Global energy investment failing to keep up with energy security and sustainability goals

The electricity sector attracted the largest share of global energy investments in 2017, sustained by robust spending on grids – exceeding the oil and gas industry for the second year in row – as the energy sector moves toward greater electrification, according to the International Energy Agency’s (IEA’s) latest review of global energy spending.

Global energy investment totalled $1.8tn in 2017, a 2% decline in real terms from the previous year, according to IEA energy analysts Michael Waldron and Simon Bennett, presenting the World Energy Investment 2018 report at the Energy Institute’s headquarters in London on 18 July. More than $750bn went to the electricity sector, while $715bn was spent on oil and gas supply globally. 

The report indicates that 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 private actors. The share of global energy investment driven by state-owned enterprises increased over the past five years to over 40% in 2017.

Meanwhile, 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, with a dwindling role for new projects based solely on revenues from variable pricing in competitive wholesale markets. Investment in energy efficiency is particularly linked to government policy, often through energy performance standards.

Upstream investment
The share of fossil fuels in energy supply investment rose last year for the first time since 2014, as spending in oil and gas increased modestly. Upstream investment rose by 4% to $450bn in 2017 and is set to rise by 5% in 2018, driven by the US shale sector, which is expected to grow by around 20%. Meanwhile, the share of national oil companies (NOCs) in total oil and gas upstream investment remained near record highs – a trend expected to persist in 2018.

The US shale industry is at turning point after a long period of operating on a fragile financial basis, and is now on track to achieve positive free cashflow for the first time ever in 2018. Between 2010 and 2014, companies spent up to $1.8 for each dollar of revenue. However, the industry has almost halved its breakeven price, providing a more sustainable basis for future expansion and underpinning a record increase in US light tight oil production of 1.3mn b/d in 2018. Despite this positive news, risks to the financial health of the sector remain, including inflationary pressures and pipeline bottlenecks in the Permian Basin.

The improved prospects for the US shale sector contrast with the rest of the upstream oil and gas industry. Investment in conventional oil projects, which are responsible for the bulk of global supply, remains subdued, states the report. Investment in new conventional capacity is set to plunge in 2018 to about one-third of the total, a multi-year low that is raising concerns about the long-term adequacy of supply.

Waldron and Bennett highlighted that the global oil and gas industry is shifting towards short-cycle projects and rapidly declining producing assets, potentially signalling market volatility ahead, while also expanding into the downstream sector and petrochemicals. Most companies continue to prioritise cost control, financial discipline and returns to shareholders. They appear to be aiming to reduce exposure to long-term risks, while expanding activities in smaller projects that generate faster payback, such as shale and brownfields. Global investment in shale is expected to reach a record of almost one-quarter of total upstream spending in 2018, according to the IEA report.

At the same time, oil and gas companies are increasing their investments outside the upstream sector. Global investment in oil refining increased by 10% in 2017. Investment in petrochemicals rose by 11% to $17bn in 2017, set to reach almost $20bn in 2018. For the first time in recent decades, the US was the largest recipient of investment in petrochemicals.

Renewables and energy efficiency
The report also highlights that after several years of growth, combined global investment in renewables and energy efficiency declined by 3% in 2017 and there is a risk that it will slow further this year. For instance, investment in renewable power, which accounted for two-thirds of power generation spending, dropped 7% in 2017. Recent policy changes in China linked to support for the deployment of solar PV raise the risk of a slowdown in investment this year.

While investment in energy efficiency showed some of the strongest expansion in 2017, it was not enough to offset the decline in renewables. Moreover, efficiency investment growth has weakened in the past year as policy activity showed signs of slowing down. This trend is ‘worrying’, according to the IEA, as it could threaten the expansion of clean energy needed to meet energy security, climate and clean-air goals.

Innovation and new technologies
Government energy research and development (R&D) spending increased by around 8% in 2017, reaching a new high of $27bn. Most of the growth came from spending on low-carbon technologies, which is estimated to have risen 13%. Low-carbon energy technologies account for three-quarters of public energy R&D spending. On average, governments allocate around 0.1% of their total public spending to energy R&D, a level that has remained stable in recent years. IEA tracking of corporate energy R&D investment shows this grew in 2017 by 3% to $88bn, with faster growth in low-carbon sectors. A major contributor to this growth was the automotive sector, driven by intense technological competition, notably in electric vehicles (EVs) and new forms of mobility. Digital efficiency technology is also attracting more funding.

The IEA states that new approaches to boosting investment in carbon capture, utilisation and storage (CCUS) are needed for the world to be on track to meet its climate change goals. Only around 15% of the $28bn earmarked for large CCUS projects since 2007 was actually spent. As commercial conditions and regulatory uncertainty have not encouraged private investment. ‘Sustainable deployment needs investment in “low-hanging fruit” today, said Waldron and Bennett, noting that 450mn t/y of CO₂  – equal to all emissions growth in 2017 – could be captured and stored for at a breakeven price of $40/t.

They concluded their presentation by reiterating that although government R&D funding has risen, more public and private efforts are needed; scaling up private capital will be key for renewables, energy efficiency and CCUS. ‘Overall energy investments risk is insufficient for meeting energy security goals and is not spurring an acceleration in the technologies needed for the clean energy transition,’ they said.