A watershed moment for energy

According to the IEA’s World Energy Investment report, published earlier this week, investment in electricity overtook investment for oil and gas for the first time ever. This is important, as we are currently at a crossroads for our energy transition. Investments today will have reverberating impacts 10, 20, 30 years to come, as certain networks will become committed to certain energy sources. Yet there is a reluctance to make these decisions, as the backdrop to electricity overtaking O&G investment is a 12% drop in global energy investment.

The numbers

Whilst the full report (and full dataset) is behind a paywall, and I’m not at work to see if we have access to it, most of the numbers have been reported in various outlets already. The key ones I found were total electricity investment, total oil and gas investment, total energy efficiency investment, and total investment for electricity networks and storage. I’ve made a quick table of them below.

What’s very interesting here is the rise in efficiency spending, which under normal market conditions wouldn’t be happening during a period of historic low prices. To me, this shows that government policies are making a difference. China made up around 27% of this spending, and could soon overtake Europe – demonstrating that middle income countries also have strong potential for environmental action in often less centralised areas, like energy efficiency.

It’s worth restating that electricity as a whole investment hasn’t actually grown in this report, but basically flatlined – with a small reduction of 1% being enough to get a lead on declining investment for oil and gas. See below for some further detail.

Whilst the increase in networks investment came mainly from countries with less mature grids, a growing proportion is coming from the replacement of ageing assets in Europe and the United States (approx. 30% together). With the replacement of assets in these countries, there has been a move to ‘smart’, with electricity transmission (certainly in cities) becoming linked to a platform for data and services – which goes further than merely sharing underground lines with the telecoms industry. This is something that is happening across the energy industry, as the IEA states:

The future role of digital technologies for generating, handling and communicating data has taken centre stage in energy discussions. We estimate that USD 47 billion was spent in 2016 on infrastructure and software directed towards digitalisation of the electricity sector to facilitate more flexible network operation, demand management and integration of renewable resources. The oil and gas industry is scaling up its utilisation of digital technologies to improve performance of its operations while keeping costs under control.

From the data above there’s also a hidden picture of declining investment in coal, which has only been offset by increased networks investment in developing countries like India and China. 20GW less coal was commissioned in 2016, which reflected concerns over the long-term profitability of coal in a hostile policy environment, as well as some market factors.

What does lower investment mean?

We are at a period of historically low oil and gas prices, and electricity prices. This would appear to be the most obvious explanation. However, there is also a rationalisation based on efficiency drives and technological progress.

Firstly, the oil and gas industry has become much leaner. In the period of higher oil and gas prices, there was a move to get as much production online as possible. Now there is much more discussion about costs.

Secondly, renewable costs have again fallen in the past year. Whilst investment in RES power fell by 3%, the capacity we are getting from that has gone up by 35% compared to last year.

Chief Economist of the IEA, Laszlo Varro, said: “The reaction of the oil and gas industry to the prolonged period of low oil prices which was a period of harsh investment cuts; and technological progress which is reducing investment costs in both renewable power and in oil and gas.” To sum up, a more competitive market, along with well-designed support for renewables, lead to lower costs. If we can get the same, or more, energy, for less money, then lower investment can be good news.