The IEA’s new industry report, to be produced in future on an annual basis, provides a detailed picture of the current investment landscape across fuels, technologies and countries.
The ability to attract and direct capital flows is vital to the process of transition to a low-carbon economy while maintaining energy security and expanding energy access worldwide, and the success or failure of energy policies can be measured by their ability to mobilise investments.
The report analyses the critical issues confronting investors, policy-makers, and consumers over the past year, appraising key issues such as the level of investment in the global energy system in 2015, which countries attracted the most capital, which fuels and technologies received the most investment and which saw the biggest changes, how the low fuel price environment is affecting spending in upstream oil and gas, renewables and energy efficiency, what this means for energy security, whether current investment trends are consistent with the transition to a low-carbon energy system, and how technological progress, new business models and key policy drivers such as the Paris Climate Agreement are reshaping investment.
Change at the top
The fall in global energy investment was due mainly to a sharp fall in upstream oil and gas investment. After three years during which the United States was the largest destination for investment in energy supply, China took back the top position, largely owing to the record level of electricity sector investment in China and the decline of US oil and gas investment. The rebalancing and slowdown of the Chinese economy is having a major impact on energy investment globally. In mature economies such as Europe, Japan and the United States the dominance of the services sector is weakening the link between energy demand and growth in GDP. These structural changes are reinforced by investment in energy efficiency, which reached $220 billion globally in 2015. Given that the majority of upstream oil and gas and almost 40% of electricity sector investment is aimed at replacing ageing assets, substantial investment is essential to maintaining supply security even as macro-economic and energy policy developments slow demand growth globally.
Oil and gas still represent the largest single category of global energy investment, accounting for over 45% of the total. Investment in the electricity sector rose to a record $690 bn, over 37% of the total, despite a marked slowdown in demand growth, driven primarily by the expansion of renewables and networks.
Fossil fuels continue to dominate energy supply, but the composition of investment flows suggests a reorientation of the energy system. Low oil and gas prices have led to cuts in investment in upstream and transportation infrastructure, with most major gas infrastructure projects in East Africa and Eurasia facing delays. Coal demand has declined, largely because of China and the United States, but coal is still the world’s second-largest primary fuel. China continued the restructuring of its mining industry, which represents half of global supply, in order to reduce excess capacity. Investment in coal globally is increasingly affected by climate policy, which is expected to drive down demand especially in Europe and the United States. On the other hand, Indian coal production continues to be supported by strong investment.
Renewables are expanding rapidly but asymmetrically as wind, solar and hydropower reshape the electricity system. Investment has remained relatively stable since 2011, but supports an accelerated production expansion due to declining technology costs. On the other hand, with the exception of solar heat in China, the investment in biofuels and renewable heat remains minor.
Fossil fuels
The impact of low oil prices on cash flow tested the debt-financed investment model of the US shale oil industry, leading to a particularly sharp fall in investment of 52% in that sector during the past two years. While financial pressures in the shale industry remain widespread, despite a recent partial recovery in oil prices, the operators that have filed for bankruptcy represent only a minor proportion of total US non-conventional production.
Impact of capital costs
Unit capital costs of supply declined across the energy spectrum, with average cost reductions in 2015 ranging from 3% in the case of onshore wind to 30% for US shale oil and gas. These cost changes are reshaping competition between fuels and technologies. Projects representing over half of total energy investment experienced significant cost declines, notably solar photovoltaic, upstream oil and gas, and electricity storage. Excess capacity in the supply chain also played a major role in pushing down costs, especially for upstream oil and gas.
Some other technologies, such as nuclear power, carbon capture and storage (CCS) and energy-efficient building renovations, whose costs are benefiting less from modularity and ‘learning by doing’, risk falling behind in the future, especially if project management risks affect financing.
Globally, cost reductions explain almost two-thirds of the fall in investment spending, with reduced activity accounting for the rest. At its current level, investment may be insufficient to maintain oil and gas production, indicating tighter markets ahead with different time horizons. Given that the impact of wind and solar investment on gas-fired generation is far stronger than the competition to oil in transport from alternative technologies, oil markets are likely to rebalance before gas markets, with low-carbon investment restricting gas demand.
Energy efficiency
Energy efficiency investment increased by 6% in 2015 despite falling energy prices. Despite lower oil prices, sales of electric cars (and investment in recharging infrastructure) continued to increase rapidly, driven by government policies in a growing number of countries. In the United States they are helping to offset the slowdown in fuel economy. Investment in other types of energy efficiency is proving resilient to declining fossil fuel prices. Investment in more energy-efficient appliances and equipment is driven mainly by standards and mandates as well as dedicated sources of financing. For energy services such as residential lighting. standards have improved the efficiency of lightbulbs so much that the cost of lighting has generally fallen since 2005, despite increases in electricity prices of up to 50% in some countries.
Decarbonisation
A major shift in investment towards low- carbon sources of power generation is underway. New low-carbon generation – renewables and nuclear – from capacity coming online in 2015 exceeded the entire growth of global power demand in the year. Renewables investment, primarily in wind, solar PV and hydropower, was almost $290 billion.
Technological progress and economies of scale are driving down the cost of renewables. The average carbon intensity of power generation from new capacity worldwide continued to fall, reaching 420 kg of CO2 per MWh in 2015. But while this decline has been a factor in the stagnation of global CO2 emissions over the past two years, the current pace of decarbonisation of power generation remains insufficient to meet the climate goal of keeping average temperature increases below 2°C. This leaves no doubt as to the necessity of stronger policy support.
This can draw on recent experience with ramping up investment in and mobilising cheap financing sources for low-carbon energy sources such as long-term contract auctions for renewable energy capacity.
Nuclear power investment reached its highest level for two decades in 2015, largely due to the expansion in China, where new nuclear capacity is reducing the need for coal-fired generation. But low wholesale prices, weak carbon price signals and project management problems continue to hinder nuclear investment in Europe and North America.
Asian pattern
In Asia, higher fuel transportation costs and infrastructure bottlenecks are limiting the competitiveness of gas-fired power generation compared to that of coal. In most importing countries, LNG infrastructure to a gas-fired power plant requires twice as much investment as the plant itself. Coal- to-power supply chains are considerably less capital-intensive. Coal mining and transportation infrastructure absorbs only 4% of global energy investment, yet coal meets 28% of global primary energy demand. Given Asia’s reliance on long- distance imports, high transportation costs put gas at a competitive disadvantage to coal across the region. Rapid growth in electricity demand, as well as energy security and cost considerations, are continuing to drive large investments in coal-fired capacity in India and the region of the Association of Southeast Asian Nations (ASEAN). On the other hand, gas is the preferred generating option in areas with abundant low-cost resources, such as North America, the Middle East and Russia. In the United States, its cost advantage is reinforced by environmental and climate regulations.
China
Signs of overinvestment in coal-fired generation have emerged in China. Macroeconomic restructuring and large- scale energy efficiency investments have put Chinese electricity demand on a structurally slower growth trajectory. Despite a decline in the average utilisation of coal-fired plants, over 70 GW of new projects started construction in 2015. With nearly 200 GW of capacity under construction in the first half of 2016, some coal-fired generators may face further reductions in operating hours and increased difficulty in recovering their capital costs. The Chinese government has since introduced measures to prevent further over-investment.
Utility investment
The role of wholesale price signals in driving investment in power generation is declining. Utility-scale renewables benefiting from long-term fixed-price contracts or regulated pricing is the largest and fastest-growing component of power generation investment worldwide, representing over half of the total. Consumer-led spending under new business models – including distributed solar PV for households and businesses and corporate buying of renewable power – accounted for over $ 50 billion of renewable investment, led by the United States, Europe and Japan. In North America, low gas prices and the retirement of coal-fired stations are still supporting market-based investment in new conventional generating
But in Europe conventional power generation investment has to all intents and purposes come to a halt, because the effect of low wholesale prices there is being reinforced by the financial weakness of many utilities. Given the looming decommissioning of a large amount of coal, nuclear and even gas capacity in the European Union, energy security concerns are on the rise. Investment in electricity storage is growing but, at $ 10 billion in 2015, remains nowhere near large enough to allay fears of a shortfall in dispatchable capacity.
In non-OECD countries, investment in conventional generation generally remains strong, dominated by state-owned utilities and independent power producers contracting with them. The growth in coal-fired capacity remained strong in developing Asia, with over 75 GW starting operation in 2015 – as much as all renewable capacity additions in the region combined. In sub-Saharan Africa, however, investment, only 1.5% of the total, remains wholly inadequate to eliminate energy poverty.
Network investment
The growing role of decentralised renewables production does not eliminate the need for continuing investment in the electricity network, given the limited prospects for large-scale electricity storage in the medium term. In fact, renewables investment often requires additional network investments in order for it to be integrated effectively into the system. The more than $260 billion invested in electricity networks around the world in 2015 is a crucial component of energy security. Almost all of this is subject to regulation, reinforcing the importance of a stable and transparent regulatory environment to maintain an adequate level of investment.
Supply security
Investment trends warn against complacency about energy security. In the electricity sector, wind and solar are now meeting a substantial proportion of the growth in demand in annual production volumes, but integrating them effectively into the power system requires additional investment and changing operational methods. In many countries, there is a policy debate about the ability of the current regulatory institutions to achieve this. Investment in flexible types of electricity generation, such as gas power, is slowing down to a halt in Europe and there are emerging uncertainties about its prospects in North America. In emerging markets such as Mexico and India, long-term contracts are helping to mobilise investment in renewables, but difficulties in upgrading the grid persist.
Transition
Globally, energy investment is not yet consistent with the transition to a low-carbon energy system envisaged in the Paris Climate Agreement of end-2015. While wind, solar PV and electric-vehicle investments are broadly on a trajectory consistent with limiting the increase in global temperature to 2°C, investment in other low-carbon technologies is falling behind. In several countries, nuclear capacity is ageing with little investment going to replacement capacity, and renewables are struggling to compensate for reduced nuclear output. Large-scale investment in CCS has yet to take off.
Large investments are still being made in subcritical coal plants, which risk locking in carbon emissions for decades. A combination of accelerated technological innovation and an investment framework aimed at encouraging rapid, large-scale deployment of low-carbon technologies will be essential to steer the transformation of the energy system if climate and energy security objectives are to be achieved.
