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Oil Rebounds On Surprise Crude Draw

Gregory Brew

Gregory Brew

Dr. Gregory Brew is a researcher and analyst based in Washington D.C. He is a fellow at the Metropolitan Society for International Affairs, and his…

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Falling Costs Push Renewable Investment Ahead Of Fossil Fuels

According to the IEA’s World Energy Investment report, investment in electricity finally surpassed investment in oil and gas in 2016, for the first time in recorded history. As spending on new fossil fuel projects fell twenty-six percent in 2016, continuing a trend of declining investment that began with the collapse of prices in 2014, investment in electricity networks, energy efficiency and renewable energy output rose.

The trend comes as the energy sector “prepared for the electrification of everything,” according to one Bloomberg report, “from cars to buildings and industrial processes.”

The expansion of the global electricity grid sucked up $718 billion, rising by six percent. Investment in energy efficiency, itself a large source of new electricity, was up by 9 percent. While investment was down overall in renewable energy, this was due largely to falling costs, as capacity additions grew by fifty percent and total output from capacity rose by thirty-five percent.

Total investment in renewables reached $297 billion, down three-percent, and was the largest single part of overall electricity investment. Spending on clean energy was forty-three percent of the total, as carbon emissions stagnated for the third year in a row.

Investment in coal-fired plants was down overall, chiefly as a result of growing concerns about local air pollution in China (by far the largest destination for new energy investment, accounting for one-fifth of the global total), though investment in coal was up in India. While global investment in coal has not ended, it has reached a “pause” according to one observer.

Related: Macquarie: OPEC Deal To Collapse In 2018

Chinese investment focused on low-carbon electricity generation and expanding existing networks. Investment in coal-fired power plants fell by one-quarter. Investment in the US energy system was up by sixteen-percent, driven in large part by a surge in renewables. Wind and solar are on track to become the cheapest source of new electricity, according to new research from Morgan Stanley. The firm observed an “inflection point” reached in 2016, with costs falling by fifty-percent thanks to better turbine designs, improved materials and the collapsing cost of PV solar panels thanks to global over-supply.

Overall, investment in electricity accounted, including low-carbon components, accounted for forty-two percent of total investment, which reached $1.7 trillion. Oil and gas continued its slump, falling to $708 billion, though the sector has seen a resurgence this year, driven largely by new investment in US shale. Overall, investment in energy was down by twelve-percent in 2016, due to falling costs and low oil prices.

The fall-off in investment has the IEA and other analysts worried about future drops in supply. As demand continues and less new output comes on line, prices could leap back up and markets could become tight.

However, it’s also possible that the IEA report indicates a continuing shift in the energy sector away from conventional fossil fuels and towards electricity investment and renewable energy. Investment in electric vehicles (EVs) charging stations increased by $6 billion, while total sales of EVs were up thirty-eight percent, topping out at 750,000 vehicles. While this is still a tiny fraction of the global automobile market (88.1 million cars and light commercial vehicles were sold in 2016, a record-breaking year, according to Business Insider), it represents a dramatic increase from 2012, when EV sales were practically non-existent. Falling battery costs could make EVs comparable to conventional vehicles by 2025, and global EV sales could increase to 3 million by 2021.

Related: The Major Wildcard That Could Send Oil To $120

The changes in transportation is just one piece of the story. While the US enjoys a boom in investment in shale, China and India, which together dwarf the United States and represent the two fastest-growing energy environments, are embarking upon new strategies to meet future demand.

While India is investing in coal, it’s also moving forward on renewable energy, with Indian Prime Minister Nahendra Modi proposing a $1 trillion international solar alliance for the developing world. In a country feeling the acute effects of changing climate, solar power offers a cheap, decentralized option for meeting energy demand. The fact that it requires no water is also attractive, as water shortages bite into an economy which, on a local level, is still dominated by agriculture.

India plans on adding 160 gigawatts of renewable energy in the next four years, and it’s government has predicted renewable sources will provide fifty-seven percent of total electricity by 2027. By contrast, the US now has just over 100 GWs of wind and solar, built up over several decades, and renewables provide just over ten percent. The world’s largest coal company, Coal India, will close thirty-seven of its coal mines by March 2018; even as the country plans new coal-firing power plants, the falling costs and rising benefits of renewable energy is rendering coal uncompetitive.

For China, clean energy accomplishes two goals at once: cutting down air pollution, an endemic and increasingly dangerous political problem for the country’s government, and advancing China’s claim to global leadership. The country has touted its advances on renewable energy, as its proponents point to falling emissions levels and rising innovation and investment.

While attention will likely fix on what the IEA report says about investment in oil and gas, the report offers further evidence of the on-going shift taking place in global energy, particularly in the developing world.

By Gregory Brew for Oilprice.com

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