AskIEA: Energy investment
(Paris) — 7 October 2016
With the release of World Energy Investment 2016 last month, we reached out to all of our followers on social media, giving the opportunity to pose questions to the authors. Your questions ranged from the technical to the political and everything in between. We selected a few of the best questions and answers to share below. If you have your own question for IEA experts, get in touch on Twitter using #AskIEA, or post a message on Facebook or LinkedIn.
Blaz Bratovic asks on Twitter: Since investment in low carbon technologies is still not sufficient to reach climate targets, does your report identify critical areas?
Juztin Plante asks on Facebook: How different do the authors think the various outcomes would have been if the oil price had not plummeted in 2014/15? Similar results in renewables but differences in oil and gas? Or was investment in all sectors impacted by this change?
The oil price decline made a huge impression on energy investment in 2015. Without this decline, the outcome could have been very different. However, assessing this counterfactual is complicated. For one thing, oil prices do not move in isolation from other macroeconomic factors that also influence energy investment. For example, the oil price is a product of oil supply and demand, which are influenced by a wide range of economic and geopolitical dynamics. Furthermore, the oil price influences commodity prices, which can impact investment in all parts of the energy system. As we have not modelled such a scenario, we are wary about quantifying the possible outcome, but a few trends are evident.
Firstly, oil may be the largest component of energy demand but energy investment decisions depend on supply and demand fundamentals in specific sectors and regions, which do not interact equally strongly with the oil market. Government policies and the responsiveness of investors to year-on-year price changes are also crucial factors.
For the upstream oil and gas sector, the price decline led to a big deflationary impact on costs and forced the industry to become leaner and more efficient. Had these changes not materialised, there may have been much more investment, but at a higher cost.
For fossil fuel power generation, investment decisions have more to do with competition between coal, gas and renewables. Gas and coal prices also declined in the past two years – but this was partly reflective of their own supply and demand fundamentals.
For renewable electricity, electricity networks and energy efficiency in buildings, government policies, from targets to standards and fiscal incentives, have sustained investment despite lower fossil fuel prices.
One area where lower oil prices could potentially have changed spending patterns is in vehicles. But, here again, we find policies to be at least as important as fuel prices, if not more so. The only notable slowdown in the fuel economy of new light duty vehicles was in the United States, where lower gasoline taxes mean that consumers feel changes to oil prices more than other regions. In other countries, the rate of improvement in fuel economy did not significantly slow down.
Situs Hijau Indonesia asks on Twitter: Why is Indonesia left far behind in renewable energy investment? Although there are abundant resources of renewable energy?
Damien Fuller asks on Twitter: Do you agree with Bloomberg New Energy Finance report on peak fossil fuel use? Doesn't the future baseline fossil fuel use mean climate change goals will fail?
Peak fossil fuel use is indeed a precondition for achieving climate goals. The good news is that fossil fuel investment in electricity has been in decline since 2010, in new capacity terms. But existing policies do not put us on track to peak consumption of fossil fuels in electricity or other sectors before 2040. Policy and technology are shifting us onto a new baseline, but must go faster.
Judd Werner asks on Linkedin: I recently read a statement claiming the percentage of the world’s primary energy demand supplied by wind and solar is forecast to rise from 1% (currently) to 3% in 2040. Is this IEA data? If so, what forecasting scenario does it correspond to? Also, how is this possible when IEA’s NPS forecasts renewables will surpass coal as the worldwide leader in power generation by the early 2030s? Does this suggest very conservative assumptions regarding the growth of renewables to supply transportation?
The New Policies Scenario of the World Energy Outlook projects solar and wind to grow from around 3% of global electricity generation to around 15% in 2040. Overall renewable generation, including hydropower, is set to overtake coal around 2030. The share of biofuels in transport and renewables in heat is also projected to increase, but at a slower pace as government policies for renewables are focusing more on electricity than other sectors. New renewable market forecasts to 2020, and in depth analysis on competitiveness will be released in October in our Medium-term Renewable Energy Market Report and in November in a WEO special focus on renewables.
Finally, Karim Choukri asks on Facebook: When do you think that concentrated solar power (CSP) technology will be as competitive as wind power? As you know some developing countries have started to integrate CSP even with its high costs, will this impact the stability of electricity system in these countries?
For solar thermal electricity with storage, system value can be more important than costs. Time-of-delivery pricing policies, as in South Africa, can encourage electricity delivery during evening peaks. And costs continue to fall as deployment spreads out in Morocco, Chile, China and the Middle East.
Stay tuned for a future #AskIEA, or get in touch with us today with any of your energy questions.