Photo: Illustration; Source: International Energy Agency (IEA)

Faster ramp-up of investments needed to tackle double whammy of energy and climate crises

Even though global energy investments are expected to reach $2.4 trillion this year – driven by renewables, energy efficiency and rising costs – the International Energy Agency (IEA) believes that this is not enough to come to grips with the energy security and climate crises, exacerbated by the current geopolitical situation.

According to the IEA’s World Energy Investment 2022 report from last week, today’s levels of capital spending are still far from sufficient to tackle the energy and climate crises, which are currently permeating the world.

Following Russia’s invasion of Ukraine, the new investment landscape includes the energy security lens through which many investments are now viewed, widespread cost pressures, the major boost in revenues that high fuel prices are bringing to traditional suppliers, and burgeoning expectations in many countries that investments will be aligned with solutions to the climate crisis.

According to a new report by the International Energy Agency, global energy investment is set to increase by 8 per cent in 2022 to reach $2.4 trillion, with the anticipated rise coming mainly in clean energy. Although the IEA finds this encouraging, it outlined that the growth in investment is still far from enough to tackle the multiple dimensions of today’s energy crisis and pave the way toward a cleaner and more secure energy future.

The report shows that the fastest growth in energy investment is coming from the power sector, mainly in renewables and grids, and from energy efficiency. However, the rise in clean energy spending is not evenly spread with most of it taking place in advanced economies and China. In some markets, energy security concerns and high prices are prompting higher investment in fossil fuel supplies, most notably in coal.

Fatih Birol, IEA Executive Director, remarked: “We cannot afford to ignore either today’s global energy crisis or the climate crisis, but the good news is that we do not need to choose between them – we can tackle both at the same time. A massive surge in investment to accelerate clean energy transitions is the only lasting solution. This kind of investment is rising, but we need a much faster increase to ease the pressure on consumers from high fossil fuel prices, make our energy systems more secure, and get the world on track to reach our climate goals.”

The IEA says that the clean energy investment grew by only 2 per cent a year in the five years after the Paris Agreement was signed in 2015, but since 2020, the pace of growth has accelerated significantly to 12 per cent. Spending has been underpinned by fiscal support from governments and aided by the rise of sustainable finance, especially in advanced economies, as outlined in this report. Renewables, grids and storage now account for more than 80 per cent of total power sector investment while the spending on solar PV, batteries and electric vehicles is now growing at rates consistent with reaching global net-zero emissions by 2050.

Moreover, tight supply chains are also playing a large part in the headline rise in investment, with almost half of the overall increase in spending being a reflection of higher costs, from labour and services to materials such as cement, steel and critical minerals. These challenges are deterring some energy companies from picking up their spending more quickly, explains the IEA.

The IEA’s latest report states that there is rapid growth underway – from a low base – in spending on some emerging technologies, notably batteries, low emissions hydrogen, and carbon capture utilisation and storage. The report indicates that the investment in battery energy storage is expected to more than double to reach almost $20 billion in 2022.

Based on this report, despite some bright spots such as solar in India, clean energy spending in emerging and developing economies – excluding China – remains stuck at 2015 levels, with no increase since the Paris Agreement was reached. The report elaborates that public funds to support sustainable recovery are scarce, policy frameworks are often weak, economic clouds are gathering, and borrowing costs are rising.

As all of this undercuts the economic attractiveness of capital-intensive clean technologies, much more needs to be done, including by international development institutions, to boost these investment levels and bridge widening regional divergences in the pace of energy transition investment.

Oil & gas needs to scale up investment in clean energy

Furthermore, the IEA informs that another warning sign comes in the form of a 10 per cent rise in investment in coal supply in 2021, led by emerging economies in Asia, with a similar increase likely in 2022. Even though China has pledged to stop building coal-fired power plants abroad, a significant amount of new coal capacity is coming onto the Chinese domestic market.

Additionally, the report elaborates that Russia’s invasion of Ukraine has pushed up energy prices for many consumers and businesses around the world, hurting households, industries and entire economies – most severely in the developing world where people can least afford it.

In lieu of this, some of the immediate shortfalls in exports from Russia need to be met by production elsewhere, notably for natural gas, and new LNG infrastructure may also be required to facilitate the diversification of supply away from Russia. While oil and gas investment is up 10 per cent from last year, it remains well below 2019 levels, based on the information available in the report.

Overall, the report points out that today’s oil and gas spending is caught between two visions of the future. On one hand, it is too high for a pathway aligned with limiting global warming to 1.5 °C while on the other, it is not enough to satisfy rising demand in a scenario where governments stick with today’s policy settings and fail to deliver on their climate pledges.

The IEA states that today’s high fossil fuel prices are generating pain for many economies but are also generating an unprecedented windfall for oil and gas producers. In light of this, global oil and gas sector income is set to jump to $4 trillion in 2022, more than twice its five-year average, with the bulk of it going to major oil and gas exporting states.

Therefore, the report outlines that these windfalls gains provide a “once-in-a-generation” opportunity for oil and gas producing economies to fund the much-needed transformation of their economies, and for major oil and gas companies to do more to diversify their spending.

The IEA further discloses that the share of spending by oil and gas companies on clean energy is rising slowly, with what progress there is driven mainly by the European majors and a handful of other companies. Bearing this in mind, the overall clean energy investment accounts for around 5 per cent of oil and gas company capital expenditure worldwide, up from 1 per cent in 2019.

In addition, worldwide exploration spending rose 30 per cent in 2021, with the increase in the United States, Canada and Latin America offering the prospect of a more diversified supply in the years ahead. The IEA concludes this report by emphasizing that higher and more diversified investment is needed to curb today’s price pressures and create more resilient clean energy supply chains.

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