
However, current investment falls short of these targets. Even in advanced economies, the smart-grid funding gap exceeds $100 billion. This shortfall poses a serious threat to the green transition and economic stability.
The need for coordinated action across complex systems further complicates the investment challenge. Service quality and stability improvements require investments spread across multiple entities owning different grid assets. Moreover, the financing of these investments raises questions of fairness and efficiency.
Who should bear investment costs?
A key consideration is who should bear the cost of investments that contribute to global emissions reduction. Local communities should not be burdened with these costs, as it would lead to inefficiencies, underinvestment, and resistance.
Areas with problematic legacy systems should not face higher charges for upgrades that benefit the broader public good. Emerging Market and Developing Economies (EMDEs) and Low Income Countries (LICs) should put this into practice since some of their population lives below the poverty line, especially in the face of rising inflation.
Transitioning to a green, stable, and efficient power system is a critical global challenge. It demands substantial investment and careful consideration of how these investments are financed and implemented.
Without addressing these issues, the power sector’s capacity and resilience – and, by extension, the entire economy – will remain at risk. The time for action is now.