Energy Crisis and Inflation

Energy Crisis and Inflation

Starting in October 2021, the world experienced the impacts of a severe global energy crisis. ² Rapid economic rebound following the slowing of the COVID-19 pandemic led to tighter markets, and the energy crisis was further exacerbated in February 2022 after the Russian Federation's invasion of Ukraine. ³ Throughout 2022, energy prices in Europe and elsewhere skyrocketed to their highest levels since 2008. ⁴ The International Energy Agency estimates that higher fossil fuel prices accounted for 90% of the increase in electricity prices in 2022, and that fossil gas prices alone accounted for more than half this rise. ⁵

The rise in energy prices had strong inflationary impacts on all energy-consuming sectors – in some cases pushing families into poverty, forcing factories to cut production and slowing economic growth across sectors. ⁶ Because energy fuels all economic activity, it can affect the prices of goods from food to clothing to smartphones. ⁷ High inflation became a global phenomenon during 2022, even if the effects were less visible in some parts of the world, such as Asia. ⁸

In many countries, governments sought alternative fossil fuel sources to restore disruptions to the energy supply or opted to heavily subsidise fossil fuels to shield consumers from price hikes; despite this, the uptake of renewables increased in all demand sectors. ⁹ Overall, 2022 was a year marked by energy crisis resulting in high inflation globally, but it also was a year of accelerated deployment of renewables as different sectors found renewable energy sources to be reliable, stable and affordable.

In direct response to rising inflation and energy costs, two major policy packages were introduced during the year: the European Commission's REPowerEU plan and the Inflation Reduction Act (IRA) in the United States. ¹⁰ Both packages aim to stimulate economic growth via subsidy packages that target, among others, renewable energy production and use while boosting local industry.

The REPowerEU plan was designed to curtail the effects of energy market disruption caused by the war in Ukraine. ¹¹ It tackles energy savings in all end-use sectors as well as diversification of the energy supply, while aiming to increase the production of renewable energy to 42.5% from the current 40%; the plan also includes an obligation to install rooftop solar on every public building by 2025. ¹² The plan commits a total investment of USD 222 billion during 2023-2027 to phase out fossil fuel imports, including phasing out fossil gas in industrial and domestic uses and, over the long term, expanding renewable hydrogen in the steel industry. ¹³

The IRA allocates USD 370 billion in new spending and tax credits and addresses all main energy demand sectors. ¹⁴ In buildings and transport, it provides tax credits for electric vehicles, energy-efficient appliances, rooftop solar, geothermal heating and home batteries, and for the industry and agriculture sectors it provides tax incentives for private investment in renewables. ¹⁵

Also in 2022, China published its 14th Five-Year Plan, and the country is expected to contribute nearly half of all new renewable power capacity additions globally during 2022-2027. ¹⁶ In early 2023, India announced one of the world's most comprehensive plans for renewable hydrogen, including a USD 2.3 billion subsidy programme aimed at benefiting from cheap renewable energy prices to produce renewable hydrogen for industry and transport. ¹⁷

Policy Trends

On the climate policy side, climate commitments expanded in 2022 and have targeted more ambitious efforts to decarbonise energy use in the end-use sectors, with progress varying across sectors and regions. During the year, 10 countries revised upwards their Nationally Determined Contributions (NDCs) towards reducing emissions under the Paris Agreement. ¹⁸ However, of the 193 countries that have signed the agreement and submitted NDCs, only 25 have set targets for net-zero emissions. ¹⁹

Climate policies need to translate into concrete enabling policies and mandates in all sectors. On the demand side, around 80 new renewable energy policies (mostly in the form of fiscal/financial incentives) were announced in 2022, while regulatory policy announcements stagnated, bringing the total to 454 policies across sectors. ²⁰ These announcements were made in 49 countries, with more than half of the countries in Europe, 8 in Latin America and the Caribbean, 7 in Asia, 4 in Africa, 2 in Oceania and only 1 each in North America and in the Middle East and North Africa. ²¹ This amounts to a total of 94 countries that had either policies or targets in at least one end-use sector by year's end (See Figure 1); however, only 3 countries (Spain, Portugal and Türkiye) had targets or policies in all four end-use sectors. ²²

In the buildings ⁱ sector (commercial, residential and public facilities), 52 countries had policies supporting the uptake of renewables as of the end of 2022. ²³ Such policies include incentives for the installation of renewable technologies (such as rooftop solar, solar water heaters, biomass boilers and geothermal heat pumps) as well as mandates and targets banning the use of fossil fuels for heating in new and existing buildings. Policies were mostly in the form of fiscal/financial policies (45 countries), followed by regulatory policies (21 countries), although 14 countries had both regulatory and fiscal/financial policies for renewables in buildings. ²⁴ (See Figure 2)

In the industry sector, no new policies for renewables have been announced since 2019. By the end of 2022, 19 countries had policies that incentivise or mandate the use of renewables in industry. ²⁵ Nine countries had renewable energy mandates enforcing the installation of renewables in specific industry sub-sectors, 12 countries had fiscal/financial incentives, and 2 countries (Spain and Türkiye) had both. ²⁶

A major policy announcement in 2022 was the European Union's (EU) Carbon Border Adjustment Agreement (CBAM), which includes a carbon tax on imports to EU member countries. ²⁷ The aim is to impose carbon taxes starting in 2026 on imports related to electricity, hydrogen, steel, cement, fertilisers and aluminium. ²⁸ The CBAM will likely have adverse effects on Europe's trade partners and is expected to speed decarbonisation of the industrial sector globally. ²⁹

In transport, despite having the lowest share of renewable energy across demand sectors, 61 countries had renewable energy mandates or enabling policies as of the end of 2022. ³⁰ Most of these were biofuel blending mandates (56 countries) and either electric vehicle targets or 100% bans on internal combustion engine vehicles (23 countries). ³¹ Only five countries – Chile, Denmark, New Zealand, Sweden and the United Kingdom – had both 100% renewable power targets and 100% bans on internal combustion engine vehicles. ³² Meanwhile, 10 countries were pushed to reduce or suspend their biofuel blending mandates in 2022, mostly in Europe but also in Latin America and the Caribbean. ³³

In the agriculture sector, 14 countries had targets and policies for renewables as of the end of 2022, with 7 of these countries announcing them during the year. ³⁴ All of the policies comprised either investments, subsidies, grants or tax deductions, mostly for solar-powered irrigation and agrivoltaics. No new or existing regulatory policies for renewables in agriculture were observed. ³⁵

Market Developments and Trends

The risk of supply disruptions, as well as high fossil fuel price volatility, prompted more energy consumers worldwide to adopt on-site renewable energy systems and to switch to electrified technologies across the end-use sectors. ³⁶

In the buildings sector, 2022 was a record year for heat pumps, with installations increasing a record 10% over 2021. ³⁷ This was most notable in Europe, with 38% growth in 2022, as households increasingly sought out efficient and reliable alternatives to fossil fuel heating. ³⁸ Rooftop solar also became more affordable and attractive to end-users following the increases in fossil fuel prices. ³⁹
(See Snapshot: Europe)

Across Europe, energy-intensive industries were hit hardest by the energy crisis, with some industries cutting production and others considering relocation to reduce energy costs and boost security. ⁴⁰ These same concerns drove a 21% increase in the number of corporate power purchase agreements (PPAs) in 2022, to surpass the installed capacity of utility PPAs by a record six times. ⁴¹ Renewable-powered industrial parks also became more attractive, as they allow hedging from energy price volatility and the risks of supply disruption. ⁴² (See Snapshot: South Africa)

In the transport sector, energy costs increased for vehicle owners, freight operators and public transport services. ⁴³ In Europe, the energy bills for most public transport operators doubled in 2022. ⁴⁴ However, a few operators that had signed PPAs in previous years benefited from the stabilising effect that these agreements had on energy costs. ⁴⁵

As the electrification of road transport continued, 2022 was another record year for spending on electric vehicles and associated charging infrastructure, with investment in these areas rising 54%. ⁴⁶ Most of this growth was in Asia, with India doubling its electric vehicle spending during the year. ⁴⁷ Asia is home to 93 of the world's 100 most polluted cities and 6 of the top 10 countries most affected by climate risks, making electric vehicles an appealing option. ⁴⁸ Several Asian countries have adopted bans on vehicles with internal combustion engines, including the Republic of Korea (target year 2025), India (2030), China and Japan (2035) and the Philippines (a new ban in 2022 with a target of 2040). ⁴⁹

In agriculture, the trend has been towards self-reliance and additional income generation, with agrivoltaics, geothermal and bioenergy taking growing shares of the sector's total final energy consumption. ⁵⁰ In Africa, Asia, and the Caribbean, decentralised renewables have become a go-to solution in agriculture to boost energy access, reduce fuel costs and save energy. ⁵¹ Advancements range from technological developments in fishing vessels, gear and operations to the use of renewables in food production and for affordable cooling and refrigeration. ⁵²
(See Snapshot: India) Solar water pumps have helped farmers boost productivity, with the Asia-Pacific region dominating this market. ⁵³

Electrification and Other Trends

Renewable energy shares increased in all four demand sectors in 2020, to reach 16.8% of energy consumption in industry, 15.5% each in buildings and agriculture, and 4.1% in transport. ⁵⁴ However, overall energy use in these sectors has risen as well, with this growth still largely met by fossil fuels. ⁵⁵ (See Figure 1) While total final energy consumption grew 16% overall during 2010-2020, it grew 18% in the transport sector, followed by agriculture (16%), industry (9%) and buildings (8%). ⁵⁶

At the same time, the rising share of electricity in the total final energy consumption of end-use sectors has enabled the higher integration of renewables. ⁵⁷ (See Figure 1) The electrification of end-uses grew from a 15.3% share in 2010 to 17.7% in 2020. ⁵⁸ Agriculture is the most electrified sector, at 26.7%, followed by industry (25.3%) and buildings (23.6%), with transport trailing well behind (only 1.4%). However, total electricity demand is still outpacing renewable electricity supply. In the last decade (2010-2020), 60% of the increase in electricity demand was met by modern renewables. ⁵⁹

The rising intensity and frequency of heatwaves presents additional challenges to rapid electrification. ⁶⁰ Both India and China suffered significant heatwaves in the summer of 2022 that led to spikes in electricity demand, resulting in weeks-long blackouts and forcing some industries to cut production. ⁶¹ Cooling is set to become a top driver of electricity demand in the coming years, especially in light of more-frequent heatwaves and rising household incomes in emerging economies. ⁶² Three countries – Barbados, Cambodia and Nigeria – published National Cooling Action Plans in 2022, bringing to 14 the total number of countries with such plans. ⁶³

FIGURE 2.

Number of Countries with Renewable Energy Regulatory Policies and Mandates, by Demand Sector, 2012-2022