Green energy not growing fast enough: IEA
Global energy investment is set to rise to $1.9 trillion this year, rebounding nearly 10% from last year and nearing pre-crisis levels, according to research published June 2 by the International Energy Agency (IEA). And global energy demand is set to increase by 4.6% in 2021, more than offsetting the 4% contraction in 2020, according to the latest IEA estimates.
But not enough investment is going into technology that is needed for the 1.5 °C ceiling on global temperature rises, it says: “Clean energy investment would need to double in the 2020s to maintain temperatures well below a 2 °C rise and more than triple in order to keep the door open for a 1.5 °C stabilisation…. The $750bn that is expected to be spent on clean energy technologies and efficiency worldwide in 2021 remains far below what is required in climate-driven scenarios.”
In a May report the IEA said that achieving the 2050 net-zero target was possible but unlikely, given the progress so far, based on published national commitments.
Oil and gas
Upstream oil and gas investment is expected to rise by about 10% in 2021 as companies recover financially from the shock of 2020, but spending remains well below pre-crisis levels. Some major national oil companies are looking to invest counter-cyclically to gain market share.
The balance of investment in fossil fuels is shifting towards state-owned companies as private companies face investor and financial pressure to keep oil and gas portfolios in check. Despite higher prices, the major oil companies are holding aggregate oil and gas spending flat in 2021, and their share of overall upstream spending is now at 25%, compared with nearly 40% in the mid-2010s. The shale sector is, for the moment, sticking to its newfound commitment to capital discipline, using higher revenues in 2021 to pay down debt and return money to shareholders rather than to increase output.
Overall, the overwhelming bulk of fuel supply investment in 2020 went into fossil fuels – 84% to oil and gas and 14.5% to coal (which is a much less capital-intensive sector). Around 1.3% was spent on low-carbon fuels. Today’s investment spending on fuels appears caught between two worlds: neither strong enough to satisfy current fossil fuel consumption trends nor diversified enough to meet tomorrow’s clean energy goals, the IEA said. But commitments to diversify investment, led by large European companies, are already starting to have an impact.
For the sixth consecutive year, capital spending in the power sector in 2020 was higher than for oil and gas supply. After staying flat in 2020, investment is set to increase by around 5% in 2021 to more than $820bn. Renewables dominate investment and are expected to account for 70% of 2021’s total of $530bn spent on generation. Investment in grids and storage makes up the remainder.
But the investments depend on available supply chains, lower costs and lenders and financiers that understand these sectors well and so they are distributed unevenly around the globe.
Governments able to borrow at low rates are boosting investment in infrastructure, efficiency and clean energy technologies. And after declining for the fourth consecutive year in 2020, spending on electricity grids is expected to rise in 2021, mainly in China and Europe. Proposed infrastructure spending in the US, if approved, would add to this momentum.
Against a backdrop of relatively low fuel prices, growth is heavily concentrated in markets and sectors with clear government policies, such as the buildings sector in Europe. Policies and stimulus spending are spurring projects in new areas such as low-carbon hydrogen and carbon capture utilisation and storage (CCUS).
Policy and finance
Sustainable energy lending has risen rapidly, reaching a record $600bn in 2020, and the mainstreaming of green bonds is increasingly accompanied by new types of securities and performance-based instruments to support more complex transitions.
Clear policy signals from government would not only reduce uncertainties associated with clean energy but also avoid potential costs from investing in assets that risk being underutilised or stranded. Mismatches in the speed of adjustment can create risks, for example, if a slow pace of grid investment leads to bottlenecks for wind and solar PV, or if oil and gas suppliers transition away from hydrocarbons faster than do their consumers. As financial regulators work to align capital flows with climate goals, slower progress in the real economy can lead investors to over-value some sectors while penalising others, creating a volatile ride along the way.
The gap between today’s investment trends and a sustainable pathway is larger in emerging market and developing economies.