A major report released June 3 by the International Energy Agency warns that the average capital cost of new energy infrastructure has been rising steeply in recent years, and that the world will need to find $40 trillion in capital investments by 2035 to continue supplying its energy needs. Of this $40 trillion, $23 trillion will be needed for fossil fuel extraction, transport and oil refining. Almost $10 trillion will be necessary to build new power generation projects, of which low-carbon technologies – renewables ($6 trillion) and nuclear ($1 trillion) – account for almost three-quarters. A further $7 trillion will be needed for transmission and distribution.
The primary concern is that capital infrastructure now costs approximately twice as much, in real dollars, compared with what it did in 2000, to produce the same amount of energy. “The doubling of capital costs is a serious issue,” IEA’s chief economist, Fatih Birol, said. “Companies have to improve their capital discipline and they have to be a bit more realistic in the future about rates of return, so long as prices remain at these levels.” A number of major energy companies have begun trimming their own capital investment plans as they come to the same realizations. This trend could lead to tightening energy supplies, which would further drive up consumer costs.
The report notes that, “Less than half of the $40 trillion investment in energy supply goes to meet growth in demand, the larger share is required to offset declining production from existing oil and gas fields and to replace power plants and other assets that reach the end of their productive life. Compensating for output declines absorbs more than 80% of upstream oil and gas spending. Replacing power plants that are retired triggers almost 60% of investment in electricity generation in OECD countries, although a much smaller share in emerging economies. These declines and retirements set a major re-investment challenge for policymakers and the industry, but they also represent a real opportunity to change the nature of the energy system by switching fuels or deploying more efficient technologies.”
For more information readers may wish to visit the IEA website for its “World Energy Investment Outlook.” The executive summary is available at this location: www.iea.org/publications/freepublications/publication/WEIO_2014_ES_English.pdf