World must invest $48trn to meet basic global energy needs

Tens of trillions of dollars in global energy investments would need to be made between now and 2035 to meet the world’s most basic energy needs, a new report by the International Energy Agency has found.

The report, released on Monday as part of the IEA’s World Energy Outlook series, has predicted it will cost the globe $48 trillion in investment in future energy supply, solutions and infrastructure to head off a global crunch by 2035 – more than half of which would be needed simply to maintain current production levels.

“The reliability and sustainability of our future energy system depends on investment,” said IEA Executive Director Maria van der Hoeven. “There is a real risk of shortfalls, with knock-on effects on regional or global energy security, as well as the risk that investments are misdirected because environmental impacts are not properly reflected in prices.”

To this end, the IEA says it would cost another $5 trillion to meet energy supply as well as head off dangerous climate change – a reach that would require a total of $53 trillion in cumulative investment to 2035, with a further $6 trillion invested in energy efficiency.

The report notes that financing the transition to a low-carbon energy system remains a “major challenge,” requiring strong policy and price signals to ensure that low-carbon and energy efficiency investments offer a sufficiently attractive risk-adjusted return.

“Today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed. A breakthrough at the Paris UN climate conference in 2015 is vital to open up a different investment landscape,” the report says.

“Our estimate of fossil fuel investments left stranded in the 450 Scenario is around $300 billion, although lack of clarity over policy could increase this risk.”

In the less ambitious New Policies Scenario, however, the IEA says around $40 trillion of the $48 trillion would need to be spent on shoring up energy supply – $23 trillion invested in fossil fuel extraction, transport and refining; around $10 trillion in power generation (renewables $6 trillion and nuclear $1 trillion); and $7 trillion in transmission and distribution – while the remaining $8 trillion would be dedicated to energy efficiency.

Upgrades in the electricity sector, including replacing aging power plants and installing new infrastructure, could require $16.4 trillion in investments, the report said.

The report points to stable and intelligent government policy as the key driver of this investment, warning that shambolic policy – as has been characteristic of Europe, and lately of Australia – risked leading to power blackouts and compromised energy security.

“In Europe we are facing the risk of the lights going off,” said Fatih Birol, the IEA’s chief economist. “This is not a joke.”

The report noted that for the electricity sector, in particular, administrative signals or regulated rates of return had become, “by far, the most important drivers for investment.”

According to the data, the share of investment in competitive parts of electricity markets has fallen from about one-third of the global total ten years ago to around 10 per cent today.

“A key message is that investment and finance are very responsive to the quality of this policy‐making,” said van der Hoeven. “Clear and credible signals from policy makers lower risks and inspire confidence.”

“Policy makers face increasingly complex choices as they try to achieve progress towards energy security, competitiveness and environmental goals,” said Birol. “These goals won’t be achieved without mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play.”