Cities and urban, metropolitan areas will be arguably the most relevant stages where the energy transition battle will unfold in the coming years and decades. This is so because:

  • More than 50% of the world’s population lives in cities at present, and this share is expected to increase to about 70% in 2050.
  • Cities account for about 75% of final energy use and 70% of total emissions of greenhouse gases.
  • Urban centers generate about 80% of global GDP.

The main implication of all these statistics is that advances in the environmental sustainability of cities will have a tremendous impact on all dimensions of the sustainability of societies and the planet at large. In particular, dealing in an efficient, effective manner with home heating and urban transport will be essential to the success of the energy transition in cities, as they represent more than 80% of total urban energy consumption.

The energy transition at the urban level involves, eventually, the full decarbonization of all human activities. Achieving net-zero emissions implies essentially: (1) increasing the amount of renewable energy in energy supply (which can be accomplished by augmenting distributed generation, such as rooftop solar energy, for instance, and other clean sources of energy), (2) increasing energy efficiency (via better insulation for buildings and technologies and equipment to actively manage energy demand but also by optimizing the use of materials and energy from a life-cycle perspective, for instance, via circular processes), and (3) decarbonizing mobility (which will probably involve a mix of electricity and other clean fuels, increased public transport services, alternative modes of mobility for first- and last-mile trips, including walking, cycling and other forms of micromobility, and an optimized, integrated management of traffic, urban logistics and the mobility of people).

What are the key challenges for cities regarding the energy transition?

While greenhouse gases represent a challenge for the planet as a whole, as their effect is independent of the location of the emissions, cities suffer directly the impact of pollution due to the emissions of particles (from vehicles, building heating and other sources), growing amounts of municipal solid waste and other forms of environmental damage.

All these side effects of human activities reduce the quality of life in cities, creating a costly burden, economically, socially and healthwise. Responding to the environmental challenge should be, therefore, an urgent and top-priority goal for urban areas around the world. Those cities that are able to adapt and make the required transformations efficiently will end up being more competitive (i.e., more capable of generating sustainable economic activity and social wellbeing) than those that lag behind in the process.

Additionally, many of the changes required to make the energy transition a reality must take place at the local level, including implementing the energy and climate strategies devised at higher levels of the administration. If we take a broad view about the energy transition (in short, the transformation of the economy into a zero net-emissions economy), this would involve changes in energy production and supply (especially with the development of distributed energy resources), the development of key transport, housing, energy and digital infrastructures and changes to end user behavior regarding the consumption of energy and other goods and services. The scale of the technological transformation is enormous at all levels.

Creating sound governance structures and decision-making processes also represents a major challenge for cities around the world. While local authorities are best placed to act at the local level, oftentimes they find themselves unable to act and implement disruptive changes, whether due to political, regulatory and legal or financial reasons. Both vertical (i.e., across layers of government) and horizontal coordination (i.e., across sectors, agents and stakeholders) will be necessary to use the available resources efficiently.

Substantially reducing the greenhouse gas emissions and pollution and waste in cities will imply making profound changes in the way homes are heated, how people travel and move around the city and how we consume goods and services. All these changes will require large amounts of investment and both technological and non-technological innovation.

Despite the inherent difficulties in implementing disruptive technological, legal and regulatory changes that pave the way to the net-zero emissions economy, perhaps the main barrier to change is related to the preferences, attitudes and culture of urban inhabitants. Strong social support for energy conservation, circular economy practices and more sustainable forms of urban mobility are needed to facilitate the political will and decisions that will shape the carbon neutral economy.

How can the transition towards sustainable, net-zero emissions cities be facilitated?

In the light of these barriers and challenges, the question arises as to what can be done to induce changes that make a difference in terms of sustainability.

First, a holistic approach to urban planning, sustainable transport policies, the energy strategy, etc., must be adopted. Solving the sustainability issues in an integrated manner will help to use the available resources efficiently and will avoid getting stuck with partial, second-best solutions. In this sense, an adequate level of coordination between the various levels of administration (local, regional, national…) must be ensured.

In particular, a well-targeted energy strategy is necessary to induce an efficient deployment of renewable energy technologies and investments in energy efficiency, especially in the buildings sector. An appropriate combination of fuel substitution policies (for heat consumption) and policies to induce investments in the renovation of the buidings’ façades, rooftops, etc., must be found in order to achieve decarbonization goals in a cost-effective manner, given the difficulties and costs associated with the deployment of the most efficient technologies (e.g., heat pumps) in certain contexts.

In terms of mobility, a balance needs to be struck between policies conducive to more sustainable forms of urban transport (i.e., alternative energies in mobility, such as electricity and others, alternative modes of transport and increased public transport) and the needs and preferences of citizens. While command-and-control policies (for instance, restricting the use of private cars in city centers) may be effective, they may also weaken the social support for deep transformations. A gradual, consensual approach to the transformation of urban mobility with a clear roadmap and long-term vision may prove to be more impactful over the medium and long run.

The development of advanced digital, transport and energy infrastructure will be essential to facilitate the adoption of “smart-city” concepts and solutions. This involves moving forward with the digitization of existing infrastructure and the digitalization of operating and management processes to effectively create smart transport and energy networks. The development of smart energy grids will be particularly relevant, as they can facilitate the integration of the energy system, covering a wide array of energy technologies and end-use technologies (in buildings, transport, etc.). In particular, smart electricity grids will have to accompany the growth in distributed energy resources, including the electric vehicle and energy storage technologies.

An impulse to circular economy processes and business models will help to reduce urban waste (and, indirectly, emissions) and create economic value linked to the monetization of recycled materials and products. Implementing circular economy programs, though, requires working on both the supply and demand sides of the market, creating the right incentives for companies to put in place new business models and for citizens and businesses to actively engage in recycling and other circular economy activities.

Fostering innovation at the city level will also be necessary to successfully decarbonize urban economies. Cities can also act as a lab for innovation. New solutions that may range from innovative “smart energy districts” (or buildings) to new forms of mobility services, automated mobility pilots or new technologies for traffic control and management can be deployed and tested on a small scale at a relatively low cost, allowing for the successful ones to be then scaled up. Creating an adequate environment for the development of new business models involving the management of energy and new mobility services (e.g., mobility as a service, MaaS) will be crucial.

Finally, a sound local regulatory framework, with adequate economic signals and incentives in place, will provide the required background for investments and for changes in citizens’ preferences and choices regarding the use of energy and mobility. There are many regulatory designs that may induce sustainability but, probably, the most feasible ones include combinations of mandates (e.g., requirements for new buildings, renovation of old buildings, etc.) and restrictive policies (e.g., regarding mobility, use of public spaces, etc.) with outright economic signals (e.g., subsidies to promote technological change or targeted local taxes and rates). Local regulatory frameworks, of course, must be in sync with higher-level regulations at the provincial/state, national and EU levels.

The relevance of securing funds to finance the urban energy transition

In addition to all the factors mentioned above, a key lever of success for the profound transformation that is required to achieve sustainable outcomes will be the cities’ capacity to attract sufficient financial resources and capital to finance the necessary investments, especially in a context of tight fiscal budgets and fierce competition for scarce capital.

The key challenge is twofold. First, it will be necessary to attract capital from sources such as higher-level administrations (i.e., regional or national) or available funds within the EU recovery plan (NextGeneration EU) in order to complement the fraction of the local budget that can be allocated to climate change and climate adaptation programs. Additionally, innovative financing schemes must be devised in order to attract private capital and, specifically, capital from both financial and non-financial institutions.

Developing a dynamic environment for sustainable financing at the local level will be a lever of urban competitiveness (Fernández Gómez & Larrea Basterra, 2021) and should, therefore, be a priority for local governments. 

The case of Greater Manchester, recently analyzed by Bellinson et al. (2021), offers an example of how to design and articulate innovative funding and financing strategies on the basis of new approaches to public-private cooperation and within the wider scope of an energy-climate strategy aiming to reach carbon neutrality in the region by 2038.

The Greater Manchester Combined Authority (GMCA), created by the cities of Manchester and Westminster in 2011, has broad powers in areas like transport, skills and jobs, land and housing, public services such as health and social care, etc., and finance. GMCA is responsible for leading the decarbonization process and establishing a strategy (based on mission-oriented innovation – see Mazzucato (2018)) and action plans to reach the stated carbon neutrality goal.

Given that the GMCA does not manage a specific budget to finance programs aligned with the stated carbon neutrality mission and the growing difficulty to support innovative activities via grant funding (due to generalized fiscal and budgetary constraints) it has sought to identify alternative ways of financing projects and mobilizing private capital. In order to do so, it has established the Greater Manchester Environment Fund, which pools resources from the public sector, foundations, philanthropic organizations and corporations and other stakeholders to feed “sub-funds” that will finance specific sustainability projects (with social, financial and/or environmental objectives).

The GMCA strategy is thus based on tailored schemes that align sustainability objectives with the goals and interests of the different actors involved. Among the tools that are used to generate flows of capital are targeted public sector procurement, urban wealth funds, seed financing and challenge/innovation prizes, value-sharing mechanisms (e.g., profit-sharing between public and private investors), project-based grants from grant-making organizations, alignment between the interests of private companies’ shareholders and the goals of the projects, creating investible assets from nature-based solutions, municipal bonds, etc.

Although a one-size fits all solution does not exist and each city faces its own specific circumstances (e.g., financial situation, types of actors and institutions, regulations, etc.), the Greater Manchester case highlights the benefits that innovation in financing and public-private cooperation may bring about in order to secure capital flows to fund innovation in sustainability in the urban context.

Some concluding remarks

Accelerating the energy transition in cities will bring about significant environmental benefits at both the local and global level. These benefits will be accompanied by numerous opportunities to create economic and social value and to foster technological and non-technological innovation. The transformation of cities into sustainable, smart cities will also help to nurture the local ecosystem of businesses and industrial companies specialized in the required low-emissions equipment and infrastructure and in new services for urban dwellers.

In order to move forward with the urban metamorphosis, a number of technological, regulatory, financial and cultural challenges will have to be overcome. Arguably, the most pressing questions regarding the coming changes are related to (1) how preferences and attitudes of urban citizens and consumers can be steered in a way that supports innovative and radical changes aligned with the sustainability goals, and (2) what are the most efficient and effective ways to induce the required investments (in energy infrastructure, energy efficiency in buildings and homes or sustainable mobility).


Jorge Fernández PEQUEÑA03

Jorge Fernández

Senior researcher and coordinator for the field of energy at Orkestra since March 2018. PhD in Economics, Georgetown University (Washington DC), Jorge has broad experience in the energy sector.

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