The economic recovery in 2021 has tightened commodity markets and put upward pressure on prices across the board. Crude oil prices whipsawed from USD 20/barrel in the immediate aftermath of the pandemic in mid-2020 to around USD 70/barrel in mid-2021. Spot natural gas prices have been on a relentless upward march around the world, and they reached their highest ever levels in Europe during the second-half of 2021 (more than ten-times the record lows reached in June 2020). Coal prices in 2021 have also seen strong growth on the back of a rebound in demand, especially in Asia. High natural gas and coal prices have fed through to higher power prices in many markets, particularly where output from renewables has been relatively low.

Prices for key critical materials, such as lithium and copper, have rebounded strongly and are near or above the highest levels observed in the past decade. This rise in prices may reflect not just the economic recovery but also the commodity market’s rising expectation of the widespread use of these critical minerals in clean energy transitions. All else being equal, we estimate that, if current spot prices for key critical minerals were maintained, they would increase clean energy investment costs in the STEPS by over USD 400 billion, and by USD 700 billion in the NZE, by 2030.

High prices are a signal that supply is struggling to meet demand. In recent years, investment in oil and gas supply has often appeared to be geared towards a world of stagnant or even falling demand, while purchases of internal combustion engine (ICE) vehicles and expansion of natural gas infrastructure point the other way: towards ever increasing oil and gas consumption. The Covid-19 pandemic, which led to a near-record low in new oil and gas investment in 2020, intensified this trend.

Uncertainty about future levels of demand is reflected in our scenarios. In the STEPS, rising oil and gas demand leads to price levels that incentivise investment in new supply. In the NZE, on the other hand, a rapid drop in oil and gas consumption means that there are no new investments in supply projects beyond those already announced or under construction: prices are set by the operating costs of the marginal project required to meet demand, and this results in significantly lower fossil fuel prices than in recent years. Navigating the uncertainty between these two outlooks will not be easy, and volatility and price shocks cannot be discounted during the transition (see section "Energy security and the risk of disorderly change").

The effect of high fossil fuel prices on clean energy transitions is not clear cut. High prices narrow the competitiveness gap with lower carbon fuels and technologies such as renewables or bioenergy. They ought to incentivise producers to take action such as reducing methane leaks or gas flaring, and consumers to improve energy efficiency or moderate consumption. But they also send strong signals to invest in new supplies, which would lock in new sources of emissions if companies and investors act on them. Higher cost sources of oil and gas often have a higher level of emissions, and this could exacerbate additional lock in. Rising energy bills for households or industries might also put pressure on governments to raise fossil fuel subsidies, reduce clean energy levies or dilute planned support packages for low-carbon technologies. Equally, it might make them more determined to push ahead as rapidly as possible with efforts move away from fossil fuels. Relative changes in the price of coal, gas and oil could also lead to fuel substitution effects, for example if high natural gas prices were to encourage a switch to coal or fuel oil, or the other way around. 

The extent to which commodity prices feed through to household and other energy bills is determined by policy and market design, as well as by whatever taxes, subsidies, capital costs and environmental surcharges are reflected in the final bill. In an ideal world, energy bills would be based on cost-reflective energy prices and would encourage efficient and sustainable choices, but without harming low income households or choking off economic activity. 

In the STEPS, average household energy bills in advanced economies decline from an average of around USD 3 200 over the last five years to USD 2 400 per household in 2050. In emerging market and developing economies they rise by 80% over this period – more than the growth in average disposable income – as a result of the rapid growth in appliance and vehicle ownership which occurs in parallel with rising electricity, gas and oil prices. Energy efficiency improvements, electrification and switching to low-carbon sources could all help to make energy more affordable. However, they often require upfront investment and, even though such costs are offset over time by energy bill savings, access to finance remains an important hurdle to overcome, especially for low income households. Targeted subsidies for low-carbon energy, particularly electricity, may be necessary to lessen the burden of price increases on low income families as energy systems move towards net zero emissions.

The share of electricity in household energy bills rises in all scenarios. In the NZE, electricity accounts for 90% of household bills in emerging market and developing economies and close to 80% in advanced economies by 2050, compared to a global average of around 30% in 2020.

In advanced economies, household electricity bills in 2050 are higher in the NZE than in the STEPS, however overall energy bills are on average nearly 10% lower because of efficiency gains and because households no longer need to pay for natural gas for heating and oil for cars. In emerging market and developing economies, higher electricity bills are offset for the same reasons, and so the total household energy bill is lower in the NZE than in the STEPS in 2030, and ends up broadly the same in the two scenarios by 2050. This outcome depends strongly on efficiency improvements; without additional improvements relative to the STEPS, average household energy bills globally in the NZE in 2050 would be a third higher.

As events in 2021 show, consumers are vulnerable when prices rise sharply. We have tested this by modelling the impact of a fossil fuel price shock in 2030 on household energy bills in the STEPS and NZE, taking the highest oil, natural gas and coal prices reached in each region over the period from 2010 to 2020. We find that:

• In the STEPS, households in advanced economies would pay 25% extra for their energy, or an additional USD 750, in this sensitivity case. In emerging market and developing economies, households would pay 35% more, primarily because gas, coal and oil make up a larger share of total household energy use in 2030 than in advanced economies. On average across all countries, the price shock raises household electricity bills by 10% in 2030, while the cost of gas-based heating doubles and that of oil-based transport rises by 45%.
• In the NZE, the additional cost to households in advanced economies is USD 470, nearly 40% less than in the STEPS, and in emerging market and developing economies it is 20% less than in the STEPS. The impact of higher commodity prices is dampened by more rapid efficiency gains, by reduced direct use of oil and gas, and by electricity having a higher share in total household energy expenditure (electricity is less affected by the price shock than oil and gas because of the rising role of renewables). In advanced economies, the price shock still leaves total costs to consumers in the NZE below the level of costs in the STEPS without a price shock. 

The reduced exposure to commodity price changes in the NZE is also due to a more capital‑intensive energy system, in which the fixed charges for recovering investment in infrastructure become more important drivers of energy bills in the long run. This is especially true for the power sector, which in the NZE becomes dominated by renewables with zero marginal cost, but nonetheless requires a ramp up in grid and battery investments to almost USD 1 trillion by 2050, a more than threefold increase on current levels. The cost of developing critical minerals also becomes more important in setting energy prices in such a capital-intensive world, but these have a less immediate effect on end-user bills than oil, gas or coal prices. Since much of the additional investment in the NZE occurs in end‑use sectors themselves, the cost of capital to consumers also forms a crucial part of the energy affordability equation.

Volatile electricity prices cannot be discounted during the transition, however. Fuel costs can still play an outsized role in price formation even though their contribution to overall electricity supply shrink, as in many markets where marginal cost pricing determines wholesale prices based on a merit order where natural gas or coal plants are dispatched according to their short-run costs of generation. Moreover, the weather-dependent nature of electricity supply (from wind and solar) and demand (from air conditioning or heat pumps) can cause significant price volatility, which can contribute to lower or higher consumer bills. Wholesale price volatility is reduced in the NZE by a broad suite of short- and long-duration sources of flexibility (via batteries, hydropower, low emissions thermal generation sources, interconnected grids and demand-side response). Their uptake relies on updated market frameworks to reflect the value of all grid services provided.

In all countries, governments, as far as possible, will want to anticipate and counteract the potential drivers of significant price increases. It will be particularly important to ensure that energy services remain accessible and affordable for all households. Possible actions in support of this include facilitating improvements in energy efficiency and incentivising fuel switching to renewables or electricity, especially for the least well-off households.