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IEA warns of looming energy investment shortfall

A looming energy investment shortfall risks derailing carbon-reduction targets the International Energy Agency (IEA) has warned

In a new report, World Energy Investment Outlook, the IEA said that to meet global energy demand, around $40 trillion will need to be invested by 2035, while a further $8 trillion will need to be spent on energy efficiency. "The reliability and sustainability of our future energy system depends on investment," IEA executive director Maria van der Hoeven said. "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."

More than half of the $40 trillion needed to meet global energy demand by 2035 would have to be spent on maintaining current production levels rather than on developing new sources of supply, the IEA said. Between now and 2035, around $23 trillion will need to be invested in fossil fuel production, transport and oil refining. Almost $10 trillion will also be needed for power generation, of which low-carbon technologies such as renewables ($6 trillion) and nuclear power ($1 trillion) comprise the majority. A further $7 trillion will be needed for power transmission and distribution.

Currently global investment in energy supply totals around $1.6 trillion per year. The bulk of that, more than $1 trillion, is spent on producing and transporting fossil fuels to markets.This will need to rise steadily over the next two decades to around $2.2 trillion, the IEA said, to compensate for declining output from existing oil and gasfields and to replace ageing power plants and idled equipment.

The IEA expects that, by 2035, investment in the upstream energy sector will rise by a quarter  to more than $850 billion per year. Around one-quarter of the total will be spent on producing unconventional resources, such as oil sands, tight oil and shale gas. More than 80% of this spending will be needed to compensate for declining production, with investment in natural gas accounting for most of the increase. 

The agency also expects that gradual depletion of the most accessible reserves will force energy companies to develop more challenging fields, which will put pressure on upstream costs and boost oil prices to around $128 a barrel (/b) by 2035. Annual spending on energy efficiency will also need to rise from around $130 billion today to more than $550bn by 2035, the IEA said. Around 62% of energy efficiency spending will be in the transport sector, with 29% in buildings.

The IEA said energy investment decisions are increasingly being shaped by government policy measures and incentives, especially in promoting low-carbon energy sources. In the electricity sector, administrative signals or regulated rates of return have become the driving factor in determining investment levels. As a result, the share of investment in competitive parts of electricity markets has fallen, from about one-third of the global total 10 years ago to around 10% today, it said."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 mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play."

The IEA expects around $700bn to be invested in developing liquefied natural gas (LNG) by 2035, adding that significant investment will be needed to build new liquefaction facilities. However this will slow the rate at which new LNG supplies come online and will also increase the cost of new supplies.  

The agency also pointed out that meeting long-term oil demand growth will increase global dependence on the Middle East for supplies, once the current rise in non-Opec output starts to plateau in the 2020s. Van der Hoeven said increased investment in the Middle East "remains absolutely critical" to the longer-term outlook for oil markets."If investment does not pick up as needed, this will mean much tighter and more volatile oil markets in the 2020s, leading to higher prices," she added.

The IEA said if the necessary investment in developing Middle East oil and gas reserves doesn't happen, because of insecurity over investment climates, average oil prices will reach around $130/b by 2025, up from previous forecasts of around $116/b.  

Key points from the IEA report:

  • More than $1.6 trillion was invested in 2013 in energy supply, more than double the rate in 2000;
  • Annual investment in renewable energy increased from $60bn in 2000 to almost $300bn in 2011 before falling back since to $250bn;
  • The largest share of current investment, more than $1 trillion per year, is related to the extraction and transport of fossil fuels, oil refining and the construction of fossil fuel-fired power plants;
  • By 2035 global annual investment in energy production will need to rise to $2 trillion while annual spending on energy efficiency will need to increase to $550bn; 
  • Around $23 trillion will be spent on fossil fuel extraction, transport and oil refining by 2035 alongside almost $10 trillion on power generation;
  • Spending on renewables ($6 trillion) and nuclear power ($1 trillion) will account for almost three-quarters of total expenditure on low-carbon technologies. A further $7 trillion will be spent on transmission and distribution;
  • More than half of the $40 trillion investment needed in energy supply by 2035 will be spent on offsetting declining production from existing oil and gas fields, rather than on developing new supplies;
  • Almost two-thirds of energy-supply investment will be made in emerging economies, such as China, south east Asia, Latin America and Africa;
  • The largest share of energy efficiency spending will be in the European Union, North America and China;
  • Decisions to commit to investment in the energy sector will be increasingly shaped by government policy measures and incentives, rather than by signals coming from competitive markets;
  • Reliance on countries with more restrictive terms of access to their oil reserves will grow, as output from North America plateaus and then falls back from the mid-2020s onwards. 
  • In the electricity sector, administrative signals or regulated rates of return have become the most important drivers for investment. Stimulating private investment in the sector will require a reduction in political and regulatory uncertainties;
  • Maintaining global temperatures to within 2 degrees centigrade will require a breakthrough at the Paris climate summit in 2015. Achieving this would require $53 trillion in cumulative investment by 2035: around $40 trillion in energy supply and $14 trillion in energy efficiency; and
  • By 2035, investment in low-carbon energy supply rises to almost $900 billion and spending on energy efficiency exceeds $1 trillion.

 

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