Global energy investment to increase by more than 8% in 2022
Investment is critical to address multiple aspects of the current energy crisis: relieving pressure on consumers, moving the world onto a net-zero emissions path, stimulating economic recovery and, for Europe in particular, reducing dependence on Russia following the invasion of Ukraine. Governments, companies and investors face a complex situation in deciding which energy projects to support, with urgent short-term needs that do not automatically align with long-term goals. Much depends on these choices.
Investment.
From tracking trends across sectors, technologies and regions, global energy investment will increase by more than 8% in 2022 to reach a total of $2.4 trillion, well above pre-COVID-19 levels, according to data from the International Energy Agency (IEA). Investment is increasing in all parts of the energy sector, but the main boost in recent years came from the power sector, mainly in renewables and grids, and from increased spending on end-use efficiency. Investment in oil, gas, coal and low-carbon fuel supply is the only area that, in aggregate, remains below levels seen before the pandemic in 2019. This is despite sky-high fuel prices that are generating unprecedented windfall profits for suppliers. Net revenues for the world’s oil and gas producers are forecast to double by 2022 to an unprecedented $4 trillion.
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Nearly half of the additional $200 billion in capital investment in 2022 is likely to be consumed by higher costs, rather than generating additional energy supply capacity or savings. Costs are rising due to multiple supply chain pressures, tight markets for skilled labor and services, and the effect of higher energy prices on essential building materials such as steel and cement.
These cost pressures are most visible in fuel supply, but are also affecting clean energy technologies: after years of declines, solar panel and wind turbine costs increased by 10% to 20% since 2020. Cost inflation concerns are a drag on companies’ willingness to increase spending, despite strong price signals.
Easing the burden on consumers is an immediate priority for many policymakers. The total energy bill paid by the world’s consumers is likely to exceed $10 trillion for the first time by 2022, hitting the poorest parts of society hardest and putting pressure on governments. to cushion the blow through fiscal measures and price interventions.
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High prices are encouraging some countries to increase investment in fossil fuels as they seek to secure and diversify their sources of supply. However, lasting solutions to the current crisis lie in accelerating clean energy transitions through increased investment in efficiency, clean electricity and a variety of clean fuels. These elements are central, for example, to the European Union’s REPowerEU plan to reduce dependence on Russia. There are many ways to respond to the immediate energy crisis that can pave the way to a cleaner, more secure future.
Investment in clean energy is finally starting to pick up and is expected to exceed $1.4 trillion by 2022, accounting for nearly three-quarters of the growth in total energy investment. The average annual growth rate in clean energy investment in the five years following the signing of the Paris Agreement in 2015 was just over 2%. Since 2020, the rate has increased to 12%, well below what is required to meet international climate targets, but nevertheless an important step in the right direction. The highest levels of clean energy investment in 2021 were recorded in China ($380 billion), followed by the European Union ($260 billion) and the United States ($215 billion).
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Transition.
Gains have been supported by the increasing cost competitiveness of many clean energy technologies and by policy and fiscal measures enacted to support transitions, often as part of efforts to ensure sustainable post-pandemic recoveries. The IEA estimated in early 2022 that governments around the world allocated $710 billion for long-term clean energy and sustainable recovery measures.
Renewable energy is at the center of the positive trend. Despite rising costs in recent months, clean technologies such as wind and solar PV remain the cheapest option for new power generation in many countries, even before factoring in the exceptionally high prices seen in 2022 for coal and gas. Renewables, grids and storage now account for more than 80% of total power sector investment.
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Solar PV accounts for almost half of new renewable energy investment, with spending split evenly between large-scale projects and distributed solar PV systems. The focus of wind power is shifting offshore. While 2020 was a record year for onshore deployment, 2021 was a record year for offshore, with more than 20 GW in service and about $40 billion in spending. Investment in improved efficiency is another major area of growth, driven by higher fuel prices and government incentives. A 16% increase in building efficiency investment in 2021 led the way. Policymakers are trying to move the global annual rate of building retrofits above the 1% mark, where it has stagnated for many years, and many countries, especially Japan, China and some in Europe, are increasingly emphasizing high energy performance standards for all new work.
The upward trend in efficiency spending is expected to continue in 2022. Rising fuel prices are generating growing interest in technologies such as electric heat pumps for heating (sales of which grew by 15% in 2021). However, efficiency investment faces headwinds, with higher borrowing costs, flat household incomes and lower consumer and business confidence. As always, continued government support is a key factor in shaping corporate and consumer demand.
Electrification.
Electrification of mobility is a key contributor to increasing clean end-use spending by consumers. Electric vehicle sales more than doubled in 2021 over the previous year and continue to increase strongly in 2022. In 2012, only 120,000 electric vehicles were sold worldwide. In 2021, more than that number were sold every week. One uncertainty is whether automakers can keep up with orders, given the supply chain issues (especially regarding the critical minerals involved) and the global shortage of semiconductors.
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Electrification is not just about cars; sales of electric two- and three-wheelers have increased, and investment in electrification of buses and commercial vehicles is also strong. Most electric buses are still deployed in China, but investment elsewhere is growing. In early 2022, India ordered more than 5,000 electric buses for five major cities, awarded at half the price achieved in previous tenders.
There are signs of life among important new and emerging technologies, where absolute investment remains relatively small but growth rates are high.
Investment in battery energy storage is reaching new highs and is expected to more than double to nearly $20 billion by 2022. This is led by grid-scale deployment, which accounted for more than 70% of total spending in 2021. The project pipeline is immense, with China targeting around 30 GW of non-hydro energy storage capacity by 2025 and the United States has more than 20 GW in grid-scale projects planned or under construction.
Hydrogen.
The momentum behind low-emissions hydrogen has been bolstered by Russia’s invasion of Ukraine, which has bolstered political support, especially in Europe. Companies focused on clean hydrogen are raising more money than ever, and the value of a portfolio of leading companies in this space has quadrupled since the end of 2019. Annual investment in low-carbon hydrogen is around $500 million. To supply the additional 15 million metric tons of hydrogen envisioned in the REPowerEU plan, it is estimated that cumulative capital investment of around $US600 billion would be needed globally through 2030, with 60% of this for infrastructure outside the European Union.
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Plans for around 130 commercial-scale CO2 capture projects in 20 countries were announced in 2021. They aim to source CO2 from a variety of applications, including hydrogen and biofuel production, which combined account for almost half of the newly announced projects.
The momentum behind emerging early-stage technologies is being maintained by increasing public financial support for energy innovation. New companies in the United States and Europe have raised record funds, particularly for promising energy storage, hydrogen and renewable energy technologies.
While global investment in clean energy is now well above where it was when the Paris Agreement was signed, the increase has been concentrated in the advanced economies of the West and China. Clean energy spending in emerging and developing economies (excluding China) remains stagnant at 2015 levels. These funds are going further than they used to, as technology costs are significantly lower than they were. There are some bright spots: utility-scale renewables in India, distributed wind and PV in Brazil, among others. But overall, the relative weakness of clean energy investment in much of the developing world is one of the most worrying trends.
Costs.
Investment in many emerging and developing economies relies more on public sources. State-owned enterprises account for about half of energy investment in these countries. However, public funds are often scarce, many state-owned utilities are heavily indebted, and the worsening global economic outlook reduces the ability of governments to finance energy projects. Of the stimulus spending mobilized to support a sustainable recovery, more than 90% is in advanced economies. High capital costs and rising borrowing costs threaten to undermine the economic attractiveness of capital-intensive clean technologies: a 2 percentage point increase in the cost of capital for solar PV and wind can lead to a 20% increase in overall levelized costs.
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Much more needs to be done to close the gap between emerging and developing economies’ one-fifth share of global clean energy investment and the fact that they contain two-thirds of the world’s population. Additional financial and technical support, including concessional capital, private sector capital and inflows from international carbon markets will be crucial. If investment in clean energy does not pick up quickly in emerging and developing economies, the world will face a major dividing line in efforts to address climate change and achieve other sustainable development goals.
