Meeting the world’s growing need for energy will require more than US$48 trillion in investment over the period to 2035, according to a special report on investment released today by the International Energy Agency (IEA) as part of the World Energy Outlook series. Today’s annual investment in energy supply of US$1.6 trillion needs to rise steadily over the coming decades towards US$2 trillion. Annual spending on energy efficiency, measured against a 2012 baseline, needs to rise from US$130 billion today to more than US$550 billion by 2035.

Newly compiled data show how annual investment in new fuel and electricity supply has more than doubled in real terms since 2000, with investment in renewable source of energy quadrupling over the same period, thanks to supportive government policies. Investment in renewables in the European Union has been higher than investment in natural gas production in the United States. Renewables, together with biofuels and nuclear power, now account for around 15% of annual investment flows, with a similar share also going to the power transmission and distribution network. But a large majority of today’s investment spending, well over US$1 trillion, is related to fossil fuels, whether extracting them, transporting them to consumers, refining crude oil into oil products, or building coal and gas-fired power plants.

Investment decisions are increasingly being shaped by government policy measures and incentives. While many governments have retained direct influence over energy sector investment, some stepped away from this role when opening energy markets to competition:  many of these have now stepped back in, typically to promote the deployment of low-carbon sources of electricity. In the electricity sector, administrative signals or regulated rates of return have become, by far, the most important drivers for investment; the share of investment in competitive parts of electricity markets has fallen from about one-third of the global total ten years ago to around 10% today.

“Policy makers face increasingly complex choices as they try to achieve progress towards energy security, competitiveness and environmental goals,” IEA chief economist Fatih Birol, says. “These goals won’t be achieved without mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play.”

Of the cumulative global investment bill to 2035 of US$48 trillion in the report’s main scenario, around US$40 trillion is in energy supply and the remainder in energy efficiency. Of the investment in energy supply, US$23 trillion is in fossil fuel extraction, transport and oil refining; almost US$10 trillion is in power generation, of which low-carbon technologies – renewables (US$6 trillion) and nuclear (US$1 trillion) – make up the lion’s share; and a further US$7 trillion in transmission and distribution. More than half of the energy-supply investment is needed just to keep production at today’s levels, that is, to compensate for declining oil and gas fields and to replace power plants and other equipment that reach the end of their productive life. The US$8 trillion of investment in energy efficiency is concentrated in the main consuming markets, the European Union, North America and China: 90% is spent in the transport and buildings sectors.

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