Illustration; Source: International Energy Agency (IEA)

Spending on solar on the brink of surpassing oil investments for the first time ever, says IEA

The global energy crisis has shaken the foundations of the energy sector, bringing a shock to the system at a time when climate change concerns are upping the ante in favour of accelerating the energy transition to low-carbon and green sources. The race to strengthen global energy security has provided more ammunition to this changing energy landscape, adding another ace up decarbonisation’s sleeve. In light of this, the clean energy investment is now extending its lead over fossil fuels, boosted by efforts to ensure the security of supply, highlights the International Energy Agency (IEA).

Illustration; Source: International Energy Agency (IEA)

The International Energy Agency’s World Energy Investment 2023 (WEI 2023) report provides the global benchmark investment picture for tracking capital flows in the energy sector, offering an opportunity to take stock of what the global energy woes have meant for investment, and what those investments might mean in turn for the future security and sustainability of the energy sector.

This report focuses on the new investment landscape, including the policies now in place that reinforce incentives for clean energy spending – the energy security lens through which many investments are now viewed – widespread cost and inflationary 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.

Based on the report, the spending on upstream oil and gas is expected to rise by 7 per cent in 2023, taking it back to 2019 levels, as some energy players, mostly large national oil companies in the Middle East, will be investing more than before the Covid-19 pandemic. Although many fossil fuel producers made record profits last year because of higher fuel prices, the majority of this cash flow has gone to dividends, share buybacks and debt repayment – rather than back into traditional supply.

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Nonetheless, the International Energy Agency believes that the expected rebound in fossil fuel investment means it is set to rise in 2023 to more than double the levels needed in 2030 in the IEA’s Net Zero Emissions by 2050 scenario. While global coal demand reached an all-time high in 2022, the coal investment this year is on course to reach nearly six times the levels envisaged in 2030 in the Net Zero scenario.

Moreover, the report underlines that the oil and gas industry’s capital spending on low-emissions alternatives such as clean electricity, clean fuels, and carbon capture technologies was less than 5 per cent of its upstream spending in 2022.

According to the IEA, the global investment in clean energy technologies, which is significantly outpacing spending on fossil fuels as affordability and security concerns triggered by the global energy crisis strengthen the momentum behind more sustainable options, is on course to rise to $1.7 trillion in 2023, with solar set to eclipse oil production for the first time.

While about $2.8 trillion is set to be invested globally in energy in 2023, more than $1.7 trillion is expected to go to clean technologies, including renewables, electric vehicles, nuclear power, grids, storage, low-emissions fuels, efficiency improvements and heat pumps. The remainder, slightly more than $1 trillion, is going to coal, gas, and oil.

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Therefore, the report indicates that annual clean energy investment is expected to rise by 24 per cent between 2021 and 2023, driven by renewables and electric vehicles, compared with a 15 per cent rise in fossil fuel investment over the same period. However, more than 90 per cent of this increase comes from advanced economies and China, presenting a serious risk of new dividing lines in global energy if clean energy transitions do not pick up elsewhere, explains the IEA.

Fatih Birol, IEA Executive Director, remarked: “Clean energy is moving fast – faster than many people realise. This is clear in the investment trends, where clean technologies are pulling away from fossil fuels. For every dollar invested in fossil fuels, about 1.7 dollars are now going into clean energy. Five years ago, this ratio was one-to-one. One shining example is investment in solar, which is set to overtake the amount of investment going into oil production for the first time.”

Furthermore, low-emissions electricity technologies, spearheaded by solar, are expected to account for almost 90 per cent of investment in power generation. Even though clean energy investments have been boosted by a variety of factors in recent years, some of the key contributions came from periods of strong economic growth and volatile fossil fuel prices that raised concerns about energy security, especially following the Ukraine crisis.

Another factor that also played a role in this is enhanced policy support through major actions like the U.S. Inflation Reduction Act (IRA) and initiatives in Europe, Japan, China, and elsewhere. The IEA points out that the biggest shortfalls in clean energy investment are in emerging and developing economies with some bright spots thrown into the mix, such as dynamic investments in solar in India and in renewables in Brazil and parts of the Middle East.

As investment in many countries is being held back by factors like higher interest rates, unclear policy frameworks and market designs, weak grid infrastructure, financially strained utilities, and a high cost of capital, the International Energy Agency underscores that “much more needs to be done by the international community, especially to drive investment in lower-income economies, where the private sector has been reluctant to venture.”