Understanding the Mega-Capital Investment Requirements to Meet Global Energy Needs

The strong correlation between energy use, economic growth (GDP) and improving standards of living is well documented. All societies that have significantly improved quality of life[1] have relied heavily on energy and energy systems to do so.

As Charts 1 and 2 below highlight, this is an inextricable link – to date, we cannot seem to have one without the other.

Chart 1 – Global GDP/per capita (AD 1 – 2001)

Chart 2 – World Energy Consumption (AD 1820-2000)

The challenge for the future is how to sustain, and conceivably significantly increase and diversify, economic growth around the globe so an even larger percentage of humanity can enjoy higher living standards.

In an era that combines climate change imperatives with the largest economic transformation in human history occurring in China and India and other emerging economies, expanding the global energy supply to meet demand is a daunting and complex challenge.

To put this in capital terms, the International Energy Agency has recently reviewed the global investment requirements needed to meet future energy needs out to 2035. The Agency estimates that a staggering $48 trillion over the 20 year period to 2035 will be required.[2]

So what does this $48 trillion get you?

According to the IEA this massive amount breaks down as follows:

• $40 trillion for energy supply
  • $23 trillion in fossil fuel extraction; transport and oil refining
  • $10 trillion in power generation
    • $6 trillion in renewables
    • $1 trillion in nuclear
    • $7 trillion in transmission and distribution (counts elsewhere)
• $8 trillion for energy efficiency
  • Primarily in EU, North America and China
  • 90% goes to transport and buildings sectors

Other noteworthy findings from the IEA report include:

• The baseline of annual investment expenditures of $1.6 trillion today will need to rise steadily to $2 trillion for energy supply and from $130 billion on energy efficiency measures to $550 billion by 2035.
• Less than half the investment goes to meeting growth in demand – a slight majority goes to offset declining production in existing capital stock.
• Two-thirds of energy supply investment will go to emerging economies.
• The IEA also modelled alternate scenarios (the 450 Scenario – a lower carbon trajectory) and found that investment increases to $53 trillion to meet energy needs, with significant shifts to renewables and energy efficiency. Overall, the fuel supply mix is still fossil fuels dominant – trending down to 65% in 2035 from current 82%.

As the IEA sees it, in the absence of widespread and low cost technological change(s), energy transitions over the next 2 decades will only be altered through government policy. While some modest shifts have occurred to date, more significant changes in energy investment trajectories, particularly in emerging markets, will only occur as a result of government policies designed to alter the cost of different energy sources. Even with new policies, current energy investment trends, which match supply and demand dynamics in the energy market, can only be shifted moderately from fossil fuels to renewables and energy efficiency investments.

With $48 trillion in play, the stakes are very high.