The International Energy Agency (IEA) is urging governments around the world to increase support for energy efficiency and clean energy technologies in order to avoid the prospect of future spikes in energy prices.
The Paris-based agency has published its latest insights into the impact of the financial crisis on the energy sector and says that energy investment worldwide is “plunging” in the face of a tougher financing environment, weakened energy demand and falling cash flows.
The IEA fears that falling energy investment will have far-reaching implications for energy security, climate change and energy poverty. It could also have a severe impact on energy prices in several years’ time when economies are recovering.
The findings echo the warnings issued by the IEA in its 2008 World Energy Outlook, in which it called for the implementation of revolutionary policies and a massive increase in investments in order to halt unsustainable patterns of energy supply and use.
In a report prepared for the May meeting of the G8 energy ministers in Rome, the IEA says that there is clear evidence that energy investment in most regions will drop sharply in 2009. This will be accompanied by a fall in demand for energy and a decline in fuel prices.
According to the IEA, energy companies are cutting back spending on infrastructure such as power stations and pipelines with many projects being cancelled or postponed. Investment in renewables-based power projects is generally falling proportionately more than that in other types of generating capacity.
In addition, falling energy prices and a drop in energy demand caused by the recession are making investment in energy efficiency less attractive.
While the IEA recognises the support for energy efficiency and clean energy in many governments’ economic stimulus packages, it says that much more needs to be done. “The investment needed to put the world onto an energy path consistent with limiting the rise in global temperature to around 2°C far exceeds the additional investments that are expected to occur as a result of the stimulus packages so far announced,” says the report.
The IEA’s analysis suggests that governments should increase the level of new funds that they commit to energy efficiency and low-carbon technologies by a factor of four. This level of commitment must be sustained for decades to come.
Around five per cent of the $2.6 trillion of stimulus funds announced so far around the world has been allocated to energy efficiency and clean energy.
The IEA estimates that global electricity consumption could drop by as much as 3.5 per cent in 2009, the first annual contraction since the end of the Second World War. In the OECD, electricity demand in the first quarter of 2009 fell by 4.9 per cent on a year-on-year basis, while non-OECD countries have also seen weaker demand.
“Weak demand growth is reducing the immediate need for new capacity additions,” says the report. “At the same time, commercial borrowing has become more difficult and the cost of capital has risen markedly; venture capital and private equity investment has fallen sharply. If a recovery takes longer than expected, and energy prices remain at depressed levels relative to recent peaks, we would expect to see a shift to coal- and gas-fired plants at the expense of more capital-intensive options such as nuclear and renewables.”
In the renewable energy sector, investment could fall by as much as 38 per cent in 2009 due to financing difficulties and low fossil fuel prices. “Preliminary data for the first quarter of 2009 indicates that the slump in investment has accelerated, with spending 42 per cent lower than in the previous quarter.”
Stimulus funds are only likely to offset a small proportion of the decline in investment in the renewables sector, according to the IEA.
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