World energy spending chasing the wrong targets – need a risky shift

A report from the International Energy Agency on World Energy Investment for the past year, pretty much says that spending on energy is chasing all the wrong targets, so that as public opinion says “chase renewables” actual budgets are chasing more fossil fuels, while VC start-ups sense a killing to be made around clean energy start-ups.

The report entitled World Energy Investment 2019, starts off content that 2018 energy investment was stable, investing over $1.8 trillion after three years of decline. Electricity spending grew almost twice the rate of oil and gas, with investors looking for shorter and shorter lead times, to help manage risk in uncertain times.

One of the big disappointment is the fact that energy efficiency, one of the easiest areas to invest in to help decarbonize, has had no improvement in spend whatsoever. Another is that renewables have not yet had any impact on transport and heat.

The other great disappointment is a 4% rise in upstream oil & gas spending was underpinned by a higher oil price, and spending on shale gas. Spending plans for 2019 point to a lot of conventional projects; but not enough to cope with electricity demand.

Prices for some efficient goods, such as LEDs and electric vehicles, have continued to fall, and many energy efficient investments are already cost-effective with relatively short payback periods. Policy, market, and financing-related challenges have acted as barriers to increased spending on efficiency.

One graph shows a really weak connection between spending on renewables and the demand for electricity. It implies that fossil fuels will make up the difference.

The US is one of the markets spending more, and most of that spend is going on shale gas. China is the only bigger market than the US with India following.

So despite investment spending being in line with last year, it still looks to the International Energy Agency, that investors are unsure of where to put their money right now, either they have too few investments available in renewables, or they are unsure where they will get their highest yields, and are just holding fire.

The graph below is key, which we have remade to make it clearer, which gives a real contrast between how each region is investing in 2018, compared with what needs to be done to reach a Sustainable Deployment Scenario (SDS).

Every region is below where it needs to be, and China and the US and India all have green areas (fossil fuels) which are far too large.

The only relief is sight are that decisions to invest in coal-fired power plants declined to their lowest level this century and retirements rose, but the global coal power fleet is still expanding, not contracting, particularly in developing Asian countries.

Without carbon capture technology or incentives for earlier retirements, coal plants and the high CO2 emissions they produce will remain part of the global energy system for many years to come. At Rethink Energy we think there will have to be “enforced retirements” with the potential for huge capital losses, either sustained by the companies or the governments involved and which may get to the point where regulation and potentially international sanctions are levelled to force early coal retirements in the 2040s.

But to meet sustainability goals, investment in energy efficiency needs to dramatically accelerate and renewable spending needs to double by 2030.

The report also shows that R&D on energy needs to grow rapidly. Clearly everyone is waiting for governments to bail out energy companies by offering tax breaks or paying directly for R&D. The ratio of energy R&D to GDP has not changed in the slightest and it should have doubled. Venture capitalists sense a killing to be made here and spending by VC funds on all forms of clean energy innovation has in fact doubled from 2017 to 2018.