The International Energy Agency released its World Energy Investment Outlook on Tuesday, highlighting the point that the cost of global energy demand through 2035 would cost $48 trillion.
In addition, the special report, part of agency’s World Energy Outlook series, sees an increasing role for governments in shaping investment decisions.
"Today’s annual investment in energy supply of $1.6 trillion needs to rise steadily over the coming decades towards $2 trillion," the IEA said, adding that annual spending on energy efficiency, measured against a 2012 baseline, needed to rise from $130 billion today to more than $550 billion by 2035.
"The reliability and sustainability of our future energy system depends on investment," said IEA Executive Director Maria van der Hoeven. "But this won’t materialize unless there are credible policy frameworks in place as well as stable access to long-term sources of finance. Neither of these conditions should be taken for granted. 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."
Newly compiled data show how 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.
The report points out that investment in renewables in the European Union has been higher than investment in natural gas production in the United States.
"Renewables, together with biofuels and nuclear power, now account for around 15% of annual investment flows, with a similar share also going to the power transmission and distribution network." The IEA adds that a large majority of current investment spending — well over $1 trillion — is related to fossil fuels, either on extraction, transportation, refining crude oil into oil products or building coal and gas-fired power plants.
The agency says government policy measures and incentives are increasingly shaping investment decisions. "While many governments have retained direct influence over energy sector investment, 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, the IEA says administrative signals or regulated rates of return have become the most important drivers for investmen. Indeed, the share of investment in competitive parts of electricity markets has fallen from about one-third of the global total a decade ago to around 10% today, according to the report.
"Policy makers face increasingly complex choices as they try to achieve progress towards energy security, competitiveness and environmental goals," said IEA chief economist Fatih Birol. "These goals won’t be achieved without mobilizing 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, some $40 trillion is slated for energy supply, with the remainder for energy efficiency. Of the $40 trillion, $23 trillion will go to 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.
More than half of the energy-supply investment is needed just to keep production at today’s levels by compensating for declining oil and gas fields and to replace power plants and other equipment that reach the end of their productive life. The $8 trillion of investment in energy efficiency is concentrated in the main consuming markets, the European Union, North America and China: 90% is spent in the transport and buildings sectors.