The changing landscape of energy investment

As the global energy sector undergoes deep transformations, investment decisions are more important than ever. They play a critical role for energy security and environmental sustainability and will shape the energy landscape for years to come.

IEA analysis last year showed that the energy sector received investments worth $1.8 trillion in 2015, totaling about 2.5% of global GDP. This includes spending on pipelines, energy efficiency and oil and gas resources, which all contribute to greater energy security. It also includes spending on renewables, electric vehicles and electricity storage, which in addition further the clean energy transition.

Helping inform the IEA’s analysis of investment flows in the energy sector, more than 40 senior industry and finance representatives from around the world – including key emerging economies – attended the first IEA World Energy Investment Roundtable, which was held in Paris on 6 February 2017. The discussions focused on three emerging trends in energy sector investment that will be reviewed in depth in the IEA’s World Energy Investment 2017, be released in early July.

First, the landscape of the energy sector has shifted, reshaping competition among fuels. The last few years have seen improvements in technology and declines in costs in solar PV, onshore wind and battery storage, but also for more conventional energy infrastructure, such as upstream oil and gas. Meanwhile, investment in network infrastructure, such as electricity grids, has emerged as a key enabler for these newer technologies. The widespread and inevitable application of digital technologies is also already affecting the investment needs of the energy sector.

IEA Executive Director Dr Fatih Birol addresses first IEA World Energy Investment Roundtable in Paris, 6 February 2017 (Photograph: IEA)

Second, despite these encouraging developments uncertainty remains as the energy sector undergoes a historic transition. How will companies and investors react to these emerging and evolving energy technologies, rebalancing energy prices, and changing energy business models? How will this shape future investment, particularly in the electricity sector?

In North America, oil and gas upstream investment has shown some signs of recovery after recent difficulties – positive news for oil supplies – which will continue to be needed over the first decades of a low-carbon transition. Still, because of the overlap in investment cycles, where short-term shale oil competes with longer-term traditional upstream projects, questions remain over how much investment is necessary today to meet demand tomorrow. Given shareholder pressures, climate concerns, and competing technologies, how will industry react?

Third, energy sector financing is adjusting to the changing policy, technology and macroeconomic landscape. The share of energy investments that are channeled through regulatory and policy measures is increasing, most notably for renewables but also for nuclear, natural gas and coal-fired power generation. How the sources and costs of financing respond to policies and market uncertainties will determine where the money flows and which assets will be on the system in coming years.

Developments in the finance sector can also have knock on effects on energy. For example, how do divestment decisions and the rise of new multilateral development banks affect the choices made by energy investors? In some cases innovative financing can lead to sustainable energy technology at an attractive cost, yet in other cases there can be undesirable side effects.