Powering the Energy Transition: Progress and Challenges

The energy transition has advanced rapidly, but unevenly. The costs of wind, solar, and battery technologies have fallen sharply, driving record investments, while electrification of transport, heating, and industry continues to lag, weakening the revenues needed to sustain further clean investment. We review the Industrial Organization literature on the market-design questions raised by this mismatch. On the supply side, we discuss why long-term contracts are essential for financing clean assets and how their design and the auctions that allocate them shape efficiency and the scale of investments; investments in transmission, storage, and demand-response policies are also needed to help power systems accommodate intermittency across space and time. On the demand side, we examine why electrification remains sluggish despite declining clean-electricity costs. An overarching theme is the social acceptance and distributional consequences of the transition, as well as the policies designed to address them. Further research in this area could play an important role in informing ongoing policy design.