The International Energy Agency forecasts that renewable energy power capacity will go up by 50% between 2019 and 2024.
Machinery are in motion for a shift from fossil fuels to renewable energy and there is pressure for energy companies to retire their assets and diversify to renewable energy.
There are, however, risks related to this transition that should attract just as much attention as the call to transition so that adequate mitigation measures can be designed. Transition risks are business-related risks that follow societal and economic shifts toward a low-carbon and more climate-friendly future. These risks can include policy and regulatory risks, technological risks, market risks, reputational risks, and legal risks.
These risks could cause a fall in government revenues, poor returns on capital investment in Non-Oil Companies (NOCs), unemployment, and reduced demand for domestic consumption.
Virtually all sectors of the economy depend on fossil fuels for their operation. And fossil fuel accounts for over 80% of global energy usage. Road users accounted for 49.3% of total usage in 2018 and only 16.7% of the world are non-users of fossil energy.
Thus, a shift from fossil energy to renewable energy would create some risk in economies and significant changes to global energy consumption. While the transition is important for the preservation of the earth, the risks must be acknowledged and dealt with.
First is the fall in government revenue. Global fossil fuel consumption is worth $5.9 trillion, contributing 6.8% to the GDP in 2020, and expected to rise to 7.4% by 2025. The transition to renewable energy will decrease global government revenue, affecting global economic growth.
There will also be a drop in domestic oil and gas supply in countries as countries move from fossil fuels to renewable energy. Change in energy consumption in the domestic market will lead to a drop in the demand for fossil fuels and lead to decreased domestic supply.
Though the sector accounts for a small fraction of total employment globally, the transition will cause a loss in jobs for those employed in the industry.
Investment will also become riskier as oil prices will assume lower long-term prices, resulting in international oil companies writing down the value of their assets in the future. This will increase the risk of national oil companies losing billions in public funds.
These are global realities of the risk involved in transition, and Nigeria is not exempt from these realities. The country’s revenue, heavily dependent on oil and gas incomes, will be significantly affected. Although the sector employs only 0.01% of the country’s working population, job loss that the transition will occasion will only add to the prevailing unemployment situation.
The African oil and gas landscape provides enormous opportunities for cross-border infrastructure to unlock the development of stranded assets. The country will lose these opportunities with the energy transition.
As countries reaffirm their commitments to energy transition, it is equally important to be just as clear on how they will mitigate the inherent risk in energy transition.
David Manley of the National Resource Governance Institute (NRGI) stated that policies should focus on preventing wasteful practices of NOCs and managing the volatility that the changes will bring. Also, diversifying the economy will place the country at a lower risk factor in response to the transition. He advised that the best policy response to minimise risk governments is to adopt the tax principle effectively.
David concluded that the government should implement all these policies effectively in a transparent and accountable manner.
David Manley places some responsibility for demanding transparency and accountability on civil society for accountability and awareness. He challenged civil societies to demand that governments acknowledge the transition risk. As well as its plans to reduce its exposure. These plans are not limited to policy statements, but actual use of public money and decisions taken.