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US$ 48 trillion of global investment needed to meet energy needs

Hydrocarbon Engineering,

According to a new report from the IEA, the world’s growing need for energy will require more than US$ 48 trillion in investment over the period to 2035. Today’s annual investment in energy supply of US$ 1.6 trillion needs to rise steadily over the coming decades towards US$ 2 trillion. Annual spending on energy efficiency, measured against a 2012 baseline, needs to rise from SU$ 130 billion today to more than US$ 550 billion by 2035.

Annual investment

The data shows how annual investment in new fuel and electricity supply has more than doubled in real terms since 2000, with investment in renewable sources of energy quadrupling over that time, mainly due to government policy. Investment in renewables in the EU has been higher than investment in natural gas production in the US. And renewables, together with biofuels and nuclear power, now accounts for approximately 15% of annual investment flows, with a similar share going to the power transmission and distribution network. However, a large majority of today’s spending, well over US$ 1 trillion, is related to fossil fuels, whether extracting them, transporting them to consumers, refining crude oil into products, or building coal and gas fired power plants.

Policy’s influence

Investments are increasingly being shaped by government policy measures and incentives. While many governments have retailed direct influence over energy sector investment, some stepped away from this role when opening energy markets to competition. In fact, 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, and the share of investment in competitive parts of the market has fallen from approximately one third for the goal total 10 years ago to 10% today.

Investment to 2035

Of the cumulative investment bill to 2035 of US$ 48 trillion, in the report’s main scenario, US$ 40 trillion is in energy supply and the rest is put in to energy efficiency. Of the investment in energy supply, US$ 23 trillion is for fossil fuel extraction, transport and oil refining. Almost US$ 10 trillion is for power generation and a further US$ 7 trillion is for transmission and distribution. More than half of the energy supply investment is needed to keep production at today’s levels, that is, to compensate for declining oil and gas fields and to replace power plants and other equipments reaching the end of their life cycle. The US$ 8 trillion of investment in energy efficiency is concentrated in the main consuming markets, the EU, North America and China. 90% is spent in the transport and buildings sectors.

LNG focus

The report has a focus on the significant costs of investing in new liquefaction facilities and how these add to the cost of imported LNG, slowing the rate at which new LNG can globalise gas markets. IT examines the long term importance of the Middle East to oil markets, as well as the obstacles that could prevent upstream investment in this region being made in time to avoid tighter markets and a spike in oil prices once non-OPEC supply starts to plateau in the 2020s. In Europe, it details how current market rules do not incentivise the investment needed in new thermal power plants, with implications for the reliability of European electricity supply.

Environmental investment

The investment path looked at in the report falls short of reaching climate stabilisation goals, as today’s policies are not strong enough to switch investment to low carbon sources and energy efficiency at the necessary scale and speed. Some US$ 53 trillion in cumulative investment in energy supply and in energy efficiency is required by 2035 to get the world onto a 2 °C emissions path. Investment of US$ 14 trillion in efficiency helps to lower 2035 energy consumption by almost 15% compared with the main World Energy Outlook scenario. At US$ 40 trillion, energy investment remains comparable, but unit investment costs rise as investment shifts from fossil fuels to the power sector. Approximately US$ 300 billion in fossil fuel investments is 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 US$ 900 billion and spending on energy efficiency to exceed US$ 1 trillion /y by 2035, double the respective amounts seen in 2035 and the main scenario.

The full investment report can be found here.

Adapted from press release by Claira Lloyd

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