Meeting the world’s growing need for energy will require investment of more than $48 trillion between now and 2035 – posing a major challenge to governments to come up with policy frameworks that encourage private investors to commit to new supply projects. So says the International Energy Agency (IEA) in a new report on global energy investment.
The agency also warns that the investment path outlined in the report’s main scenario “falls well short of reaching climate stabilisation goals” because “today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed”. For there to be any chance of putting the world on a 2°C emissions path “a breakthrough at the Paris UN climate conference in 2015 is vital to open up a different investment landscape”.
Launching the report in London, the agency’s executive director, Maria van der Hoeven, warned that the necessary investment to meet global energy needs would only materialise if there are “credible policy frameworks in place as well as stable access to long-term sources of finance”.
“Real risk of shortfalls”: “Neither of these conditions should be taken for granted,” she said. “There is a real risk of shortfalls, with knock-on effects on regional or global energy security, as well as the risk that investments are misdirected because environmental impacts are not properly reflected in prices.”
The IEA’s chief economist, Fatih Birol, added: “Policy-makers face increasingly complex choices as they try to achieve progress towards energy security, competitiveness and environmental goals. These goals won’t be achieved without mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play.”
Of the cumulative global investment bill to 2035 of $48 trillion in the report’s central scenario, around $40 trillion is in energy supply and the remainder in energy efficiency. Of the investment in energy supply, $23 trillion is in fossil fuel extraction, transport and oil refining; almost $10 trillion is in power generation, of which low-carbon technologies – renewables ($6 trillion) and nuclear ($1 trillion) – make up the lion’s share; and a further $7 trillion in transmission and distribution.
Over 80% of upstream oil & gas investment offsets output declines at today's fields, while over 40% of power generation investment is to replace plants that retire. (Source: IEA)
Running to stand still: Crucially, more than half of the energy-supply investment is needed just to keep production at today’s levels; in other words, to compensate for declining oil and gas fields and to replace power plants and other equipment that reach the end of their productive life.
To compensate for the decline and to meet energy demand growth, today’s annual investment in energy supply of $1.6 trillion needs to rise steadily over coming decades towards $2 trillion. Annual spending on energy efficiency needs to rise from $130 billion today to more than $550 billion by 2035.
Data compiled by the IEA show that – despite rapid growth in investment on renewable energy sources – by far the largest share of a today’s investment spending, well over $1 trillion, goes fossil fuels: extracting them, transporting them to consumers, refining crude oil into oil products, and building coal- and gas-fired power stations.
Annual investment in new fuel and electricity supply has more than doubled in real terms since 2000, with investment in renewable source of energy quadrupling over the same period, thanks to supportive government policies. Renewables, biofuels and nuclear power now account for around 15% of annual investment flows, with a similar share going to power transmission and distribution networks.
Focusing on the significant costs of investment in new natural gas liquefaction facilities, the IEA’s report notes that these are adding to the cost of imported LNG – “slowing the rate at which new LNG can globalise gas markets”.
Shaped by policy: The report notes that investment decisions are increasingly being shaped by government policy measures and incentives.
“While many governments have retained direct influence over energy sector investment,” says the IEA, “some stepped away from this role when opening energy markets to competition; many of these have now stepped back in, typically to promote the deployment of low-carbon sources of electricity. In the electricity sector, administrative signals or regulated rates of return have become, by far, the most important drivers for investment. The share of investment in competitive parts of electricity markets has fallen from about one-third of the global total ten years ago to around 10% today.”
Threat to European power supply: Focusing on Europe, the report sets out how current market rules do not incentivise the investment needed in new thermal power plants, with implications – if these rules do not change – for the reliability of European electricity supply.
Mitigating climate change: In an alternative scenario looking at the cumulative investment in energy supply and energy efficiency needed by 2035 to get the world onto a 2°C emissions path, the IEA reckons that the total rises from $48 trillion in the central scenario to $53 trillion.
Investment of $14 trillion in efficiency helps to lower 2035 energy consumption by almost 15%, compared with the main scenario. At $40 trillion, energy supply investment remains at a comparable level, but unit investment costs rise as investment shifts from fossil fuels – where investment is almost 20% lower on average and coal is hit hardest – to the electricity sector. Fossil-fuel assets worth around $300 billion are left stranded by stronger climate policies.
“Consistent policy signals and innovative financing vehicles will be essential to see investment in low-carbon energy supply rise to almost $900 billion and spending on energy efficiency to exceed $1 trillion per year by 2035,” says the agency, “double the respective amounts seen in 2035 in the main scenario.”
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