Global investment growth in clean energy is set to outpace fossil fuel spending this year as uncertainties over future energy demand scenarios keep oil, gas and coal capital expenditures below the levels seen prior to the pandemic in 2019, the International Energy Agency said June 22.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Led by power sector spending on renewables, grids, and storage, clean energy investment is expected to exceed $1.4 trillion in 2022, accounting for almost three-quarters of the growth in overall energy investment, the IEA said in its World Energy Investment 2022 report. As a result, the annual average growth rate in clean energy investment has now risen to 12%, up from 2% in the wake of the 2015 Paris Agreement, the IEA said.
At the same time, while oil and gas investment is up 10% from last year, it remains well below 2019 levels, the IEA said, noting that surging energy prices this year have done little to spur additional spending plans for fossil fuels.
"The cyclical incentive to invest in times of high prices is being reinforced in some areas by policy drive to diversify away from Russian Federation supply and address near-term market tensions, but there are constraints on this price responsiveness," the IEA said.
"Policy uncertainty is high, financing can be difficult to secure and companies are generally shying away from large commitments of capital that may take many years to pay back," it said.
Overall, world energy investment is set to rise more than 8% in 2022 to reach a total of $2.4 trillion, well above pre-COVID levels, but almost half of the additional spending is likely to be absorbed up by higher costs, rather than bringing additional energy supply capacity to the market, the IEA said.
Growing concerns about inflation are a "brake on the willingness of companies to increase spending, despite the strong price signals," it said.
With spiraling costs as construction and industrial materials prices skyrocket, the spending challenges mean the expected investment uptick this year will do little to help alleviate the current energy supply shortage which has fueled energy prices.
"It's a real pick-up in spending but it's not enough to lift us out of the current energy crisis and to prepare for a better climate future," Birol said.
The IEA report comes a day after the International Energy Forum warned that rising inflation and borrowing costs, Russia's invasion of Ukraine, supply chain constraints and "policy confusion" are all holding back new investment in upstream oil and gas when the world needs more supplies.
"A growing storm of new factors is worsening the underinvestment problem and creating a red alert for energy markets," IEF secretary general Joseph McMonigle said in a statement. "At a time when the global energy crisis calls for more supply, underinvestment in hydrocarbons will be the main reason for supply shortages, higher prices and volatility for the foreseeable future."
The IEA said the oil and gas sector is showing variability in its response to high prices with some countries boosting spending plans to take advantage of higher prices.
Spending by Middle Eastern national oil companies is now well above pre-crisis levels, the IEA said, as major resource holders look to bolster dwindling spare capacity. Saudi Aramco and the UAE's ADNOC have announced plans to increase investment spending by about 15-30% in 2022.
Among the Western and international companies, however, the largest increase in upstream investment in 2022 is expected to come from the US majors, while planned upstream capex is essentially flat for the European majors in 2022.
Noting that high oil and gas prices and the drive to diversify away from Russian imports could see some countries promote a return to upstream spending, the IEA said exploration activity still remains well below levels prior to the 2015 oil price downturn. Just under 10 billion barrels of oil equivalent were discovered in 2021, it said, with exploration spending down 35% from 2019 levels. The total volume of oil and gas achieving FID increased by nearly 85% in 2021, however, reverting to the pre-pandemic levels at around 24 billion boe, the IEA said.
In the downstream sector, investment in new refineries and upgrades increased by about 30% in 2021 but that was not enough to offset the near-record 1.8 million b/d of plant retirements that saw the first reduction in global refining capacity in 30 years, the IEA noted.
"The strong financial performance and high utilization rates seen in recent months may not necessarily translate into higher investment levels given lingering uncertainty around the long-term outlook for oil demand," the IEA said.
Overall, clean energy investment accounts for around 5% of oil and gas company capital expenditure worldwide, up from 1% in 2019, the IEA said.
Despite its higher carbon payload, the IEA noted that investment in coal is stronger than for oil and gas due in part to its lower capex intensity. Around $105 billion was invested in the coal supply chain in 2021, the IEA said, an increase of 10% year-on-year, and a further 10% rise is expected in 2022 as tight supply continues to attract new projects.