A new type of IEA study projects huge energy investments and identifies challenges to be met for a different energy future.
"If present trends continue, the world will need to invest [U.S.]$16 trillion over the next three decades to maintain and expand energy supply." So says Claude Mandil, executive director of the International Energy Agency.
This number, much larger in real terms than the comparable figure for the past 30 years, is equivalent to 1 percent of annual global GDP over the period, according to Mandil. And it provides fair warning that countries and companies need to make some changes to bring it off. "Without new policy actions," he asserts, "world energy demand will rise by two-thirds between now and 2030, and the world economy will falter if these energy supplies are not made available."
The $16 trillion estimate comes from the IEA study, "World Energy Investment Outlook" (WEIO), Mandil introduced at the annual Oil and Money Conference earlier this week in London.
The IEA periodically issues studies under the World Energy Outlook banner. Unlike previous studies, this one results from what IEA calls an "unprecedented collaboration." It involved organizations such as OPEC and the World Bank, as well as major energy companies, financial institutions, and individual experts. WEIO quantifies in detail, by fuel sector and by region, energy investment needs and then identifies the obstacles to mobilizing capital on the required scale.
"To the best of my knowledge, no previous attempt has been made to build such a comprehensive picture of future energy investment, worldwide, in all parts of the energy supply chain," Mandil said.
The study delivered some unexpected findings:
Power generation, transmission, and distribution will absorb almost 60 percent of global energy investment--about $10 trillion. This rises to more than 70 percent when investment in the fuel chain to meet power station fuel requirements is included.
Transmission and distribution will account for more than half of global electricity sector investment.
The bulk of the estimated $4 trillion of upstream investment in the oil and gas sectors will be needed simply to maintain production capacity at current levels.
The coal industry is projected to require a mere $400 billion, or 2 percent of global energy investment.
Many Challenges Ahead
The WEIO study identifies many impediments to raising the capital needed.
Member countries of the Organisation for Economic Co-operation and Development (OECD), for example, face challenges in financing electricity investments. Up to this point, this has not been a problem, but different financial risks have now been introduced by their transition to competitive markets. Along with the many benefits of liberalization have come increased risks to investors in power generation, especially peaking capacity. There are also obstacles, such as public resistance to expansion of transmission networks, which cause investment in distribution to lag behind investment in generation capacity. Recent power failures in the United States and some European countries have driven home the importance of this issue, the WEIO report says.
Oil and Gas
The oil and gas sectors, it is projected, will require more than $3 trillion each to 2030, or around 19 percent each of global energy investment, according to WEIO. Huge amounts of capital are needed to mobilize the bulk of the world's remaining hydrocarbon reserves in the Middle East. Whether these will be forthcoming is a major uncertainty. Iraq alone would need to raise almost $5 billion to hike its oil production capacity to 4 million barrels per day by 2010.
Investors in the natural gas industry face increasing risks from energy market reforms, more complex supply chains, and the growing share of international LNG supplies, according to the WEIO report. They will require a commensurate increase in returns if a shortfall in gas investment is to be averted. Investments in liquefied natural gas chains will have to be greater than in the past to meet a six-fold increase in LNG trade--despite lower LNG unit costs. Lifting impediments to foreign investment and tax reform--still widespread--will be crucial to capital flows to this industry, especially in the Middle East, Africa, and Russia, where global gas reserves are concentrated.
Financing investments in developing countries and transition economies is the biggest and most pressing challenge. Their financial needs are greater than those of OECD countries (in absolute terms as well as in proportion to their economies). Russia will require investment amounting to 5 percent of its GDP, Africa 4 percent, compared to only .5 percent in OECD countries. And investment risks outside the OECD are generally higher, particularly for domestic electricity and downstream gas projects. Energy has to compete against other sectors of the economy for capital--most of which will have to come from private investors. Mandil said that, as huge as the overall investment figure might seem, nothing precludes successful financing on this scale if, and only if, investment conditions are favorable.
Financing the $5 trillion of investment in the electricity sector in developing countries will be a daunting task, particularly in Africa and India. Far-reaching reforms are urgently needed--chief among which is to make tariff structures more cost-reflective--to facilitate higher capital flows into these and other developing regions.
Even so, the rate of investment projected in the WEIO study is insufficient to bring power to most people who do not have it now. It will leave 1.4 billion people without it in 2030, only 200 million fewer than now. If electricity investment can be boosted by just 7 percent globally, it would be enough to bring in a minimal level of supply for these people, according to Mandil. It would take another $665 billion in the poorest regions, which are already struggling to raise capital. "We all have a duty to work towards raising the funds necessary to bring electricity to every world citizen before the year 2030. If not, someone, somewhere in the world, will go without the energy he, or more likely she, needs." Mandil said.
There is opportunity to better the projections if technologies being developed today combine with new policy actions to improve conditions even more, WEIO says. New and better technologies, including carbon sequestration, hydrogen, fuel cells, and advanced nuclear reactors, could dramatically alter energy investment patterns and requirements in the longer term, according to WEIO. How quickly these technologies are deployed depends critically on fiscal and regulatory incentives to accelerate their commercial viability.
The WEIO report calls on governments to play a vital role in creating the right conditions for energy investment. Increasingly, this will involve adopting policies that encourage private investment, relegating to the past direct state-financed investment or ownership. This will involve greater attention to overall policy, legal, and regulatory frameworks, identifying changing risks and ways to lower barriers to investment.
In many parts of the world, there is still a long way to go to ensure that basic instruments of good governance, both in the energy sector and more generally, are reinforced, applied, and respected. "Our projections for the future identify many challenges. The WEIO is a policy analysis tool that is premised on the assumption that we can have a different future, if we understand the challenges and if we address them now," said Mandil.
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