The clean energy divide between advanced and developing economies risks growing, according to the International Energy Agency (IEA), as the world enters its “first global energy crisis”.
The IEA has warned in its World Energy Outlook 2022, published on October 27, that a “huge increase in energy investment is essential to reduce the risks of future price spikes and volatility”. The report comes as worst energy crisis since the oil supply shock of the 1970s continues in the international coal, electricity, natural gas and oil markets.
“Shortfalls in clean energy investment are largest in emerging and developing economies,” the report notes, which is “a worrying signal, given their rapid projected growth in demand for energy services”.
Fatih Birol, the IEA’s executive director, said in a statement that “it is essential to bring everyone on board, especially at a time when geopolitical fractures on energy and climate are all the more visible”.
“The journey to a more secure and sustainable energy system may not be a smooth one. But today’s crisis makes it crystal clear why we need to press ahead,” he added.
Clean energy annual investments, which currently stand at $1.3tn, are due to rise above $2tn by 2030, according to the IEA’s stated policies scenario — the agency’s modelling system which uses policy measures set out by governments so far. This still falls short of the $4tn it says is required under the net-zero scenario.
In the five years following the Paris Agreement in 2015, investment going into clean energy remained flat at just below $1tn per year, the IEA says, but since 2020, the pace of growth has accelerated significantly to 12%. This year, it is expected that clean energy investments, spanning renewable energy, nuclear, energy efficiency, grids and storage, low-carbon fuels and electric vehicles (EVs) will surpass $1.4tn.
However, if China is excluded, the amount being invested in clean energy each year in emerging and developing economies has not moved since 2015, the IEA says.
The agency warns that the problem in emerging markets and developing economies may get worse. This is in light of cost of capital for a solar photovoltaic plant in emerging economies already being two- to three‐times higher than in advanced economies and China.
“Today’s rising borrowing costs could exacerbate the financing challenges facing such projects, despite their favourable underlying costs. A renewed international effort is needed to step up climate finance and tackle the various economy‐wide or project‐specific risks that deter investors,” the report warns.
Meanwhile, governments in advanced economies have issued incentive packages mobilising billions of dollars’ worth of investments in their own territories, such as the US’s Inflation Reduction Act, the EU’s Fit for 55 package and REPowerEU, and Japan’s Green Transformation plan.
Short-term fossil fuels
At the same time, the IEA stresses that if clean energy investment does not accelerate, investment in oil and gas would be needed to avoid further fuel price volatility, in turn jeopardising the 1.5 degrees Celsius goal.
In the IEA’s stated policies scenario, an average of almost $650bn is set to be spent on upstream oil and natural gas investment annually to 2030 — a rise of more than 50% compared with recent years.
This year, foreign direct investment into oil and gas extraction projects has made a massive comeback as energy companies expand production, according to fDi Markets. Between January and August 2022, foreign investors announced 15 greenfield oil and gas extraction projects worth $42bn — more than seven times higher than the $5.4bn of capital expenditure committed in 2021.
Despite the short-term jump in fossil fuel investments, the report also highlights that the IEA’s stated policies scenario has forecast, for the first time ever, global demand for fossil fuels reaching a peak or plateau over the next decade.
“In this scenario, coal use falls back within the next few years, natural gas demand reaches a plateau by the end of the decade, and rising sales of electric vehicles mean that oil demand levels off in the mid-2030s before ebbing slightly to mid-century,” it says.