Energize Weekly, June 3, 2020
Energy investment across the world has suffered an unparalleled 20 percent decline, equal to $400 billion, in 2020, as a result of the novel coronavirus pandemic, according to the International Energy Agency (IEA).
The IEA had projected an increase of 2 percent in global energy investment for the year, which would have been the biggest increase since 2014 – but COVID-19 has ground economies around the world to a halt.
“The speed and scale of the fall in energy investment activity in the first half of 2020 is without precedent,” the agency said in a report on global energy investment. “Many companies reined in spending; project workers have been confined to their homes; planned investments have been delayed, deferred or shelved; and supply chains interrupted.”
While investment has been cut on all energy sectors, the oil and gas industry has suffered the sharpest drop – nearly a $245 billion loss, equal to a 32 percent reduction in investment.
“The effects on energy investment in this scenario come from two directions,” the IEA said. “First, spending cuts due to lower aggregate demand and reduced earnings; these cuts have been particularly severe in the oil industry, where prices have collapsed. Second, the practical disruption to investment activity caused by lockdowns and restrictions on the movement of people and goods.”
Upstream oil and gas investment dropped to $322 billion from $483 billion in 2019, and midstream investment was down to $189 billion from $273 billion.
After a brief price war between Saudi Arabia and Russia, which led to the price of Brent crude oil falling as low as $19 a barrel, a glut in oil supplies grew as demand collapsed.
“Oil is bearing the brunt of this shock because of the curtailment in mobility and aviation, which represent nearly 60 percent of global oil demand,” the IEA said.
Among the hardest hit companies have been small and medium-size North American shale drillers, many of which were already facing demands from investors to cut losses, improve cash flow and operations, the IEA said.
Renewable power fared better than the oil and gas sector with a 10 percent drop in investment to $341 billion. Renewables for transportation and heat went to $29 billion from $33 billion, and renewable power investment declined to $281 billion from $308 billion.
“Larger renewables-focused utilities in advanced economies appear on firmer footing, but also face some revenue risks from shifting market demand and price trends,” the agency said.
Still, final investment decisions for new utility-scale wind and solar projects slowed in the first quarter of 2020 back to a level not seen since the first quarter of 2017, and distributed solar, such as rooftop solar, investments looked to take an even larger hit as it faces lower consumer spending and lockdowns.
The IEA said that the current economic woes may offer an opportunity for renewables.
“A focus on value and quick delivery, as well as environmental gains, could provide an opening for some cleaner technologies, especially in power where solar PV [photovoltaic] and wind are not only among the cheapest options for new generation, but also have relatively short investment cycles,” the agency said.
Energy efficiency investments are expected to decline 12 percent to $247 billion in 2020. These investments, primarily in buildings and energy efficient boilers, pumps and appliances, closely follow the rate of economic growth, the agency said.
The IEA said that the level of investment in energy efficiency is insufficient to meet sustainability goals and reduce energy demand. Primary energy intensity needs to drop by an average 3.6 percent annually to achieve climate goals. In 2019, the reduction was just 2 percent, about the same as it was in 2018.
Investment in power grids, which was already declining in a number of countries, is also projected to fall again in 2020. “The impact will be larger in developing countries as most of the investment in networks is financed by state-owned utilities that were in weak financial position before the crisis,” the agency said.
Even before the crisis, the flow of energy investments was not well aligned with the world’s future needs. “Market and policy signals were not leading to a large-scale reallocation of capital to support clean energy transitions,” the agency said. “There was a large shortfall in investment, notably in the power sector.”
The IEA said that investment in grids is “at risk of falling short” of what is needed to support growing renewable generation and the electrification of sectors such as transport. The agency estimates that overall global grid spending would need to rise 50 percent over the next decade to meet long-term sustainability goals.
