According to the International Energy Agency (IEA), the pledges made in the lead up to the Paris meeting in December will require more than $13 trillion of energy efficiency and low carbon investments in order to be realised.
More than $1600 billion was invested worldwide in 2013 to provide energy, which has more than doubled since 2000. Just under 10% of that ($130 billion) has also been invested in improving energy efficiency. More than $1100 billion of the $1600 billion is related to the extraction and transport of fossil fuels, refining oil and the construction of fossil fuel fired power plants.
Over the next 2 decades ... the level of investment required annually just to supply the world’s energy needs will rise to $2000 billion
Over the next 2 decades to 2035, the level of investment required annually just to supply the world’s energy needs will rise to $2000 billion and expenditure on energy efficiency will need to increase to $550 billion. This equates to an investment of more than $48 trillion worldwide-$40 trillion in energy supply and $8 trillion in energy efficiency.
Of the $40 trillion required for energy supply, approximately half relates to fossil fuel extraction, transport and refining. A further 20% is related to expenditure in power generation-$6 trillion in renewables, nuclear ($1 trillion) and $7 trillion in transmission and distribution. The majority of this will be needed in emerging economies (parts of Asia other than China, Africa and Latin America), although ageing infrastructure and climate policies across the OECD means that significant investment will also be required in member nations.
By far the largest share of the $40 trillion is required to offset reduced production from existing oil and gas fields and to replace power plants and assets nearing the end of their productive lives. Compensating lower output consumes more than 75% of upstream oil and gas expenditure and replacing “retired” power plants necessitates more than half of the total investment in electricity generation in OECD countries.
In terms of the $8 trillion required for energy efficiency in the next 2 decades, approximately 90% will be required in the transport and building sectors. Two thirds of this will be centred in the European Union, North America and China, based on the size of their respective vehicle markets and current or future vehicle efficiency standards, efforts in the European Union and North America to improve the energy efficiency of appliances and building stock, and China’s drive to improve the efficiency of its industrial sector.
Government policy measures and incentives are increasingly shaping capital investment decisions, rather than signals from competitive markets. In many countries Governments directly influence investment in the energy sector, through ownership of oil and gas reserves or control of power generation capacity through State-Owned Enterprises (SOEs). Some OECD Governments are now once again influencing energy markets again where previously they opened them to competition, in a move to promote low carbon electricity sources.
Mobilising the private sector to invest in energy will require a deliberate effort to reduce both political and bureaucratic uncertainties. Pressures on public funds and the need for new technology and expertise create opportunities for the private sector, however the conditions are not always conducive for such investment.
The supply of long term finance for investment in the energy sector is not guaranteed, even with new types of investors emerging. The expansion of shale gas and the production of tight oil in North America are two examples, arising from entrepreneurial companies. Emerging State and private companies are increasing their investment in many nations outside the OECD, and the expansion of distributed renewable energy systems (e.g. rooftop solar photovoltaic systems) and energy efficiency initiatives are bringing small businesses and households in the investment mix.
In countries other than the US and Canada where external financing is more readily available, new sources of finance via bonds, securitisation, equity markets or institutional investors (e.g. pension funds and insurance companies) must be unlocked in order to reduce the reliance on bank loans (which could be constrained by new capital adequacy requirements following the last financial crisis).
More than $2 trillion of investment is required in Europe to maintain the reliability of the electricity system. This is unlikely to be forthcoming given the current design of power markets. In addition to the rapid expansion of low carbon electricity generation, approximately 100GW of additional thermal capacity is needed in the next decade. The wholesale electricity price is currently too low to incentivise the level of investment required in those new thermal plants.
Credible policies and innovative financing can be a bridge to a low carbon energy system. In the next 2 decades, approximately $900 billion of investment is required in low carbon energy supply, and energy efficiency expenditure of the order of $1 trillion is required. Dependable policy signals are required to ensure that these investments offer a sufficiently attractive return.
Getting prices right is through carbon pricing and phasing out fossil fuel subsidies is essential. A lot of work is still required to match the currently available instruments with the specific requirements of low carbon energy projects. Time, a realistic approach and determination are required in equal measure to harness the skills of the financial sector and apply them to the global ambition to reach what are now essential climate change targets.