IEA: ENERGY INVESTMENT UPDOWN
IEA - World Energy Investment 2017
Investment trends in 2016
Energy investment by sector
Total energy investment worldwide in 2016 was just over $1.7 trillion, accounting for 2.2% of global GDP. Investment was down by 12% compared to IEA's revised 2015 energy investment estimate of $1.9 trillion.
Spending in energy efficiency rose by 9% while spending in electricity networks rose by 6%, yet these increases were more than offset by a continuing drop in investment in upstream oil and gas, which fell by over a quarter, and power generation, down 5%. Falling unit capital costs, especially in upstream oil and gas, and solar photovoltaics (PV), was a key reason for lower investment, though reduced drilling and less fossil fuel-based power capacity also contributed.
For the first time ever, the electricity sector edged ahead of the oil and gas sector in 2016 to become the largest recipient of energy investment. However oil and gas still represent two-fifths of global energy supply investment, despite a fall of 38% in capital spending in that sector between 2014 and 2016. As a result, the share of low-carbon supply-side energy investments, including electricity networks, grew by six percentage points to 43% over the same period.
Regional trends in investment
China remained the largest destination of energy investment, taking 21% of the global total yet the makeup of investments in China has been changing. 2016 saw a 25% decline in commissioning of new coal-fired power plants. Today, energy investment in China is increasingly driven by low-carbon electricity supply and networks, and energy efficiency.
Energy investment in India jumped 7%, cementing its position as the third-largest country behind the United States, owing to a strong government push to modernise and expand India's power system and enhance access to electricity supply. The rapidly growing economies of Southeast Asia together represent over 4% of global energy investment.
Despite a sharp decline in oil and gas investment, the share of the United States in global energy investment rose to 16% – still higher than that of Europe, where investment declined 10% – mainly as a result of renewables.
A rebound in upstream investment
After a 44% plunge between 2014 and 2016, it appears that upstream oil and gas investment will rebound modestly in 2017. A 53% upswing in US shale investment and resilient spending in large producing regions like the Middle East and Russia looks to drive upstream investment to bounce back by 3% in 2017 (a 6% increase in nominal terms). Spending is also rising in Mexico following a very successful offshore bid round in 2017.
There are diverging trends for upstream capital costs: at a global level, costs are expected to decline for a third consecutive year in 2017, driven mainly by deflation in the offshore sector, although with only 3% decline the pace of the plunge has slowed down significantly compared to 2015 and 2016. The rapid ramp up of US shale activities triggers an increase of costs of 16% in 2017 after having almost halved in 2015-16.
The oil and gas industry is undertaking a major transformation in the way it operates, with an increased focus on activities delivering paybacks in a shorter period of time and the sanctioning of simplified and streamlined projects. The global cost curve has rebased, and the significant component of cost reduction experienced over the last two years is likely to persist in the foreseeable future.
Financial health of oil and gas companies
The downturn in oil prices did not significantly affect the funding of investments by oil and gas companies, though most of them increased leverage significantly. Despite investment cutbacks and better cost discipline, the oil majors increased debt by over $100 billion between late 2014 and early 2017.
Independent US oil companies, which have a more leveraged business model, initially saw debt costs soar, but the availability and cost of bond financing has improved with a rebound of oil prices since early 2016 and their financial health has improved with efficiency gains. Increased interest in shale assets by large oil companies and financial pressures to reduce debt led to a series of asset sales by independents.
Increased spending on networks
Global electricity investment edged down by just under 1% to $718 billion, with an increase in spending on networks partially offsetting a drop in power generation. Investment in new renewables-based power capacity, at $297 billion, remained the largest area of electricity spending, despite falling back by 3%. Renewables investment was 3% lower than five years ago, but capacity additions were 50% higher and expected output from this capacity about 35% higher, thanks to declines in unit costs and technology improvements in solar PV and wind.
Trends in gas, coal and nuclear power
Investment in coal-fired plants fell sharply, with nearly 20 gigawatts (GW) less commissioned, reflecting concerns about local air pollution and the emergence of overcapacity in some markets, notably China, though investment remained elevated in India. The investment decisions taken in 2016, totalling a mere 40 GW globally, signal a more dramatic slowdown ahead for coal power investment once the current wave of construction comes to an end.
Gas-fired power investment remained strong, most of it in North America, the Middle East and North Africa where cheap gas resources are abundant. In Europe, although 4 GW of new capacity came online based on investment decisions made years ago, retirements of gas-power plants exceeded the amount of new capacity that was given the green light for construction.
The 10 GW of nuclear power capacity that came on line in 2016 was the highest in over 15 years, but it results from investment decision taken years ago. In 2016, only 3 GW of nuclear capacity started construction, situated mostly in China, which was 60% lower than the average of the previous decade.
Rising investment in networks and storage
Spending on electricity networks and storage continued its steady rise of the past five years, reaching an all-time high of $277 billion in 2016. China accounted for 30% of networks spending, driven by distribution networks and a significant expansion of large-scale transmission. Another 13% went to India and Southeast Asia, where the grid is expanding rapidly to accommodate growing demand. In the United States (17% of the total) and Europe (15%), a growing share is going to replacement of ageing transmission and distribution assets.
Overall, the grid is modernising and moving from a pure electricity delivery business to an integrated platform for data and services, enabled by rapid progress in digital information and communications technologies, which grew to over 10% of networks spending. Investment in grid-scale battery-based energy storage is ramping up quickly, reaching over $1 billion in 2016.
Impact of policies and new business models
Government policies and new business models are having a profound impact on the way investment in electricity supply is funded.In 2016, 94% of global power generation investment was made by companies operating under fully regulated revenues or regulatory mechanisms to manage the revenue risk associated with variable wholesale market pricing.
However, significant changes are occurring in some sectors and markets. Nearly 40% of utility-scale renewable investment took place in markets where prices for power purchase were set by auctions, contracts with corporate buyers and other competitive mechanisms, up from under 30% in 2011. In wholesale markets, funding new thermal generation increasingly depends on capacity payments or other revenues beyond wholesale markets.
While virtually all network investment occurs in regulated markets, unbundled grid companies accounted for only 40% of grid investment, with the large majority funded on the basis of regulated network tariffs, compared with 50% in 2011. Policies that help to reduce the cost of capital and improve the cost-reflectiveness of electricity pricing are especially important in countries where electricity demand is growing rapidly and where utilities face financing constraints, such as India and Indonesia.
Growing investment into energy efficiency
Investment in energy efficiency once again expanded, despite persistently low energy prices, reaching $231 billion in 2016.While Europe spent the most on energy efficiency 2016, the fastest growth occurred in China, where a strengthening of energy efficiency policies is helping to reduce the energy intensity of the economy, alongside structural changes. Globally, most investment – $133 billion – has gone to the buildings sector, which accounts for one-third of total energy demand.
Room for improvement in performance standards
While the energy performance standards of equipment and appliances in emerging economies are gradually tightening, there is still a lot of room for improvement. For example, new air conditioners sold in 2016 will add up to 90 terawatt hours (TWh) of power demand globally and 10 TWh in India alone, exacerbating peak loads. This could have been 40% lower if the highest efficiency standards had been adopted in all countries.
In 2016, the numbers of heat pumps sold grew 28% and electric vehicles (EVs) grew 38%. These technologies improve overall efficiency and if co-ordinated with renewables deployment could help decarbonise space heating and mobility, though so far their impact on oil and gas demand is small. The 750 000 EVs sold in 2016, another record year for EVs, are expected to reduce transport oil demand by only 0.02%.
Financing energy investments
Majority of energy investment based on earnings
More than 90% of energy investment is financed from the balance sheets of investors, suggesting the importance of sustainable industry earnings, which are based on energy markets and policies, in funding the energy sector.This share has barely changed in recent years, though sources of finance are changing in some sectors.
While the overall share of project finance, which depends on cash flows for a given asset, remains small, its use in power generation investment – especially renewables – has grown by 50% in the past five years, reflecting lower project risk in some emerging economies and the maturation of certain technologies. Newer mechanisms for raising equity and debt, such as green bonds and project bonds, are enabling investors to tap into larger financing pools, especially for refinancing assets and funding investments in smaller-scale projects such as energy efficiency and distributed generation.
States continue to play a key role in energy investments
While the share of state actors in investment, including state-owned enterprises (SOEs), edged down slightly to 42% in 2016, this was still notably higher than the 39% recorded in 2011. This is largely due to the increased role of SOEs in electricity sector investment, notably in China.
The share of public bodies in generation investment, at one-third in 2016, has recently begun to moderate while their share in networks investment, at nearly 70%, continues to rise. National oil companies are playing a larger role in upstream oil and gas spending, with their share rising to 44% in 2016 from below 40% before the recent downturn in oil prices. The costs of government energy efficiency programmes represent 14% of energy efficiency spending and, via loans and competitive mechanisms, directly generate private spending that has risen to over twice this level.
Cross-cutting themes in energy investment
Technology progress is clearly affecting employment in energy
In general, technological progress is leading to lower labour intensity across the energy system. For example, a 30% drop in jobs in US oil and gas upstream from its peak level in 2014 to its trough in 2016 was accompanied by only a marginal decrease in production.
Productivity improvements are also unfolding for key renewable power generation technologies. A snapshot comparison of different power generation technologies suggests that renewables tend to create more upfront jobs in construction and manufacturing whereas thermal generation requires more ongoing employment in operations and fuel supply. Combining these activities shows that the employment across the project life cycle resulting from the generation of a new unit of electricity is comparable across technologies.
However, the impact on employment of investment in different power generation technologies is likely to be highly region-specific, partly because of the geographical mismatch between fossil fuel production and clean energy deployment as well as due to differences in the international competitiveness of relevant engineering and construction industries. Labour intensity also varies markedly across regions for the same technology. For example, the employment impact of both solar and coal-fired power can vary by 100% or more depending on local conditions.
The role of digital technologies in the energy sector
The future role of digital technologies for generating, handling and communicating data has taken centre stage in energy discussions. Approximately $47 billion was spent in 2016 on infrastructure and software directed towards digitalisation of the electricity sector to facilitate more flexible network operation, demand management and integration of renewable resources. Meanwhile, the oil and gas industry is scaling up its utilisation of digital technologies to improve performance of its operations while keeping costs under control.
Spending on energy research and development remains flat
Information on research and development (R&D) expenditures per technology area is scarce, especially for private sector spending. However WEI 2017 tracks $67 billion of spending on energy research and development worldwide in 2015, based on a bottom-up assessment of spending by public and private bodies.
Analysis of this total reveals some important trends. Most critically, despite growing recognition of the importance of energy innovation, spending on neither energy technology generally nor clean energy specifically has risen in the past four years.
Europe and the United States are the largest spenders, each accounting for 28% of the total, whereas China is the highest spender on energy R&D as a share of GDP, after overtaking Japan in 2014. Although public and private sources each represent around half of the R&D total, most private R&D goes to oil, gas and thermal power generation, whereas most public R&D is devoted to clean energy technologies.
Important carbon, capture and storage projects, largely financed by companies, are starting operation in 2017, but current policies do not support a significant uptick of spending in this decade on these long lead-time projects, as evidenced by the lack of new projects entering construction.
Implications of energy investment
Falling investment points to future energy security risks
An 18% decline in global energy investment since 2014 has not yet raised major concerns about the adequacy of energy supplies in the short-term, but falling investment points to a risk of market tightness and undercapacity at some point down the line.
Energy investmenthas been eased by excess capacity in global fossil fuel supply and electricity generation in some markets as well as cost deflation in many parts of the energy sector. A drop in upstream oil and gas activity and the recent slowdown in the sanctioning of conventional oil fields to its lowest level in more than 70 years may lead to tighter supply in the near future.
Given depletion of existing fields, the pace of investment in conventional fields will need to rise to avoid a supply squeeze, even on optimistic assumptions about technology and the impact of climate policies on oil demand. The energy transition has barely begun in several key sectors, such as transport and industry, which will continue to rely heavily on oil, gas and coal for the foreseeable future.
Electricity sector flexibility remains a concern
Continuous investment in flexible assets to ensure system adequacy during periods of peak demand – and to help integrate higher shares of wind and solar PV capacity into the system – is essential to energy security. Yet it is unclear if today's business models are encouraging the necessary investment in flexible electricity assets.
The bulk of the flexibility that has been introduced so far has come from existing assets, primarily dispatchable capacity (mainly gas-fired plants and hydropower) and transmission interconnections. In 2016, the amount of new flexible generation capacity plus grid-scale storage that was sanctioned worldwide fell to around 130 GW – its lowest level in over a decade. This reflects weaker price signals for investment stemming from ongoing regulatory uncertainty and flawed market designs.
For the first time ever, this capacity was virtually matched by the 125 GW of olar PV and wind commissioned in 2016, whose construction times are generally a lot shorter. The 6% increase in electricity network investments in 2016, with a larger role for digital technologies, supports grid modernisation and the ongoing integration of variable renewables. However, new policies and regulatory reforms are needed to strengthen market signals for investment in all forms of flexibility.
Slowing low-carbon generation
Although carbon dioxide emissions stagnated in 2016 for the third consecutive year due to protracted investment in energy efficiency, coal-to-gas switching and the cumulative impact of new low carbon generation, the sanctioning of new low-carbon generation has in fact stalled.
Even though the contribution of new wind and solar PV to meeting demand has grown by around three-quarters over the past five years, the expected generation from this wind and solar capacity is almost entirely offset by the slowdown in nuclear and hydropower investment decisions, which declined by over half over the same time frame.
Investment in new low-carbon generation needs to increase just to keep pace with growth in electricity demand growth, and there is considerable scope for more clean energy innovation spending by governments and, in particular, by the private sector.
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