Market and product

In a detailed analysis of investment across the globalenergy system, the International Energy Agency said Wednesday that global energy investment fell by 8 per cent in 2015, with a drop in oil and gas upstream spending outweighing continued robust investment in renewable, electricity networks and energy efficiency.

Total investment in the energy sector reached $1.8 trillion in 2015, down from $2 trillion in 2014, according to IEA's World Energy Investment 2016 report.

With energy supply spending of $315 billion, China was once again the world's largest energy investor last year thanks to robust efforts in building up low-carbon generation and electricity networks, as well as implementing energy efficiency policies.

Investment in the United States' energy supply declined to about $280 billion in 2015, falling nearly $75 billion, due to low oil prices and cost deflation, representing half of the total decline in global energy spending. The West Asia and Russia emerged as the most resilient regions to spending cuts, due to lower production costs and currency movements respectively. As a result, national oilcompanies accounted for 44 per cent of overall upstream investments, an all-time high.

The new report provides a detailed picture of the current investment landscape across fuels, technologies and countries. It shows that the energy system is undergoing a broad reorientation towards low-carbon energy and efficiency but investment in key clean energy technologies needs to be further ramped up to put the world economy on track for climate stabilisation.

"We see a broad shift of spending towards cleaner energy, often as a result of government policies," said Fatih Birol, Executive Director, IEA. "Our report clearly shows that such government measures can work, and are key to a successful energy transition. But while some progress has been achieved, investors need clarity and certainty from policy makers. Governments must not only maintain but heighten their commitment to achieve energy security and climate goals."

Investment in coal globally is increasingly affected by climate policy, which is expected to drive down demand especially in Europe and the United States, said the report. On the other hand, Indian coal production continues to be supported by strong investment. Renewables are expanding rapidly but asymmetrically: wind, solar and hydropower and are reshaping the electricity system. In dollar terms, renewable investment has remained relatively stable since 2011, but investment supports an accelerated production expansion due to declining technology costs. On the other hand, with the exception of solar heat in China, the investment in biofuels and renewable heat remains minor.

Renewable energy investment of $313 billion accounted for nearly a fifth of total energy spending last year, establishing renewable as the largest source of power investment. While spending on renewable power capacity was flat between 2011 and 2015, electricity generation from the new capacity rose by one third, reflecting the steep cost declines in wind turbines and solar PV. The investment in renewable power capacity in 2015 generates more than enough to cover global electricity demand growth.

Technology innovations boosted investment in smart grids and storage, which are expected to play a crucial role in integrating large shares of wind and solar. While grid-scale battery storage investment expanded tenfold since 2010, their value is predominantly to complement the grid, which continues to absorb much larger investment.

In emerging markets such as Mexico and India, long-term contracts are helping to mobilise investment in renewable, but difficulties in upgrading the grid in order to integrate them into the system persist. Investment in transmission lines is critically dependent on the regulatory framework and often faces licencing obstacles. For systems where variable renewable account for a large and growing share of the power generation mix, investment in both electricity storage and smart demand-respons solutions will need to expand substantially.

Global gas-fired power generation investment declined by nearly 40 per cent. Asian marketscontinued to favour investment in coal power. Investment activity in European gas power remained muted despite large retirements anticipated in the next decade.

Energy efficiency investment increased by 6 per cent in 2015 despite falling energy prices. Nevertheless, low oil prices risk derailing fuel efficiency improvements in the transport sector, especially in countries with low taxes. Lower oil prices have had a visible impact on vehiclemarkets in some regions. The rate of fuel economy improvements in new light-duty vehicle sales slowed by two-thirds in the United States and stagnated in India although it continued to accelerate in China. Reaching fuel economy targets will require robust efficiency standards, which can be reinforced by price incentives such as excise taxes and reduced fossil fuel subsidies.

With investment rising 6 per cent, energy efficiency spending was robust in 2015 due to government policies such as minimum standards that cover a rising share of new buildings, appliances and motor vehicles. In certain countries, lower prices slowed the trend towards more fuel-efficient vehicles, most notably in the United States where the rate of improvement in efficiency was two-thirds lower than that in recent years.

Rapid growth in electricity demand, as well as energy security and cost considerations, are continuing to drive large investments in coal-fired capacity in India and the region of the Association of Southeast Asian Nations (ASEAN). On the other hand, gas is the preferred generating option in areas with abundant low-cost resources, such as North America, the West Asia and Russia. In the United States, its cost advantage is reinforced by environmental and climate regulations. - Business Standard