Global energy investment is on the rise and expected to grow by 8 percent annually this year, pushed up by record spending on clean energy, the International Energy Agency (IEA) said in its new report World Energy Investment 2022.
On the face of it, that's great news for global energy supply and climate goals. But in reality, the rising trend is a function of galloping inflation, a deepening divide between developed and emerging economies' investment trends, and an increase in coal investments as the biggest economies in Asia prioritize energy security amid soaring energy prices and upended energy markets following the Russian invasion of Ukraine.
"As things stand, today's energy investment trends show a world falling short on climate goals, and on reliable and affordable energy," the IEA itself admitted as much in its report.
Inflation To Eat Up Nearly Half Of Investment Increase
Global energy investment is forecast to rise by 8 percent to $2.4 trillion this year, with renewables and grid investments increasing at the fastest pace.
Still, nearly half of the $200 billion increase in investment in 2022 is likely to be eaten up by higher costs rather than bringing additional energy supply capacity or savings. Costs are soaring amid supply chain pressures, tight labor, and energy services markets, and surging steel and cement prices, the Paris-based agency said.
Inflation has also brought the first increases in the cost of renewables in a decade, and as capital-intensive technologies, renewables face a stronger impact from pressures affecting the cost of raw materials and financing than other forms of power generation, the IEA notes.
"Renewable equipment manufacturers are passing on some of these pressures in their products, with increases in the cost of solar PV panels and wind turbines of 10-20% and attempts to renegotiate existing contracts, depending on the technology and region," the agency said.
Cost pressures could raise the levelized cost of electricity (LCOE) from variable renewables by 20-30 percent this year compared to 2020.
Nevertheless, the IEA says, investment in renewables remains attractive due to the role of clean energy in the energy transition, especially if backed by supportive government policies and incentives.
Renewable Investment Is A Tale Of Two Worlds
While renewables investment and capacity installations are continuously rising in developed economies and China, the developing and emerging economies are stuck at the same level of clean energy investment as in 2015, when the Paris Agreement was signed, the IEA's estimates showed. Related: Biden's Gas Tax Suspension Proposal Falls Flat In Congress
Apart from some bright spots such as growth in wind and solar in Brazil and utility-scale renewables in India, the developing economies except China struggle to see renewable energy investment take off. Those major regional variations in clean energy investment "underline the risk of new dividing lines on energy and climate," the IEA notes, adding that "overall, the relative weakness of clean energy investment across much of the developing world is one of the most worrying trends revealed by our analysis."
The cost of capital can be up to seven times higher in developing markets than in advanced economies. Moreover, in developing economies excluding China, public funds to back renewables are lacking, policy frameworks are often weak, economies are threatened by soaring inflation and increased poverty, and borrowing costs are rising.
"Much more needs to be done to bridge the gap between emerging and developing economies' one-fifth share of global clean energy investment, and their two-thirds share of the global population," the IEA said.
Fossil Fuel Investment Caught Between Climate Goals And Energy Security
Investment in renewables is rising, but it's nowhere near the levels necessary to limit global warming within a 1.5 degrees Celsius increase. At the same time, investment in fossil fuels, including coal, is set to increase this year, undermining the global pathway to climate goals on the one hand, but still insufficient to meet rising global energy demand, on the other hand.
"Overall, today's oil and gas spending is caught between two visions of the future: it is too high for a pathway aligned with limiting global warming to 1.5 Â°C but not enough to satisfy rising demand in a scenario where governments stick with today's policy settings and fail to deliver on their climate pledges," the IEA said.
Investment in new coal supply is rising amid energy security concerns.
"High prices and Russia's invasion of Ukraine mean that fuel supply investment is currently viewed through an energy security lens, but climate pressures cannot be put aside," the IEA said.
Investment in coal supply jumped by 10 percent last year, led by Asia, and is likely to rise by another 10 percent this year to reach $116 billion, which would be higher than the 2019 investment of $104 billion.
In upstream oil and gas, investment is also set for a 10-percent rise this year, to $417 billion, but it lags the $500 billion investment in 2019, per the IEA's estimates. Moreover, cost escalation is diminishing the impact of higher spending on activity levels. Only the national oil companies in the Middle Eastern oil exporters are set to spend more this year than in 2019, as Saudi Arabia and the UAE look to boost oil production capacity.
Despite an expected increase of U.S. shale investments, the level of 2022 spending is still expected to be around 30 percent below 2019 levels, as operators focus on profitability and capital discipline rather than production expansion, the IEA noted.
In refining, the sector saw in 2021 the first net reduction in global capacity for the first time in 30 years, as near-record levels of capacity were retired in 2020 and 2021, contributing to the current tightness in global fuel markets. Investment in refining, however, is not certain going forward, the IEA says.
"However, the strong financial performance and high utilisation rates seen in recent months may not necessarily translate into higher investment levels given lingering uncertainty around the long-term outlook for oil demand."
By Tsvetana Paraskova for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More