Investments In Renewable Energy Exceed Fossil Fuel Expenditures
The International Energy Agency has released new data that shows the recovery from the slump caused by the Covid-19 pandemic and the response to the global energy crisis provoked by Russia’s war of aggression against Ukraine have provided a significant boost to renewable energy investments. When the IEA compared it estimates for 2023 with the data for 2021, it found that annual clean energy investments have risen much faster than investments in fossil fuels over this period — 24% vs 15%.
“Our new analysis highlights how the period of intense volatility in fossil fuel markets caused by the Russian invasion of Ukraine has accelerated momentum behind the deployment of a range of clean energy technologies, even as it also prompted a short term scramble for oil and gas supply.
“We estimate that around USD 2.8 trillion will be invested in energy in 2023. More than USD 1.7 trillion is going to clean energy, including renewable power, nuclear, grids, storage, low emission fuels, efficiency improvements, and end-use renewables and electrification. The remainder, slightly over USD 1 trillion, is going to unabated fossil fuel supply and power, of which around 15% is to coal and the rest to oil and gas. For every dollar spent on fossil fuels, 1.7 dollars are now spent on clean energy. Five years ago this ratio was 1:1.”
Renewable Energy & Economics
What’s causing the increase in clean energy investments? The IEA points to improved economics at a time of high and volatile fossil fuel prices, together with greater policy support from programs like the US Inflation Reduction Act, which in turn has sparked new initiatives in Europe, Japan, and China. Energy security is also an important driver of investments in clean energy, after Russia demonstrated how over-reliance on an unstable nation led by a sociopath is not a smart long-term energy strategy. Finally, there has been an added focus on industrial strategy as countries seek to strengthen their footholds in the emerging clean energy economy, the IEA says.
According to the Associated Press, new solar and wind installations are expected to hit 440 GW in 2023, which is one third more than the world added in 2022. Once completed, the new renewable energy resources will bring the total global installed capacity to 4,500 GW, which is roughly the combined total power output of the United States and China.
“The global energy crisis has shown renewables are critical for making energy supplies not just cleaner but also more secure and affordable,” said Fatih Birol, the IEA’s executive director.
In 2023, low emissions power is expected to account for almost 90% of total investment in electricity generation. Solar is the star performer with more than $1 billion per day expected to be invested in 2023. If that projection holds true, it means investments in solar will exceed spending in oil production for the first time.
Consumers are investing in more electrified end uses. Demand for electric cars is booming, with sales expected to leap by more than a third this year after breaking all previous records in 2022. As a result, investment in EVs has more than doubled since 2021, reaching $130 billion in 2023. Global sales of heat pumps have seen double digit growth since 2021. The IEA says the momentum behind the rise in clean energy investment is the result of a powerful alignment of costs, climate and energy security goals, and industrial strategies.
More Renewable Energy Investment Needed
Despite all the good news about increased renewable energy investments, the IEA says more needs to be done. While $1.3 trillion will go to expanding renewable energy this year, the world really needs to be spending more than three times that amount by 2030 to make a significant impact on the threat of an overheating planet.
While renewable energy is booming, the IEA points out that 2022 was an extraordinarily profitable year for many fossil fuel companies, thanks to the windfall they received as a result of turmoil in world energy markets as a result of the Ukraine war that led to higher fuel prices. Net income from fossil fuel sales more than doubled compared with the average in recent years, with global oil and gas producers pocketing about $4 trillion.
The IEA says that based on its analysis of the spending plans that the large- and medium-sized oil, gas, and coal companies have announced, investments in fossil fuel supply are set to rise by more than 6% in 2023 to $950 billion. The largest share of that total is going to upstream oil and gas, where investment is expected to rise by 7% in 2023 to more than $500 billion, which is in line with the amount the industry was spending pre-Covid.
Uncertainties over longer term demand, worries about costs, and pressure from many investors and owners to focus on returns rather than production growth suggest that only large Middle Eastern national oil companies will be spending more in 2023 than they did in 2022 — the only subset of the industry spending more than pre-pandemic levels.
The headline rise in spending on new oil and gas supply represents less than half of the cash flow that was available to the oil and gas industry. Between 2010 and 2019, three quarters of cash outflows were typically invested into new supply. This is now less than half, with the majority going to dividends, share buybacks and debt repayment. All the while, the industry is pedaling furiously to fend off lawsuits filed in state courts in the US that could result in damages of tens, if not hundreds, of billions of dollars.
Investment by the oil and gas industry in low emissions sources of energy is less than 5% of its upstream investment, the IEA says, with European companies spending more for research in this area that companies in other countries. Investment by the industry in clean fuels such as bioenergy, hydrogen, and CCUS is picking up in response to more supportive policies but remains well short of where it needs to be in climate-driven scenarios.
Investment in coal supply is expected to rise by 10% in 2023, according to IEA estimates, and is already well above pre-pandemic levels. Investment in new coal-fired power plants remains on a declining trend, but a warning sign came in 2022 with 40 GW of new coal plants being approved — the highest figure since 2016.
Almost all of these were in China, reflecting the high political priority attached to energy security after severe electricity market strains in 2021 and 2022, even as China deploys a range of low-emission technologies at scale. Sad to say, China is a leading — some might say dominant — supplier of solar panels to the world, but many of its solar panel factories are powered by electricity from coal-fired thermal generating plants.
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The Takeaway
This latest report from the IEA is both good news and bad news. Renewable energy investments are up strongly, but are still less than required. Demand destruction for fossil fuels continues, however, with decarbonization efforts for heavy vehicles like buses, trains, trucks, and ships seeing greater interest worldwide. Electric vehicles use no gasoline or diesel. The handwriting is on the wall. The days of fossil fuel-powered transportation and energy generation are numbered. The only question is, will they end soon enough?
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