Energy spending signals an opportunity for the industry

The world’s level of energy investment is set to increase by 8% in 2022 to well over $2 trillion, with clean energy accounting for the majority of that figure.

The International Energy Agency says while the figures look encouraging the growth in investment is still far from enough to tackle the multiple dimensions of today’s energy crisis and pave the way towards a cleaner and more secure energy future.

The fastest growth is coming from the power sector – mainly in renewables and grids – and from energy efficiency, according to the IEA’s World Energy Investment 2022 report. The rise in clean energy spending is not evenly spread, however, with most of it taking place in advanced economies and China. And in some markets, energy security concerns and high prices are prompting higher investment in fossil fuel supplies, most notably on coal.

Clean energy investment grew by only 2% a year in the five years after the Paris Agreement was signed in 2015. But since 2020, the pace of growth has accelerated significantly to 12%. Spending has been underpinned by fiscal support from governments and aided by the rise of sustainable finance, especially in advanced economies. Renewables, grids and storage now account for more than 80% of total power sector investment. Spending on solar PV, batteries and electric vehicles is now growing at rates consistent with reaching global net zero emissions by 2050.

Tight supply chains are also playing a large part in the headline rise in investment, though. Almost half of the overall increase in spending is a reflection of higher costs, from labour and services to materials such as cement, steel and critical minerals. These challenges are deterring some energy companies from picking up their spending more quickly.

From a low base, there is rapid growth underway in spending on some emerging technologies, notably batteries, low emissions hydrogen, and carbon capture utilisation and storage. Investment in battery energy storage is expected to more than double to reach almost $20 billion in 2022.

However, according to the IEA, despite some bright spots, such as solar in India, clean energy spending in emerging and developing economies (excluding China) remains stuck at 2015 levels, with no increase since the Paris Agreement was reached. Public funds to support sustainable recovery are scarce, policy frameworks are often weak, economic clouds are gathering, and borrowing costs are rising. All of this undercuts the economic attractiveness of capital-intensive clean technologies. Much more needs to be done, including by international development institutions, to boost these investment levels and bridge widening regional divergences in the pace of energy transition investment.

“Overall, today’s oil and gas spending is caught between two visions of the future: it is too high for a pathway aligned with limiting global warming to 1.5 °C but not enough to satisfy rising demand in a scenario where governments stick with today’s policy settings and fail to deliver on their climate pledges,” It warned.

It provides the (re)insurance industry with a huge opportunity to deliver on its promise to aid the transition to sustainable energy sources. The key will be the role that the industry is able to play in the emerging economies where the lack of investment is fuelling their reliance on fossil fuels.

As the date for the COP27 meeting gets ever closer the likelihood is that there will be further pressure to level up the ability of all nation to transition to a net zero future. However is comes with risk and risk is the industry’s business.

Jon Guy, Editor,

Emerging Risks

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