May 16, 2019 - "Energy investments now face unprecedented uncertainties, with shifts in markets, policies and technologies," Fatih Birol, the executive director of the International Energy Agency (IEA) says in the Paris-based organization's latest annual review.
The findings of the World Energy Investment 2019 report signal a "growing mismatch" between current trends and the paths to meeting the Paris Agreement and other sustainable development goals.
"[T]he bottom line is that the world is not investing enough in traditional elements of supply to maintain today's consumption patterns, nor is it investing enough in cleaner energy technologies to change course. Whichever way you look, we are storing up risks for the future," Birol said.
Global energy investment stabilized in 2018, ending three consecutive years of decline, as capital spending on oil, gas and coal supply bounced back while investment stalled for energy efficiency and renewables, according to the report. It totaled more than USD1.8 trillion in 2018, a level similar to 2017. For the third year in a row, the power sector attracted more investment than the oil and gas industry. The biggest jump in overall energy investment was in the USA, where it was boosted by higher spending in upstream supply, particularly shale, but also electricity networks. The increase narrowed the gap between the United States and China, which remained the world's largest investment destination.
Still, even as investments stabilized, approvals for new conventional oil and gas projects fell short of what would be needed to meet continued robust growth in global energy demand, the report says. At the same time, there are few signs of the substantial reallocation of capital towards energy efficiency and cleaner supply sources that is needed to bring investments in line with the Paris Agreement and other sustainable development goals, it adds.
The world is "witnessing a shift" in investments towards energy supply projects that have shorter lead times. In power generation and the upstream oil and gas sector, the industry is bringing capacity to market more than 20% faster than at the beginning of the decade. This reflects industry and investors seeking to better manage risks in a changing energy system, and also improved project management and lower costs for shorter-cycle assets such as solar PV, onshore wind and US shale.
Even though decisions to invest in coal-fired power plants declined to their lowest level this century and retirements rose, the global coal power fleet continued to expand, particularly in developing Asian countries, it says.
The continuing investments in coal plants, which have a long lifecycle, appear to be aimed at filling a growing gap between “soaring demand” for power and a "leveling off" of expected generation from low-carbon investments (renewables and nuclear), it says. Without carbon capture technology or incentives for earlier retirements, coal power and the high CO2 emissions it produces would remain part of the global energy system "for many years to come", it adds. At the same time, to meet sustainability goals, investment in energy efficiency would need to accelerate while spending on renewable power doubles by 2030.
Among major countries and regions, India had the second largest jump in energy investment in 2018 after the USA. However, the poorest regions of the world, such as sub-Saharan Africa, face persistent financing risks, the report says. They only received around 15% of investment in 2018 even though they account for 40% of the global population. Far more capital needs to flow to the least developed countries in order to meet sustainable development goals, it adds.
The report also found that public spending on energy research, development and demonstration (RD&D) is "far short of what is needed". While public energy RD&D spending rose "modestly" in 2018, led by the USA and China, its share of gross domestic product remained flat and most countries are not spending more of their economic output on energy research, it says.
"Current investment trends show the need for bolder decisions required to make the energy system more sustainable," Birol said. "Government leadership is critical to reduce risks for investors in the emerging sectors that urgently need more capital to get the world on the right track."
A better understanding the risks faced by investors requires "timely and authoritative" data and analysis, which the IEA says it is providing with this year's World Energy Investment report.
For the power sector, the 2018 investment total is comparable to the projected needs in the report's New Policies Scenario (NPS), but more than one-third lower than required in its Sustainable Development Scenario (SDS).
"Both scenarios would require a sizeable reallocation of capital, especially in the accelerated decarbonization and electrification that marks the SDS, which would require a doubling of renewable power spending, more investment in nuclear and a rising level of spending on electricity networks," it says.
Low-carbon spending in 2018 was marked by unchanged investment in energy efficiency and nuclear, while that for renewable power edged downwards. Battery storage investments grew by almost half, but were the equivalent, in dollar terms, to just over 1% of total grid spending. Spending on renewables for transport and heat declined slightly, with more biofuels investment offset by lower spending on solar heating installations.
Nuclear power investment edged up, the report says, as new grid-connected plants in 2018 grew threefold, 80% of them in China. Construction starts rose to 6 GWe, none of which were in China, but were much lower than capacity additions. Spending on the long-term operation of existing plants was 13% of the total.
Overall, low-carbon power generation (renewables and nuclear) comprised nearly three-quarters of generation spending. The share of low-carbon generation plus networks and storage, key enablers for power system flexibility, reached nearly 85% total power spending.
Investment in nuclear power was only 3% less than the needs under the NPS, the report says, but nearly 40% less than spending required in the SDS, with the largest gaps in Europe, the USA, and China.
FIDs - decisions to start construction for the first time - for the main sources of large-scale dispatchable power - coal, gas, nuclear, and hydropower - fell by a quarter in 2018 to 90 GW, 55% lower than in 2010.
FIDs for the largest sources of low-carbon dispatchable generation - hydropower and nuclear - were 40% lower than in 2017. Construction starts for new nuclear power plants rose by 50% in 2018, none of which were in China, but were lower than grid connections. Pumped hydro accounted for the majority of hydro projects taking FID in 2018 for the first time.
The five leading countries for public spending on energy R&D were the USA, China, Japan, France and Germany. These five countries accounted for around 70% of all such spending worldwide. RD&D budgets in Denmark and Italy also increased in 2018, while in Germany spending declined 2%.
Preliminary information indicates that governments around the world spent around USD26 billion on energy RD&D in 2018, suggesting a 5% increase year-on-year, similar to the previous year’s increase.
The European Union's research budget is approved for multi-year cycles and annual variations in spending should be seen in this context, the report says. The commitment to energy research remains high, but actual funding for energy research in 2018 fell back by around 15%. While R&D spending for cross-cutting technologies (such as smart grids) rose, it was lower in other areas, notably for energy efficiency and nuclear. Still, as the EU research budget is approved for multi-year cycles, annual variations do not change the overall growth in spending in each funding period.