If anyone was expecting 2024 to be a run-of-the-mill year, they can guess again. By the time we reach December, billions of citizens worldwide will have gone to the polls and cast their ballots – and almost all of those voters had felt the recent effects of an energy crisis triggered by wars and extreme weather. Energy is high on the agenda across the globe these days, driven by price shocks, geopolitical challenges and growth concerns. This reality serves as a reminder that government policies need to be adapted as situations change, balancing the trade-offs and ensuring that hard-earned cash and goodwill are spent efficiently.

Energy occupies a pivotal position in politics due to its profound impact on a country. Affordable and reliable energy is essential for industries, businesses, and households to foster economic stability and job creation across various sectors. In terms of national security, reliance on foreign energy sources affects a country’s autonomy – this in turn makes the management of domestic resources a strategic priority for many countries. And then there’s the highly topical subject of achieving climate targets, where a government’s energy policies can be shaped to promote technological innovation, public welfare and environmental improvements.

The year of elections
The 2024 election results thus far indicate how the public’s priorities have evolved, both in terms of power shifting between parties, but also how parties have realigned their policies to match the public requests.  Results from the European Parliamentary election tell a story of politics having become more inward-looking, leaning more towards solving problems at home rather than addressing challenges that transcend borders. This is a familiar trend, seen previously in the US, among other places. Lingering domestic issues have caused an erosion of trust in the ability of the traditional parties to deliver on their promises.

Energy has become an area of contention, especially since 2022, driven by skyrocketing energy costs and what is perceived in some circles as wasteful spending on new energies. This has helped to fuel the growth of non-traditional parties and the collapse of traditional ones, as seen from the election results in France, Germany and the UK this year. Similar trends can be seen in the US, where many Republicans have voiced strong skepticism to climate change and the pursuit of low carbon solutions.

To complicate matters further, countries around the globe are looking to strengthen trade agreements with trusted partners, in effect reducing their dependence on China. At the same time, initiatives to strengthen strategic domestic industries are high on the agenda, as such policies yield strategic autonomy and create jobs. The vast scale and efficiency of the Chinese manufacturing machine, however, means that the cost of near- or homeshoring could be substantial for countries that pursue such a path.

With increased borrowing since the pandemic and an accompanying spike in interest rates, governments have limited fiscal room to maneuver. The newly elected Labour government in the UK plans to spend £4.7 billion annually to fund its energy policies1. This may seem a handsome sum, but it is dwarfed by the Inflation Reduction Act (IRA)2, introduced last year by the administration of US President Joe Biden, which includes a $369 billion Clean Energy and Climate support package. Most countries share a similar fate as the UK, with clear limitations on their ability to spend public money on energy infrastructure.

Solving the policy conundrum
Given the current financial, domestic and political constraints, how should governments structure energy policies that are effective in reaching targets while also addressing the concerns brought forward by the public? The solutions will vary by country, but should be focused and scalable, as that is the only way to create real impact.

Firstly, addressing the limited financial capacity of governments, policies should be designed to meet their targets without any additional need for taxpayers’ money, and they should not rely on continuous financial support. This can be achieved by supporting attractive energy domains and applying effective incentives. It is also important to focus on technologies that can be deployed at scale. Small R&D projects consume cash and goodwill that are generally in short supply for governments. For industrial investments, governments need to focus on the strategic part of the supply chain that is competitive and profitable.

Secondly, policies should create jobs for local communities. Deployment of foreign technology by overseas companies is bound to create resentment and a lack of ownership in communities, irrespective of the impact on energy security or emissions. A direct link between the project and other activities in the area can cement support.

Lastly, the local community should directly benefit from policies, preferably through reduced energy costs and improved cash flow (lower taxes or higher dividends). The demonstration of value creation should be immediate and tangible to the public.

Meeting these objectives would also insulate the projects and policies from shifts in government. This is particularly relevant in the US, where a potential Republican administration for the next four years is likely to take a hard look at the policies implemented under President Biden. The red-state projects with strong local support are inherently much more robust in such a scenario.

The ‘right policy’ depends on a country’s strategic advantages
With even more countries entering elections in the remaining months of 2024, the energy policy landscape will continue to evolve. Effective policies that can reach targets within limited governmental budgets while benefiting local communities with jobs, lower costs, and additional revenue, will be advantaged. Critically, governments need to first identify strategic advantages before structuring policies that enable their success.

With a deep understanding of the global energy sector, Rystad Energy is supporting governments and companies in identifying their advantages across energy carriers and along the entire value chain. We provide our clients with the tools to enable the development of policies that deliver benefits locally while also providing energy for the future.

Source:
1). Green Prosperity plan, Labour’s fiscal plan. https://labour.org.uk/change/labours-fiscal-plan/
2). US Department of Energy. https://www.energy.gov/sites/default/files/2022-08/8.18%20InflationReductionAct_Factsheet_Final.pdf

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