Not Spending Enough On Energy

Global energy investment fell by 2 percent in 2017, the third consecutive year of a decline, according to the International Energy Agency, which sounded the alarm this week, warning that the world is not spending enough on energy.

“The overall trend of energy investment remains insufficient for meeting energy security, climate and air quality goals, and is not spurring an acceleration in technologies needed for the clean energy transition,” IEA executive director Fatih Birol said in a statement. Global spending stood at USD$1.8 trillion in 2017, down 2 percent from a year earlier.

Much of the decline occurred in the electricity sector, and the IEA declared 2018 “the year of electricity” to raise awareness about the problem. The ongoing electrification of the global economy puts extra emphasis on the need for more generation capacity. The declining investment in coal, hydro and nuclear power more than offset the increased spending on solar.

Fossil fuel spending edged up but still remains at just two-thirds of 2014 levels. The IEA credits the oil and gas industry with keeping costs in check, and because of “cost discipline by operators and excess capacity in the services industry,” the rise in oil prices since 2016 has not led to a corresponding increase in costs. However, the IEA then pointed out that the U.S. shale sector, which has attracted so much attention and investment, did see cost inflation on the order of 10 percent in 2017. More drilling has put a strain on the supply chain, pushing the cost of everything from sand, to drilling services, to labor and equipment. Another 10 percent increase in costs are slated for 2018.

Globally, upstream oil and gas spending rose by 4 percent to $450 billion, and will edge up another 5 percent this year. Beneath that headline figure, U.S. shale spending will grow by 20 percent while conventional oil and gas spending remains flat. Within the conventional segment, most spending is now focusing on brownfield development, a sign of the industry’s cautious approach to development, while spending on new greenfield projects “is expected to plunge to about one-third [of total upstream investment] in 2018 – the lowest level for several years.”

Geographically speaking, China attracted the lion’s share of energy investment. And unlike in years past, China’s energy campaign is increasingly focused on clean energy. “China's energy investment is increasingly driven by low-carbon electricity supply and networks, and energy efficiency. Investment in new coal-fired plants there dropped by 55% in 2017,” the IEA said.

An even more eye-opening conclusion came from India, often positioned as the pivotal country that will decide the pace of de-carbonization over the coming decades because it represents the largest source of growth in both oil and coal consumption. “In India, investment in renewable power topped that for fossil fuel-based power generation for the first time in 2017,” the IEA concluded. Perhaps the energy transition is occurring faster than everyone thinks.

As for the U.S., the increase in investment in 2017 mostly came from upstream oil and gas spending, as well as on gas-fired power plants.

However, there is still a lot of trouble on the horizon. The IEA warned that globally there “was a pause in the shift of investments towards cleaner sources of energy supply.” The share of total energy investment made up by fossil fuels actually increased slightly to 59 percent.

Total investment in renewables declined by 7 percent in 2017, although renewables still accounted for two-thirds of total power generation spending at $300 billion. Also, part of the decline is due to the fact that renewable energy is getting cheaper.

Unit costs for solar PV fell by 15 percent in 2017 and solar investment rose to record levels, the IEA said. And economies of scare also helping. “Technology improvements and government tendering schemes are facilitating economies of scale of new projects in some markets: in emerging economies outside of [China] the average size of awarded solar PV projects rose by 4.5 times over the five years through 2017, while that of onshore wind rose by half,” the IEA noted.

But the decline of nuclear power will put more onus on renewable energy to carry the slack into a low-carbon future. “Robust investment in renewable power is even more important for boosting low-carbon power generation in light of a sharp fall in investment in new nuclear power, which declined to its lowest level in five years,” the IEA said. “Construction starts for new nuclear plants remain muted, while in some regions, retirements of existing plants are reducing the impact of the growth in renewables.”

The agency says that although Europe has historically led in renewable deployment, the retirements of nuclear plants have offset over 40 percent of the growth in solar and wind.

Nick Cunningham for OilPrice.com