The COVID-19 pandemic has set in motion the largest drop in global energy investment in history, with spending expected to plunge in every major sector this year, the International Energy Agency (IEA) said in a report.
According to World Energy Investment 2020, at the start of 2020, global energy investment was on track for growth of around 2%, which would have been the largest annual rise in spending in six years. But after the COVID-19 crisis brought large swathes of the world economy to a standstill in a matter of months, global investment is now expected to plummet by 20%, or almost $400 billion, compared with last year.
“The historic plunge in global energy investment is deeply troubling for many reasons,” said Dr Fatih Birol, IEA’s executive director. “It means lost jobs and economic opportunities today, as well as lost energy supply that we might well need tomorrow once the economy recovers. The slowdown in spending on key clean energy technologies also risks undermining the much-needed transition to more resilient and sustainable energy systems.”
The World Energy Investment 2020 report’s assessment of trends so far this year is based on the latest available investment data and announcements by governments and companies as of mid-May, tracking of progress on individual projects, interviews with leading industry figures and investors, and the most recent analysis from across IEA.
The estimates for 2020 then quantify the possible implications for full-year spending, based on assumptions about the duration of lockdowns and the shape of the eventual recovery.
A combination of falling demand, lower prices and a rise in non-payment of bills mean that energy revenues going to governments and industry are set to fall by well over $1 trillion in 2020, according to the report. Oil accounts for most of this decline as, for the first time, global consumer spending on oil is set to fall below the amount spent on electricity.
Companies with weakened balance sheets and more uncertain demand outlooks are cutting back on investment, while projects are being hampered by lockdowns and disrupted supply chains. In the longer term, a post-crisis legacy of higher debt will present lasting risks to investment.
This could be particularly detrimental to the outlook in some developing countries, where financing options and the range of investors can be more limited. New analysis in this year’s report highlights that state-owned enterprises account for well over half of energy investments in developing economies.
Global investment in oil and gas is expected to fall by almost one-third in 2020. The shale industry was already under pressure, and investor confidence and access to capital have dried up: investment in shale is anticipated to fall by 50% in 2020. At the same time, many national oil companies are now desperately short of funding.
Power sector spending is on course to decrease by 10% in 2020, with worrying signals for the development of more secure and sustainable power systems. Renewables investment has been more resilient during the crisis than fossil fuels, but spending on rooftop solar installations has been strongly affected and final investment decisions in the first quarter of 2020 for new utility-scale wind and solar projects fell back to the levels of three years ago.
An expected 9% decline in investment in electricity networks this year compounds a large fall in 2019, and spending on important sources of power system flexibility has also stalled, with investment in natural gas plants stagnating and spending on battery storage levelling off.
“Electricity grids have been a vital underpinning of the emergency response to the health crisis — and of economic and social activities that have been able to continue under lockdown,” Dr Birol said. “These networks have to be resilient and smart to ward against future shocks but also to accommodate rising shares of wind and solar power. Today’s investment trends are clear warning signs for future electricity security.”
Specific to hydropower, the report says: “Investment in longer-lead time technologies, offshore wind and hydropower, is set to rise supported by ongoing projects around the world, and completion of two mega hydro projects in China, though there are risks of delays in some regions.” IEA includes pumped storage in its definition of hydropower.
Energy efficiency is suffering too. Estimated investment in efficiency and end-use applications is set to fall by an estimated 10% to 15% as vehicle sales and construction activity weaken and spending on more efficient appliances and equipment is dialed back.
The overall share of global energy spending that goes to clean energy technologies — including renewables, efficiency, nuclear and carbon capture, utilization and storage — has been stuck at around one-third in recent years. In 2020, it will jump toward 40%, but only because fossil fuels are taking such a heavy hit. In absolute terms, it remains far below the levels that would be required to accelerate energy transitions.
“The crisis has brought lower emissions but for all the wrong reasons. If we are to achieve a lasting reduction in global emissions, then we will need to see a rapid increase in clean energy investment,” said Dr Birol. “The response of policymakers — and the extent to which energy and sustainability concerns are integrated into their recovery strategies — will be critical. The IEA’s upcoming World Energy Outlook Special Report on Sustainable Recovery will provide clear recommendations for how governments can quickly create jobs and spur economic activity by building cleaner and more resilient energy systems that will benefit their countries for decades to come.”
Finally, investment in coal supply is set to fall by one-quarter this year. Although decisions to go ahead with new coal-fired plants have come down by more than 80% since 2015, the global coal fleet continues to grow. Approvals of new coal plants in the first quarter of 2020, mainly in China, were running at twice the rate observed over 2019 as a whole.
Click here to access IEA’s World Energy Investment 2020 report.
This article was adapted from one previously published on the ESI-Africa website.