Global energy investment on downward trend

TOTAL energy investment worldwide was around US$1.7 trillion (RM7.28 trillion) in 2016, 12% lower than 2015 in real terms and accounted for 2.2% of global gross domestic product (GDP). A 9% increase in spending on energy efficiency and 6% increase in electricity networks were more than offset by a continuing drop in investment in upstream oil and gas (O&G), which fell by over a quarter, and power generation, down 5%.

Falling unit capital costs, especially in upstream O&G, and solar photovoltaic (PV), was a key reason for lower investment, though reduced drilling and less fossil fuel-based power capacity also contributed.

The electricity sector edged ahead of the fossil fuel supply sector to become the largest recipient of energy investment in 2016 for the first time ever. O&G represented two-fifths of global energy investment, despite a fall of 38% in capital spending in that sector between 2014 and 2016. As a result, the low-carbon components, including electricity networks, grew their share of total supply-side investment by 12 percentage points to 43% over the same period.

China remained the largest destination of energy investment, taking 21% of the global total. With a 25% decline in commissioning of new coal-fired power plants, 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 US, 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 altogether represented over 4% of global energy investment. Despite a sharp decline in O&G investment, the share of the US in global energy investment rose to 16% — still higher than that of Europe, where investment declined 10% — mainly as a result of renewables.

After a 44% plunge between 2014 and 2016, upstream O&G investment has rebounded modestly in 2017. Global electricity investment edged down by just under 1% to US$718 billion, with an increase in spending on networks partially offsetting a drop in power generation. Investment in new renewables-based power capacity, at US$297 billion, remained the largest area of electricity spending, despite falling back by 3%.

Spending on electricity networks and storage continued its steady rise of the past five years, reaching an all-time high of US$277 billion in 2016, with 30% of the expansion driven by China’s spending in the distribution

system. China accounted for 30% of total networks spending. Another 15% went to India and South-East Asia, where the grid is expanding briskly to accommodate growing demand.

Investment in energy efficiency expanded once again, despite persistently low energy prices, reaching US$231 billion in 2016. While Europe was the largest region for this type of spending in 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 — US$133 billion — has gone to the buildings sector, which accounts for one-third of total energy demand.

Financing

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 cashflows for a given asset, remains small, its use in power generation investment — especially renewables — has grown rapidly in the past five years, by 50%, 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.

Investment Implication

A 17% decline in global energy investment since 2014 has not yet raised major concerns about near-term energy supply adequacy, which have 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.

But falling investment points to a risk of market tightness and under-capacity at some point down the line. A drop in upstream O&G 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 coal and O&G for the foreseeable future.

In many cases, it is unclear whether the business models in place are conducive to encouraging adequate investment in flexible electricity assets, raising concerns about electricity security. 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.

For the first time ever, this capacity was virtually matched by the 125GW of variable renewables capacity (solar 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 the energy market, which signals for investment in all forms of flexibility.

  • Extracted from World Energy Investment 2017 released by the International Energy Agency