“A major shift in investment towards low-carbon sources of power generation is underway”, according to a first-ever detailed analysis of investment across the global energy system from the International Energy Agency (IEA). Yet, in non-OECD countries, “investment in conventional generation remains strong”, with over 75 GW of coal-fired power plants starting operation in 2015 in “developing Asia” – “as much as all renewable capacity additions in the region combined”. A “shift” may be underway – it is not going fast enough.
The IEA keeps adding to its series of high-level annual global energy publications. The latest IEA tome – coming in between the Energy Techology Perspectives (June) and the World Energy Outlook (November) – is called World Energy Investment. (The IEA did produce a special report on energy investment in 2014 (World Energy Investment Outlook), but this has now been upgraded into a regular annual report.)
Looking at the energy sector from an investment perspective, provides a useful “test” to the reliability of the developments reported in the other major reports. Investments after all determine what will really happen in the energy sector. In this sense, the World Energy Investment 2016 offers no major surprises. Its overall conclusions confirm the consensus views of analysts about where the energy sector is going. Yes, towards more renewables (and more nuclear), but no, “not fast enough” to limit temperature increases to 2 degrees Celsius.
Still, behind those generalisations there are plenty of interesting facts to emerge from this report. First of all, global energy investment declined last year by 8% (in real terms) to $1.8 trillion, mainly due to “a sharp fall in upstream oil and gas investment”. China “retook” the number one position from the US as top investor: whereas US investment in oil and gas production fell sharply, Chinese investment in the electricity sector rose to a “record level”. China increased its investment both in renewable energy and in nuclear power.
Oil and gas still represent the largest single category of global energy investment, reports the IEA, accounting for over 45% of the total. Investment in the electricity sector rose to a record $690 billion, or over 37% of the total, “despite a marked slowdown in demand growth, driven primarily by the expansion of renewables and networks”.
It will come as no surprise, then, that “fossil fuels continue to dominate energy supply”, but “the composition of investment flows points towards a reorientation of the energy system”.
Oil, “the largest primary energy source, slightly increased its share of the global energy mix”. Gas demand growth on the other hand remained “subdued”, as a result of a slowdown of electricity demand and the expansion of renewables.
Gas-fired power generation has a problem competing with coal, particularly in Asia, as a result of “higher fuel transportation costs and infrastructure bottlenecks”. This is not a new point either (the Golden Age of Gas is currently nowhere in sight), but it is brough home once again by the IEA: “Global gas-fired power generation investment declined by nearly 40% [in 2015 compared to 2014]. Asian markets continued to favour investment in coal power. Investment activity in European gas power remained muted despite large retirements anticipated in the next decade.”
A big bottleneck for gas are the high costs of LNG: “In most importing countries, LNG infrastructure to a gas-fired power plant requires twice as much investment as the plant itself”, notes the report. “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.”
Elsewhere the report speaks of “the looming collapse in investment in LNG from 2017 on”.
Interestingly, “upstream oil investment remained robust in Russia and the Middle East, helping to push up the share of national oil companies (which dominate production in those regions) in oil and gas upstream investment to an all-time high of 44%.” In Russia, capital spending even increased in ruble terms, helping to stabilise Russian production at a post-Soviet high.
Investment in energy efficiency increased by 6% in 2015 despite falling energy prices. Nevertheless, the IEA warns that “low oil prices risk derailing fuel efficiency improvements in the transport sector, especially in countries with low taxes.” In the US the rate of fuel economy improvement slowed down by two-thirds last year. Despite lower oil prices, “sales of electric cars (and investment in recharging infrastructure) continue to increase rapidly, driven by government policies in a growing number of countries.”
Renewables “are expanding rapidly”, notes the IEA, “but asymmetrically”. Whereas “wind, solar and hydropower are reshaping the electricity system”, with the exception of solar heat in China, “the investment in biofuels and renewable heat remains minor”.
Renewable energy investments of $313 billion “accounted for nearly a fifth of total energy spending last year, establishing renewables as the largest source of power investment”. Nevertheless, in US dollar terms renewable investment has remained “relatively stable” since 2011. Spending on renewable power capacity “was flat between 2011 and 2015”. However, electricity generation from this new capacity rose by one third, reflecting “the steep cost declines in wind turbines and solar PV”. The investment in renewable power capacity in 2015 generated “more than enough to cover global electricity demand growth”.
So while the money spent on renewables is not going up (or down), the amount of electricity produced by renewables is rising substantially, thanks to lower cost. Notably solar PV and electricity storage saw much lower cost, as a result of technology improvements and “learning by doing effects”. The cost of onshore wind fell 3%.
The IEA notes that “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.”
How the power market is changing
The World Energy Investment Report notes that the nature of investment in power markets is changing. “Around 95% of power generation investments rely on vertical integration, long-term contracts or price regulation to manage risks”, says the IEA. “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.”
In addition, “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 natural gas prices and the retirement of coal-fired stations are still supporting market-based investment in new conventional generating capacity. Liberalisation is driving investment in Japan. On the other hand, conventional power generation investment has essentially come to a halt in Europe, where the effect of low wholesale prices 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.”
With regard to electricity storage, investment is growing, but at $10 billion in 2015, “remains nowhere near big 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.”
Given “the limited prospects for large-scale electricity storage in the medium term”, continued investment in the electricity networks will be needed. In fact, the growing role of renewables “often requires additional network investments in order for it to be integrated effectively into the system. The over $260 billion invested in electricity networks globally 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 adequate investment.”
Nuclear power investment reached its highest level for two decades in 2015, largely due to expansion in China, “where new nuclear capacity is reducing the need for coal-fired generation”. But in Europe and North America, “low wholesale prices, weak carbon price signals and project management problems continue to hinder nuclear investment”.
For the electricity sector the IEA concludes that “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 exceeds the entire growth of global power demand in that year. Renewables investment, primarily in wind, solar PV and hydropower was almost USD $290 billion. Technological progress and economies of scale are driving down the cost of renewables.”
Despite this good news, the IEA adds the by-now familiar warning that “energy investment is not yet consistent with the transition to a low-carbon energy system envisaged in the Paris Climate Agreement reached at the end of 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”, the report notes. “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. On the demand side, economically viable alternatives to oil have yet to emerge in aviation, heavy-duty transport and shipping, which collectively account for the bulk of oil consumption. And large investments are still being made in highly inefficient subcritical coal plants, which risk locking in carbon emissions for decades.”
To really get to a low-carbon economy, “a combination of accelerated technological innovation and an investment framework aimed at encouraging rapid, large-scale deployment of low-carbon technologies will be essential”, the IEA concludes.