World Energy Investment Outlook Sees Need for $16,000 billion of Energy Investment through 2030, Highlights Major Challenges in Mobilising Capital
(Paris) — 4 November 2003
"If present trends continue, the world will need to invest $16 trillion over the next three decades to maintain and expand energy supply," Claude Mandil, Executive Director of the Paris-based International Energy Agency, said today. This number, much larger in real terms than the comparable figure for the past thirty years, is equivalent to 1% of annual global GDP over the period. "Without new policy actions, world energy demand will rise by two-thirds between now and 2030, and the world economy will falter if these energy supplies are not made available."
Mr. Mandil made his remarks in introducing the World Energy Investment Outlook (WEIO), a major new IEA study, at the Oil and Money Conference in London. The latest volume in the World Energy Outlook series, it is the fruit of an unprecedented collaborative effort, involving experts and organisations, including OPEC, the World Bank and major energy companies and financial institutions. It quantifies in detail, by fuel sector and by region, energy investment needs and identifies the obstacles to mobilizing capital on the required scale. "To the best of my knowledge, no previous attempt has been made to build such a comprehensive picture of future energy investment, worldwide, in all parts of the energy supply chain," he said.
Some unexpected observations reveal:
Power generation, transmission and distribution will absorb almost 60% of global energy investment or almost $10 trillion. This increases to more than 70% if investment in the fuel chain to meet power station fuel requirements is included.
Transmission and distribution will account of more than half of global electricity-sector investment.
The bulk of the $4 trillion of upstream investment in the oil and gas sectors will be needed simply to maintain production capacity at current levels.
The coal industry requires a mere $400 billion, or 2% of global energy investment.
OECD countries also face challenges in financing electricity investments. This has not been a problem until now, but different financial risks have been introduced by the transition to competitive markets. While liberalisation has resulted in many benefits, there is some increased risk to investors in power generation, especially peaking capacity. There are also obstacles, such as public resistance to expansions in transmission networks, which lag behind investment in generation capacity in some OECD countries. Recent power failures in the United States and some European countries have driven home the importance of this issue.
Total investments in the oil and gas sectors will each amount to more than $3 trillion to 2030, or around 19% each of global energy investment. Whether the huge amounts of capital needed to mobilise the bulk of the world’s remaining hydrocarbon reserves in the Middle East will be forthcoming is a major uncertainty. Iraq alone would need to raise almost $5 billion to hike its oil-production capacity to a projected level of almost 4mb/d by 2010.
Energy-market reforms, more complex supply chains and the growing share of international trade in global supply are, in many cases, increasing risks to investors in the natural gas industry. They will require a commensurate increase in returns if a shortfall in gas investment is to be averted. Investments in liquefied natural gas chains will have to be greater than in the past to meet a six fold increase in LNG trade – despite lower LNG unit costs. The lifting of still-widespread impediments to foreign investment and tax reform will be crucial to capital flows to the gas industry, especially in the Middle East, Africa and Russia, where global gas reserves are concentrated.
Financing the required investments in developing countries and transition economies is the biggest and most pressing challenge. Their financial needs are larger than those of OECD countries, both in absolute terms and relative to the size of the economy. Russia’s investment requirement will amount to 5% of GDP and Africa’s to 4%, compared to only half a percent in the OECD. And, in general, investment risks outside the OECD are higher, particularly for domestic electricity and downstream gas projects. The energy sector has to compete against other sectors of the economy for capital – most of which will have to come from private investors. Mr. Mandil said that as huge as the overall investment figure might seem, nothing precludes successful financing on this scale but if, and only if, investment conditions are right.
Financing the $5 trillion of investment in the electricity sector in developing countries will be a daunting task, particularly in Africa and India. Far-reaching reforms are urgently needed – chief among which is to make tariff structures more cost-reflective – to facilitate higher capital flows in these and other developing regions.
The projected rate of investment will still leave 1.4 billion people without access to electricity in 2030, only 200 million fewer than now. Boosting global electricity investment by just 7% would be sufficient to bring a minimal level of supply to these marginalised people, but that would mean raising another $665 billion in the poorest regions, which are already struggling to raise capital. "We all have a duty to work towards raising the funds necessary to bring electricity to every world citizen before the year 2030. If not, someone, somewhere in the world, will go without the energy he, or more likely she, needs." Mr Mandil said.
Advanced technologies being developed today, including carbon sequestration, hydrogen, fuel cells and advanced nuclear reactors, could dramatically alter energy investment patterns and requirements in the longer term. How quickly these technologies are deployed depends critically on fiscal and regulatory incentives to accelerate their commercial viability.
Governments will play a vital role in creating the preconditions for energy investment. Increasingly, this will involve adopting the policies and setting the conditions for private investment, relegating to the past direct state-financed investment or ownership. This will involve greater attention to overall policy, legal and regulatory frameworks, identifying changing risks and ways to lower barriers to investment. In many parts of the world, there is still a long way to go to ensure that basic instruments of good governance, both in the energy sector and more generally, are reinforced, applied and respected. "Our projections for the future identify many challenges. The WEIO is a policy analysis tool that is premised on the assumption that we can have a different future, if we understand the challenges and if we address them now. " said Mr. Mandil.