Low carbon investment may be slowing down28 October 2018
The International Energy Agency’s latest report on global investment trends suggests that although the policy driven spend has risen, private investment is falling behind the needs of an effective clean energy transition. Staff report
For the third consecutive year, global energy investment declined, to USD 1.8 trillion in 2017 – a fall of 2% in real terms. The power generation sector accounted for most of this decline, owing to a drop in new coal, hydro and nuclear power capacity, which more than offset increased investment in solar photovoltaics. Several sectors saw an increase in investment in 2017, including energy efficiency and upstream oil and gas. Nevertheless, capital spending on fossil fuel supply remained around two-thirds of that for 2014. The electricity sector was the largest recipient of investment for the second year running, reflecting the ongoing electrification of the world’s economy and supported by robust investment in networks and renewables.
Falling costs continue to affect investment trends, prices, and inter-fuel competition across several parts of the energy sector. Unit costs for solar PV projects, which represent 8% of total energy investment worldwide, fell by nearly 15% on average, thanks to lower module prices and a shift in deployment to lower-cost regions. Investment rose to a record level nonetheless. Technology improvements and government tendering schemes are facilitating economies of scale of new projects in some markets. In emerging economies other than China the average size of awarded solar PV projects rose by 3.5 times over the five years to 2017, while that of onshore wind rose by half.
China remained the largest destination for energy investment, taking over one-fifth of the global total, and is increasingly driven by low-carbon electricity supply and networks, and energy efficiency. Investment in new coal- fired plants there dropped by 55% in 2017. The United States consolidated its position as the second-largest investing country, thanks to a sharp rebound in spending in the upstream oil and gas sector (mainly shale), on gas-fired plants and on electricity grids. Europe’s share of global energy investment was around 15%, with a boost in spending on energy efficiency and a modest increase in renewables investment offset by declines in thermal generation. In India, investment in renewable power topped that for fossil fuel-based power generation for the first time.
The broader context
There was a pause in the shift of investments towards cleaner sources of energy supply. The share of fossil fuels, including thermal power generation, in energy supply investment rose slightly to 59% as spending in upstream oil and gas increased modestly. The IEA Sustainable Development Scenario (SDS) sees the share of fossil fuels in energy supply investment falling to 40% by 2030. Mature economies and China, with a fossil fuel share of supply investment at 55%, have seen faster change than emerging economies, where the share stands at 65%, but all three regions saw an increase in 2017. Clean energy supply investment has grown fastest in the power sector. The share of clean power sources (renewables and nuclear) in generation investment was over 70% in 2017, up from less than 50% a decade ago, though this stems partly from lower coal-fired power investment. Greater spending on electricity networks and battery storage are also contributing to a more flexible power system.
Electricity and renewables
The relationship between electricity demand and investment continues to evolve, with the power sector becoming more capital intensive. Over the past decade, the ratio of global power sector investment to demand growth more than doubled on average with policies to encourage renewables and efforts to upgrade and expand grids, but also due to more energy efficiency damping demand growth. The share of investment in less capital-intensive thermal generation has generally declined over time. In 2017, global power sector investment fell by 6% to near USD 750 bn, mainly the result of a 10% slump in the commissioning of new capacity. Half of the fall was seen in the coal- fired sector, driven by China and India.
Retirements of existing coal-fired power capacity – mainly inefficient subcritical plants – offset nearly half of the additions. Investment in gas- fired generation capacity rose by nearly 40%, led by the United States and the Middle East/North Africa. There are indications of lower investment in both these sources of generation in the years ahead. Final investment decisions for gas power plants fell by 23% in 2017, while those for coal dropped by 18% to a level only one-third of that in 2010.
Although it declined by 7%, investment in renewable power, at nearly USD 300 bn, accounted for two-thirds of power generation spending in 2017. Investment was supported by record spending for solar PV, of which nearly 45% was in China. Offshore wind investment also reached record levels, with the commissioning of nearly 4 GW, mostly in Europe. On the other hand, onshore wind investment fell by nearly 15%, largely due to the United States, China, Europe and Brazil, though one-third of this decline was from falling investment costs. Investment in hydropower fell to its lowest level in over a decade, with a slowdown in China, Brazil and Southeast Asia. Recent policy changes seeking to promote more cost-effective solar PV development in China raise the risk of a continued slowdown in renewables investment, even as prospects remain strong in other markets.
Global spending on the electricity network grew more slowly in 2017, at 1%, to top USD 300 bn. Spending reached a new high, and the grid’s share of power-sector investment rose to 40% – its highest level in a decade. China remained the largest market for grid investment, followed by the United States. Investment is rising in technologies designed to enhance the flexibility of power systems and support the integration of variable renewables and new sources of demand. Power companies are modernising electricity grids by spending more on, and acquiring businesses related to, so-called smart grid technology, including smart meters, advanced distribution equipment and EV charging, which accounted for over 10% of network spending. Although investment in stationary battery storage fell by over 10% to under USD 2 bn, it was six times higher than in 2012.
Fossil fuel supply
Investment in fossil fuel supply stabilised around USD 790 bn in 2017 as reduced spending in coal supply and in liquefied natural gas offset a modest rise in upstream oil and gas. Upstream investment rose by 4% to USD450bn in 2017 and is set to rise by 5% to USD 472 bn (in nominal terms) in 2018, driven by the US shale sector, which is expected to grow by around 20%. Investment in conventional oil and gas remains subdued, focusing on brownfield projects.
Key trends in financing and funding
While corporations continue to provide the bulk of primary finance for energy investments, there are signs of diversification of financing options in some sectors.
In the power sector, the perceived maturity and reliability of renewable technologies and better risk management of renewables projects has facilitated the expansion of off- balance sheet structures outside the USA and Europe, with project finance rising in Asia, Latin America and Africa. This trend is supported in part by public financial institutions, such as development banks, which can reduce risks for commercial finance. In Europe, better debt financing terms have helped lower generation costs for new offshore wind by nearly 15% in the past five years. Improvements in standardisation, aggregation and credit assessment for small- scale projects facilitated record issuance of green bonds of USD 160 bn in 2017. This is helping developers of energy efficiency and distributed solar PV projects to gain access to finance from the capital markets and EV buyers to get loans from banks.
The share of private-led energy investment has declined in the past five years. There is a rising share of investment in renewables, where private entities own over 70% of investments, energy efficiency, which is dominated by private spending, and private- led grid spending. However, the share of energy investment from state-owned enterprises (SOEs) rose by more over the period. Fossil fuel supply and thermal power investment are increasingly dominated by SOEs.
In 2017, the share of national oil companies in total oil and gas investment remained near record highs, while the share of SOEs in thermal generation investment rose to 55%. In the case of new nuclear plants, all investment is made by SOEs.
Investment decisions in some sectors are increasingly affected by government policies. In the power sector, over 95% of global investment is made by companies whose revenues are fully regulated or affected by mechanisms to manage the risk associated with variable prices on competitive wholesale markets. Network investment is very sensitive to regulation of retail and use-of-system tariffs, which determine the ability of utilities to recover their costs. In some emerging economies, regulated tariffs are still too low to ensure the financial viability of the power system and support investment. Utilities in mature electricity markets are finding that their thermal power generation assets exposed to wholesale market pricing are becoming less profitable or even unprofitable and are seeking profitable opportunities in other areas, such as renewables and networks.
While most renewables investment depends on contracts and regulated instruments, over 35% of utility-scale investment is underpinned by competitive mechanisms, such as auctions, to set prices. Outside China, this share reached a record 50%.
Innovation and new technologies
Government energy R&D spending increased by around 8% in 2017, reaching a new high of USD 27 bn. Most of the growth came from spending on low-carbon technologies, which is estimated to have risen 13%, after several years of stagnation. Low-carbon energy technologies account for three-quarters of public energy R&D spending. On average, governments allocate around 0.1% of their total public spending to energy R&D, a level that has remained stable in recent years. IEA tracking of corporate energy R&D investment shows that this grew in 2017 by 3% to USD 88 bn, with faster growth in low-carbon sectors.
Not on track
New approaches to boosting investment in carbon capture, utilisation and storage (CCUS) are needed for the world to be on track to meet its climate change goals. Only around 15% of the USD 28 bn earmarked for large CCUS projects since 2007 was actually spent, because commercial conditions and regulatory certainty have not attracted private investment alongside available public funds. However, investment may pick up with the stronger incentives for CO2 storage set out in a revised US tax credit. Building on this type of policy approach, this report estimates that a dedicated commercial incentive as low as USD 50 per tonne of CO2 sequestered could trigger investment in the capture, utilisation and storage of over 450 million tonnes of CO2 globally in the near term.
A record number of investment decisions were taken in 2017 to build electrolysers to make hydrogen for clean energy applications. While investment remains well below that in electric batteries for stationary storage and road vehicles, interest in hydrogen projects is growing.
Energy investment highlights
• The share of state-backed energy investment has risen, with more dependence on SOEs across the energy system; policies play a growing role in driving private investment
• Electricity was the largest sector for the second year running, sustained by networks and renewables; but recent trends raise a risk of slowing low-carbon supply investment
• The oil and gas industry is shifting towards short-cycle projects and assets with rapidly declining production, potentially signalling market volatility ahead
• Government R&D funding has risen, but more public & private efforts are needed; scaling up private capital will be key for renewables, energy efficiency and CCUS.
• Overall energy investments risk being insufficient for meeting energy security goals and are not spurring an acceleration in technologies needed for the clean energy transition