Energy investment

Neil Eisberg | Editor

It is now almost a year since the world was plunged into an energy crisis by the Russian invasion of Ukraine. But this crisis might become the potential turning point for world climate – with the move away from fossil fuels gaining momentum as society looks at the route to energy security and also decarbonisation.

Described by the International Energy Agency as ‘delivering a shock of unprecedented breadth and complexity’, the energy crisis has had the greatest impact on three key fossil fuel markets: natural gas, coal and electricity as well as oil. These markets remain extremely vulnerable, says the IEA, and the crisis ‘is a reminder of the fragility and unsustainability of the current global energy system’.

As well as short-term actions to try to protect consumers from the impact on prices, governments around the world have taken long-term action, including to increase or diversify oil and gas supplies as well as to speed up structural changes, such as boosting renewable energy sources.

As IEA Executive Director Fatih Birol, noted: ‘Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come. Even with today’s policy settings, the energy world is shifting dramatically before our eyes. Government responses around the world promise to make this a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.’

According to the IEA, in October 2022 global demand for each of the key fossil fuels peaked or plateaued across all of the IEA’s World Energy Outlook scenarios. Coal use is expected to fall back within the next few years, while natural gas demand is forecast to plateau by the end of the decade, and rising sales of electric vehicles (EVs) are expected to level off oil demand in the mid-2030s before ebbing slightly by 2050.

Overall, the IEA believes this will mean total fossil fuel demand could decline steadily over the period from the mid-2020s to 2050 by an average roughly equivalent to the lifetime output of a large oil field. With a greater focus on climate protection measures, the predicted declines could be faster and more pronounced.

The IEA believes, for example, if today’s growth rates for the deployment of solar PV, wind, EVs and batteries are maintained, then a faster transformation could be achieved. However, the IEA also believes stronger policies will be essential to drive the major increase in energy investment that will be needed to reduce the risks of future price spikes and volatility. ‘Subdued investment due to lower prices in the period 2015-20 made the energy sector much more vulnerable to the sort of disruptions we have seen in 2022,’ says the IEA.

In total, the IEA expects global renewable power capacity to grow by 2400GW over the period 2022-27, which is equivalent to China’s entire power capacity today. The expected increase is 30% higher than the growth predicted in 2021, demonstrating how governments have focused their attention on renewables as a result of the energy crisis. In its Renewables 2022 report, the IEA highlights renewables are forecast to account for more than 90% of global electricity expansion over the next five years, overtaking coal to become the largest source of global electricity by early 2025.

‘Renewables were already expanding quickly,’ said Fatih Birol, ‘but the global energy crisis has kicked them into an extraordinary new phase of even faster growth as countries seek to capitalise on their energy security benefits. The world is set to add as much renewable power in the next five years as it did in the previous 20 years.’

Utility-scale solar PV and onshore wind are the cheapest options for new electricity generation in a significant majority of countries worldwide, says the IEA. Global solar capacity is set to almost triple over the 2022-27 period, overtaking coal to become the largest source of power capacity in the world. Global wind capacity is expected to almost double over the same period, with offshore projects accounting for 20% of the growth. ‘Together, wind and solar will account for over 90% of the renewable power capacity that is added over the next five years,’ the IEA believes.

Over the same period, the IEA forecasts that global biofuel demand will increase by 22%, with the US, Canada, Brazil, Indonesia and India accounting for 80% of the expansion in biofuel use.

Investment in new generating capacity is also being matched by an increased focus on improving energy efficiency. The IEA estimates that investment in energy efficiency, such as building renovations, public transport and EV infrastructure, totaled $560bn in 2022. According to the IEA’s report Energy Efficiency 2022, the world used energy 2% more efficiently in 2022, compared with 2021. The rate of improvement is almost four times that achieved over the past two years and almost double that over the past five years.