Another year of falling investment
The International Energy Agency (IEA) recent report titled ‘World Energy Investment 2018’ provides a critical benchmark for decision making by governments, the energy industry, and financial institutions to set policy frameworks, implement business strategies, finance new projects, and develop new technologies. It highlights the ways in which investment decisions taken today are determining how energy supply and demand will unfold tomorrow.
This year’s edition points to another year of falling investment in 2017, and that energy investment is failing to keep up with energy security and sustainability goals.
The decline in global investment for renewables and energy efficiency combined could threaten the expansion of clean energy needed to meet energy security, climate and clean-air goals. While we would need this investment to go up rapidly, it is disappointing to find that it might be falling this year,” Fatih Birol, Executive Director, IEA stated.
The report looks at critical questions that have shaped the energy industry, including:
- Which countries and policies attracted the most energy investment in 2017, and what fuels and technologies are growing fastest?
- Is energy investment sufficient and targeted appropriately to realise the world’s energy transition objectives?
- How are oil and gas companies responding to higher oil prices? Are they changing their strategy decisions in order to ensure adequate supplies while minimising long-term risks?
- How is the business model for US shale evolving? Is the rapid growth of production in 2018 still largely based on continuous overspending or is the industry finally moving towards financial sustainability?
- Are business models and financing approaches supporting a shift in power generation investments towards renewables? How are regulators around the world shaping enabling investments in power system networks and flexibility?
- What policy and market factors drive energy efficiency spending? What new approaches to financing are emerging for efficient goods and services?
- How are the sources of energy finance evolving? What roles are public financial institutions and utilities playing? How are decision makers addressing investment risks in India and other emerging economies?
- What are governments and the energy sector spending on energy research and development? What are the main considerations facing investors in batteries and the electric vehicle value chain; carbon capture, utilisation and storage; and hydrogen?
Key findings
Total energy investment has fallen again…
2017 was the third consecutive year of decline in global energy investment with energy efficiency the lone sector of growth. Despite a 6% decline in spending, the electricity sector again attracted the largest share of energy sector investments, exceeding the oil and gas industry for the second year in row, as the energy sector moves toward greater electrification.
… and is increasingly underpinned by governments
State-backed investments are accounting for a rising share of global energy investment, as state-owned enterprises have remained more resilient in oil and gas and thermal power compared with the private sector.
The share of global energy investment driven by state-owned enterprises increased over the past five years to over 40% in 2017.
Government policies are playing a growing role in driving private spending
Across all power sector investments, more than 95% of investment is now based on regulation or contracts for remuneration.
Investment in energy efficiency is particularly linked to government policy, often through energy performance standards.
The power sector is becoming more capital intensive
Electricity investment has shifted towards renewables, networks and flexibility. Yet, renewable power investment declined in 2017 by 7%, despite record levels of spending on solar PV. Moreover, the expected output from low-carbon power investments fell 10% in 2017 and did not keep pace with demand growth.
In emerging markets, auctions are supporting larger renewable projects
In emerging markets, the average size of awarded solar PV projects in auctions rose by 4.5 times while that of onshore wind rose by half over 2013-17, helping to support economies of scale. In Europe, tendered large projects are mainly concentrated in offshore wind; auctions have generally not resulted in large, land-based renewables projects.
Fewer decisions are being taken for investment in thermal generation
In 2017 newly sanctioned coal power fell 18%, driven by a slowdown in China, India and Southeast Asia. However, despite declining capacity additions – and a wave of retirements of existing plants – the global coal fleet continued to expand in 2017. And while investment decisions signal a continued shift towards more efficient plants, 60% of currently operating capacity uses inefficient subcritical technology. Meanwhile, sanctioned gas power fell nearly 23%, due mainly to the MENA region and the United States.
Oil and gas companies are doing more with less…
Following the peaks in oil and gas upstream investment reached in 2014, investment collapsed abruptly as a result of lower prices. 2017 investment rebounded by 2% in real terms, and IEA estimates the same level of growth for 2018.
One notable trend concerns the relationship between oil prices and upstream costs. In the past, there has been a roughly linear relationship between upstream costs and oil prices. When price spiked, so did costs, and vice versa. What we are noting now is a decoupling. While prices have more than doubled since 2016, global upstream costs have remained substantially flat and for 2018 IEA estimates those increasing very modestly, by just 3%. Companies appear to have learned to do more with less.
… and the dynamics of the oil and gas industry are evolving
The oil and gas industry has been traditionally characterised by long-lead times projects with predictable production profiles. Yet as a result of the shale revolution in the United States this trend is changing and the industry is re-thinking the way they choose, execute and manage projects. Furthermore, investment in conventional assets (responsible for the bulk of supply) remains focused on expansion of existing projects rather than developing new sources of production.
Moving forward, the overall balance of market supply will be given by combination of conventional activities (which respond slowly) and unconventional projects (which respond to market conditions in a much more rapid way) suggesting the possibility of more volatility ahead in the markets.
Meanwhile, US LTO is becoming a financially sustainable business
The prospects of the US shale industry are improving. Between 2010 and 2014, companies spent up to USD 1.8 for each dollar of revenue. However, the industry has almost halved its breakeven price, providing a more sustainable basis for future expansion. This underpins a record increase in US light tight oil production of 1.3 million barrels a day in 2018.
Clean energy R&D investment is finally on the rise
Government low-carbon energy RD&D spending in 2017 was estimated to have increased by 13% in 2017. This is a welcome increase after years of decreases and stagnation. Much of the increase in low-carbon energy technology RD&D spending is driven by North America, more than compensating for declines in Europe and Japan.
Yet investment in carbon capture, utilisation and storage is falling behind
Commercial incentive as low as USD 40 per tonne of CO2 sequestered could trigger investment in the capture, utilisation and storage of up to 450 million tonnes of CO2.
ICT appears to be banking on the energy sector
Corporate investments in new energy technology companies are growing strongly, reaching their highest ever level of just over USD 6 billion in 2017 – strategic investments by companies to get a stake in potentially key new technology areas. While there is some increase in investments by utilities, the striking finding is that vast majority of the growth is coming from ICT companies, mostly investing in EV start-ups and digital solutions for smart grids and efficiency.
