Affordability is always a concern for consumers and policy makers, but this has been heightened in recent years by price spikes for fossil fuels during the global energy crisis and resulting pressures on the cost of living. Consumers around the world spent nearly USD 10 trillion on energy in 2022 – an average of more than USD 1 200 per person – even after considering the subsidies and emergency support mobilised by governments. This is nearly 20% more than the average over the previous five years. Some countries and communities experienced a much greater shock, and high prices hit the poor and vulnerable hardest, in both developing and advanced economies. Almost one in ten people within the European Union – more than 40 million people – were unable to keep their homes adequately warm. 

Issues of affordability and fairness are central to clean energy transitions, with debate fuelled by two misperceptions. First, that today’s pressures on the cost of living are related to clean energy, rather than the real cause – the gas supply crunch that followed the Russian Federation’s cuts to deliveries to Europe. Second, the view that clean energy technologies are always more expensive than fossil fuel-based ones, which is not supported by the data. But there are nonetheless legitimate questions about risks to affordability that might arise during clean energy transitions, how transitions will be paid for, and how the costs and benefits of transitions will be shared. This special report provides, for the first time, an evidence base for the discussion and a pragmatic look at strategies and policy approaches that can safeguard affordability and fairness as transitions proceed.

The starting point for the analysis is an energy system characterised by multiple inequities, in which affordable energy is often out of reach. The most fundamental inequity is the 750 million people today who lack access to electricity and more than 2 billion people who do not have access to clean cooking technologies and fuels. There are also wide disparities in energy use and ability to pay across different income groups within societies. In advanced economies, the poorest 10% of households spend close to a quarter of their disposable income on residential energy and transport fuels, even though they consume about half as much of these fuels as the richest 10% (who spend 5% of their income on energy). There are even larger disparities across developing economies, with the poorest grouping consuming one-fourth that of the richest and often going without reliable, modern energy services. A key question for successful transitions is how policies can be designed in a way that ensures access to the clean energy economy for lower-income countries, communities and households.

Cost reductions for key clean technologies open a huge opportunity to chart a new course for the energy sector: clean, efficient choices are often now the most affordable ones, especially in terms of lifetime costs. Cost reductions have mainly been driven by a virtuous circle of innovation, accelerated deployment, economies of scale and policy support, with examples extending beyond renewable power to LED lighting in India and electric vehicles in the People’s Republic of China (hereafter “China”). In 2023, more than 95% of new utility-scale solar photovoltaic (PV) installations and new onshore wind capacity had lower generation costs than new coal and natural gas plants. Where electric cars and two- and three-wheelers have higher upfront costs, which is not always the case, they typically result in substantial savings because of lower operating expenses. Efficient appliances, such as air-conditioning units, usually pay back any upfront premium with lower operating costs. Heat pumps can be more expensive than gas-fired boilers for heating alone, depending on the relative prices of electricity versus gas, but are typically competitive when considering both cooling and heating. Solar PV module prices are now exceptionally low – they declined by 30% in 2023 – creating affordable openings for everything from utility-scale projects to home solar systems, with their value enhanced by cheaper batteries.

A more electrified, renewables-rich and efficient system brings important gains for affordability, alongside the clear environmental benefits. When all costs of delivering energy are considered (e.g. operating expenses, the need to pay back previous investments, financing costs) the Net Zero Emissions by 2050 (NZE) Scenario’s 1.5 °C pathway is less costly on a global basis than the Stated Policies Scenario (STEPS), which is based on today’s policy settings. This is because the running costs of a rapidly decarbonising energy system are much lower as the need to buy fuels reduces. Operating the energy system in the NZE Scenario in 2035 costs USD 2 per gigajoule (GJ) of energy in the NZE Scenario, less than half the USD 5/GJ in the STEPS. Electrification also brings important efficiency improvements: electric motors are more efficient than internal combustion engines. Likewise, heat pumps are more efficient than gas-fired boilers. 

Today, around 50% of total consumer energy expenditure is on oil products, and another 35% is on electricity. In rapid energy transitions these swap places, making the price of electricity the key measure of affordability for most consumers. By 2035, in the NZE Scenario, the share of electricity in total spending on energy rises to 50% of the total, while oil falls to 25%. The average cost per unit of electricity is slightly higher in the near term in rapid energy transition scenarios, because of the need to pay for a surge in investments, but by the 2040s electricity prices in most regions are lower than in the STEPS. Retail electricity prices are typically less volatile than oil product prices, so consumers face more predictable energy costs as they move through transitions. 

Climate change is already affecting lives and livelihoods around the world, putting additional pressure on the cost of living, with poor and vulnerable communities ono the front line. This is raising awareness in many countries of the need to press ahead with action on emissions, as well as the benefits that this brings for a range of sustainable development goals. For example, the combination of increased clean electricity generation, electrified transport, phasing out of polluting fuels and progress with access to clean cooking fuels in the NZE Scenario leads to a significant improvement in health outcomes, particularly in developing economies, including 40% fewer deaths from air pollution by 2035 compared with the STEPS. 

Realising the benefits of clean energy transitions hinges on unlocking the higher levels of upfront investment that are required. As things stand, around USD 3 trillion is invested each year into the energy sector, of which USD 1.9 trillion is in a range of clean energy technologies and infrastructure. By 2035, total investments need to rise to USD 5.3 trillion in the NZE Scenario, with USD 5 trillion going to clean energy. The required increases are particularly steep in emerging and developing economies outside China, whose 15% share of clean energy investment is far out of step with its two-thirds share of the global population, as well as its prospects for rapid growth in demand for energy. 

Financing costs for clean energy projects are a major additional hurdle, especially in emerging and developing economies that face a much higher cost of capital. Financiers and investors demand higher returns in these countries because investments tend to be – or are perceived to be – riskier than those in advanced economies. This issue has been exacerbated for relatively capital-intensive clean energy projects by the recent worldwide rise in borrowing costs. If financing costs remain high in developing economies, these countries risk being locked into polluting technologies that might initially be less expensive but end up incurring long-term fuel and environmental costs. Enhanced international efforts to increase the availability and lower the cost of capital for developing economies are a vital dimension of affordable transitions.

The need to keep energy affordable is a reason why many governments intervene to keep regulated fuel and electricity prices low. This also has the effect of introducing barriers to change, especially when the intervention keeps fossil fuel prices below their market value. Governments spent USD 620 billion in 2023 subsidising the use of fossil fuels, mostly in emerging and developing economies; many of these subsidies are poorly targeted and disproportionately benefit higher-income groups that use more of the subsidised fuel. This amount is significantly above the USD 70 billion that was spent in 2023 on support for consumer-facing clean energy investments, in the form of grants or rebates for electric vehicles, efficiency improvements or heat pumps. Innovative financial approaches are also required to facilitate the phase-out of the relatively young fleet of coal-fired power plants in many developing economies (mostly in Asia), which represent more than a trillion dollars of unrecovered capital.

The litmus test for affordability in energy transitions is what happens to consumer energy bills. Ultimately, consumers need to pay for the investments that are required to transform the energy system, whether directly through bills or indirectly through taxation or the cost of goods and services. However, the repayment of these investments is spread out over time, and the way that costs are allocated across different types of industrial and residential consumers is strongly affected by national circumstances and policies, making this a key decision point for policy makers. As it stands, some 10% of investment by consumers in clean energy is supported by governments in the form of grants or tax incentives.

Our projections highlight that rapid clean energy transitions result in lower consumer bills compared with a trajectory based on today’s policy settings. In advanced economies, total energy expenditure in the NZE Scenario by 2035 is already 20% lower than in the STEPS. In emerging and developing economies, a key variable is the phase-out of fossil fuel subsidies: progress with energy transitions requires phasing out inefficient fossil fuel subsidies that do not address energy poverty as soon as possible, even if this pushes up energy expenses for some better-off households. This process needs to be accompanied by mechanisms to target support to those in need, while maximising private sector participation and keeping a watchful eye on public finances. The net effect in emerging and developing economies is that total consumer energy expenditure is higher in the NZE Scenario than in the STEPS – by 25% in aggregate over the next ten years – but by 2050 it is lower by nearly 20% compared with the STEPS.

Who picks up the upfront costs of energy transitions is a political question for which countries will find a range of answers. Currently, around 45% of energy sector investments worldwide are made by private companies, around 35% by governments and state-owned enterprises, and 20% by households. Three-quarters of the financing for these investments comes from private and commercial sources. The remainder comes from states, with a small but important role for development finance institutions. Each of these actors face challenging starting conditions. Many governments are constrained in their ability to pick up a much larger share of the upfront costs of transitions because of fiscal limitations and indebtedness. Many large energy-intensive industrial consumers face intense international competition and thin margins, complicating efforts to invest in more innovative, cleaner technologies. Most investment in clean energy by households – such as efficiency improvements, solar panels, heat pumps or electric vehicles – are made by higher-income households. In the absence of policy interventions, the uptake of clean energy technologies by households will proceed much more slowly than is required for rapid energy transitions. 

The analysis highlights examples of how well-designed policies can bring clean energy technologies to households and communities that would otherwise be underserved.

• Alongside high standards for new construction, countries have adapted grant programmes for energy efficiency retrofits to make them more accessible to lower-income households. Several countries, including France, Ireland and the United Kingdom, have focused these programmes on lower-income households that are often tenants rather than owners and more likely to live in homes with relatively poor energy performance.
• Countries have used a range of policy tools to shift upfront expenditure away from poorer households, for example by obliging energy utilities or suppliers to fund more efficient heating or cooling systems (over 30 countries have some form of energy efficiency obligation in place, although this is not always targeted at lower-income households), and through lease arrangements or pay-as-you-go schemes for solar panels or electric cars.
• Governments have used minimum energy performance standards and top-up financing to make high-efficiency appliances more accessible. Mexico’s experience with performance standards shows that they can improve efficiency without pushing up costs, and policies in Senegal and Ghana illustrate how modest financial support can make best-in-class models competitive with less efficient ones.
• Policies have focused on a range of affordable clean transport options. Purchasing a new electric car is not an option for most low-income households, but there are policies that can make electrified transportation more widely accessible, with examples from China and India on support to the electrification of public transport and incentivising the purchase of electric two- and three-wheelers. Government support is now extending into second-hand electric vehicle markets in some countries.
• There are good examples of countries replacing fossil fuel subsidies with targeted support for vulnerable households. Subsidy reforms can be politically and socially difficult, but well-designed cash transfer schemes have proven to be effective in mitigating the impact of subsidy reforms on those in need, while freeing up resources for other social priorities such as health and education.
• Where carbon pricing schemes are in place, there is an increasing body of experience on how the associated revenues can be used for social aspects of energy transitions, following the examples of the European Union Social Climate Fund or California’s Climate Credit.
  

Taxes on energy production and use are important sources of revenue for governments around the world, and these will change profoundly as the world moves through transitions. The situation varies widely by country, but at global level governments have seen a surfeit of energy revenues (USD 3.4 trillion) over energy expenditures (USD 1.1 trillion) in recent years. Taxes on energy production, mostly from oil, have averaged around USD 1.5 trillion in recent years. Governments also receive USD 1.8 trillion from taxes on energy use, again mostly from oil, and close to USD 100 billion from carbon pricing instruments. In rapid clean energy transitions, declining government revenue from taxes on fossil fuel production and use is partly offset by higher revenue from carbon pricing. 

Net government income from the energy sector halves by 2035 in the NZE Scenario as fossil fuel-related revenues fall and support for clean energy picks up. Governments will need to formulate strategies to find alternative sources of revenue without penalising electricity use (which is already more heavily taxed than fuels in many countries), while managing the distributional implications. For example, expanding the scope of carbon pricing instruments to cover sectors such as transport and buildings could mean that lower-income households pay a larger proportion of overall CO₂ costs, if they cannot switch away from fossil fuels. There would be even larger implications at international level, with sharp reductions in fossil fuel rents payable to oil and gas exporters. How this plays out in practice depends on how fuel prices evolve, but the effect over time is to create severe strains on countries that are heavily dependent today on hydrocarbon revenues.

Energy transitions are an opportunity to create an energy system that is cheaper as well as cleaner, but transitions are not immune from price shocks. Such shocks have been a regular feature of energy markets in the past and this will no doubt continue to be so in the future, even as the nature of the risks to affordability and exposure to them evolves. Geopolitical tensions and upheavals remain important potential drivers of volatility, both in traditional fuel markets and, in a more indirect way, in clean energy supply chains. But the shift to a more electrified energy system also brings a new set of hazards into play that are more local and regional, especially if investments in grids, flexibility and demand response fall behind. Many power systems are vulnerable to an increase in extreme weather events and cyberattacks, putting a premium on adequate investments in resilience and digital security.

Alongside preventative measures, governments need to be ready to react when price shocks come, including targeted measures to protect vulnerable segments of the population. During the recent global energy crisis, governments spent USD 900 billion to help consumers manage sky-high energy prices. Three-quarters of this support was not targeted to protect those most in need and was instead administered to all consumers. Readiness to manage risks in the future means prior design of support mechanisms that can be time-limited and targeted. The global energy crisis was a costly reminder of the frailties of today’s energy system. It is time to move to one that is more affordable, and fair.

1. The transition to a clean energy system will not be complete unless all parts of society participate and benefit. It is essential to generate sustained public support. The key measure of success for transitions is expanded access to clean and affordable energy for everyone.
2. Affordable and fair transitions depend on policy design. Fair distribution of the costs and benefits of clean energy technologies depends on intentional policy design. Assessing the distributional impacts of policies in advance and monitoring and evaluating their implementation are essential to positive outcomes.
3. Make the most of clean technologies that are cost-competitive; bringing costs down and increasing access doesn’t have to be expensive. Many clean and efficient technologies are already cost-competitive with the alternatives, but they need to be widely available and their lifetime benefits recognised. There are tools available to policy makers, such as minimum energy performance standards, that can support clean energy goals without significant costs to either government or consumers.
4. Recognise and value the wider benefits of clean energy transitions. Successful energy transitions are not just about finding the cheapest pathway. Access to clean energy technologies can improve overall welfare through cleaner air, better-quality housing and improved health. Valuing such co‑benefits can make an even stronger case for change.
5. Know your consumers and their needs. Nuanced policy and programme design can meet the needs of all different segments of society. Using trusted intermediaries and simple administrative procedures can help increase uptake of targeted technologies and programmes.
6. Create the conditions for large-scale investment and finance from the private sector. Investment needs for energy transitions are well beyond the capabilities of public sources, so affordable transitions require working with the private sector. Using public funds strategically will bring in much larger volumes of private finance and provide enhanced support to developing economies.
7. Minimise the chances of adverse price shocks. Policies for energy transitions need to be clear and well-sequenced, with adequate attention to infrastructure, power system flexibility, demand-side measures, and dialogue between consumers and producers, to minimise the risks of sudden market imbalances and price shocks.
8. Be clear on long-term objectives, and vigilant on short-term risks. Policy-making in energy transitions requires a long-term clarity of purpose to drive investment decisions alongside a readiness to respond to near-term threats to security and affordability. Emergency preparedness, market monitoring, supply chain diversity, and climate and cyber resilience are essential tools to limit the risk of disruptions.