Overview and Key Findings - Global Energy Investment to 2023 - Analysis - IEA (2023)

The recovery from the recession caused by the Covid-19 pandemic and the response to the global energy crisis gave a big boost to investments in clean energy. Comparing our estimates for 2023 with data for 2021, during which annual investment in clean energy grows much faster than investment in fossil fuels (24% vs. 15%). Our new analysis highlights how a period of intense fossil fuel market volatility stemming from the Russian Federation's ("Russia") invasion of Ukraine accelerated the momentum behind the development of a range of clean energy technologies, even as it also led to short- and long-term oil supply struggles and gas.

We estimate that approximately $2.8 trillion will be invested in energy in 2023. More than $1.7 trillion will go to clean energy, including renewables, nuclear, grids, storage, low-emission fuels, efficiency improvements, and renewables for end use and electrification. fossil fuels and electricity, of which about 15% is used for coal, and the rest for oil and natural gas. Today, for every dollar spent on fossil fuels, $1.70 is spent on clean energy. Five years ago the ratio was 1:1.

Investments in clean energy are driven by several factors. These include improving economic conditions amid high and volatile fossil fuel prices; strengthening policies through tools such as the Inflation Reduction Act in the United States and new initiatives in Europe, Japan, the People's Republic of China ("China") and elsewhere; strong support for aligning climate and energy security goals, especially in import-dependent economies, and a focus on industrial strategies as countries seek to strengthen their position in the emerging clean energy economy.

The momentum is led by renewable energy sources and electric vehicles, with other sectors such as batteries, heat pumps and nuclear power also contributing significantly. By 2023, low-emission electricity is expected to account for almost 90% of total investment in electricity generation. Solar is the top performer, with more than $1 billion a day expected to be invested in solar by 2023 ($380 billion a year), surpassing oil consumption for the first time.

Consumers are investing in more electrified end users. Demand for electric vehicles is growing, with sales expected to rise by more than one-third this year after reaching record levels in 2022. As a result, investment in electric vehicles (defined as the ratio of additional spending on electric vehicles to average sales of electric vehicles ) price in a specific country) has more than doubled since 2021 to reach $130 billion in 2023. Global heat pump sales have seen double-digit growth since 2021.

2022 will be a profitable year for many fossil fuel companies as their revenues rise due to higher fuel prices. Net revenue from the sale of fossil fuels has more than doubled compared to the average in recent years, giving global oil and gas producers about $4 trillion.

Our overall forecast, based on an analysis of the published spending plans of all large and medium-sized oil, gas and coal companies, is that investment in fossil fuel supply will grow steadily by more than 6% to $950 billion by 2023.

The lion's share of that total goes to upstream oil and gas production, where investment is forecast to rise 7% to more than $500 billion in 2023, bringing the total back to 2019 levels. About half of that increase could be absorbed by cost inflation .

Some major oil and gas companies have announced bigger spending plans, supported by record revenues. However, long-term demand uncertainty, cost concerns and pressure from many investors and owners to focus on returns rather than production growth mean that only the Middle Eastern national oil majors will spend more in 2023 than in 2022. Much more, and that's just a subset industries whose consumption exceeds pre-pandemic levels.

The total increase in spending on new oil and gas supplies is less than half of the cash flow available to the oil and gas industry. Three-quarters of cash outflows between 2010 and 2019 were typically invested in new supply. Now it's less than half, and most of that goes to dividends, share buybacks and debt repayments.

The oil and gas industry invests less than 5% of its investment in low-emission energy production. This metric varies from company to company, with double-digit shares common for large European companies. Industrial investment in cleaner fuels (such as bioenergy, hydrogen and CCUS) is increasing in response to supportive policies, but remains far from the levels required for climate-based scenarios.

Investment in coal supply is expected to increase by 10% in 2023, already well above pre-pandemic levels. Investment in new coal-fired power plants remains on a downward trend, but a warning sign emerged in 2022, with 40 GW of new coal-fired power plants approved – the highest rate since 2016. Almost all of this is in China, reflecting the high political priority for the implications to energy security after severe tensions in the electricity market in 2021 and 2022, even as China develops a range of low-emission technologies on a large scale.

The positive momentum behind clean energy investment is not evenly distributed across countries or sectors, highlighting the challenges policymakers must address to ensure a broad and safe transition. The macroeconomic environment presents additional obstacles, with higher short-term yields on fossil fuel assets and increasing borrowing costs and debt burdens. Investments in clean energy often require high upfront costs, making financing costs a key variable for investors, even if this is offset by lower operating costs over time.

From 2021, more than 90% of the increase in clean energy investment occurred in advanced economies and China. There are bright spots elsewhere: for example, solar investment in India remains high, installations in Brazil are on a steady upward trend, and investment activity is picking up in parts of the Middle East, particularly in Saudi Arabia, the United Arab Emirates and Oman. However, higher interest rates, unclear policy frameworks and market design, fiscally burdened utilities, and high capital costs have discouraged investment in many other countries. Specifically, as of 2021, clean energy investment growth in advanced economies and China has outpaced total clean energy investment in the rest of the world.

After a series of falling costs, prices for some key clean energy technologies are rising in 2021 and 2022, driven largely by higher input prices for basic minerals, semiconductors and bulk materials such as steel and cement. At the start of 2022, solar PV module prices were around 20% higher than last year, although these price pressures have since eased. Wind turbine costs, especially for European manufacturers, remain high in early 2023 and are 35% higher than the low level in early 2020. Licensing is a major concern for investors and financiers, especially when it comes to wind power and grid infrastructure.

While solar installations are increasing year by year, some other technologies have a less reliable pipeline of projects. In response to the changing political environment, wind energy investments in major markets change from year to year. Investments in nuclear power are on the rise, but hydropower, a key source of low-emission electricity market flexibility, is in decline.

Poor grid infrastructure is a limiting factor for renewable energy investment in many developing economies, and current investment flows are highly concentrated. Advanced economies and China account for 80% of global consumption and are responsible for almost all of the growth in recent years.

Our analysis presents a mixed picture of the outlook for energy efficiency and end-use investment. They are increasing in 2022, driven by new policies in Europe and North America and unusually high energy prices. However, we expect consumption to level off in 2023 due to slowing construction activity, rising borrowing costs and tight household budgets.

Russia has cut the flow of gas to the EU by around 80% in 2022, seeking leverage by imposing higher energy bills on consumers and a supply shortage following its invasion of Ukraine. This has resulted in strong price and policy incentives for investors to increase gas supply outside of Russia, build alternative delivery infrastructure and increase alternatives to natural gas. All these results are visible in our analysis.

The amount of new oil and gas sources approved for development in 2022 and 2023 is below the average level of the last decade. However, new approvals in 2023 will increase by 25% compared to 2022, with most of them being natural gas, reflecting efforts to offset supply shortfalls from Russia.

A wave of new regasification capacity is underway as countries seek to secure imports of liquefied natural gas (LNG). From 2022 to 2025, Europe's annual regasification capacity will increase by 50 billion cubic meters, increasing the continent's total LNG import capacity by a fifth. Import projects are growing fastest in Asia, where more than 100 billion cubic meters of LNG import capacity is expected to be added by 2025 (more than half in China).

The crisis has also spurred additional investment in liquefaction capacity, the most expensive part of the natural gas value chain. About 6 billion cubic meters of capacity has been approved since Russia's invasion of Ukraine, nearly doubling the rate of new approvals compared to the past decade. Together with projects already under construction, this will bring an unprecedented export capacity of 17 billion cubic meters, which could be commissioned between 2025 and 2027.

A key conundrum for investors working on large capital-intensive natural gas supply projects is balancing strong short-term demand growth with uncertain and potentially declining long-term demand. This is a particular problem for Europe, given the continent's strong climate goals. Many importers were reluctant to enter into long-term gas supply contracts. Favoring floating regasification terminals is one way to avoid blocking future emissions.

The second path is the expansion of investment in low-emission fuels and CCUS. Driven by energy security and climate requirements, new policies expand the line of projects in these areas. The number of hydrogen electrolysis projects has increased in Europe, while increased incentives in the US in the Lower Inflation Act have fueled a wave of investor interest in hydrogen and CCUS. After many false dawns, the number of large projects and well-funded sponsors, as well as a series of acquisitions by major oil and gas companies, particularly in transportation biofuels and biogas, suggest that investment in low-emission fuels may increase in the coming years.

A safe clean energy transition depends on resilient and diverse clean energy technology supply chains. According to data from the International Energy AgencyPerspectives of energy technologyCumulative investments in clean energy generation and key minerals supply, in addition to the energy sector investments covered in this report, will require about $1.2 trillion in cumulative investments by 2030 to stay on track for a 1.5°C scenario.

Record sales of electric vehicles, strong investment in electric battery storage (expected to approach $40 billion by 2023, nearly double 2022 levels), and a policy push to expand domestic supply chains are driving a new lithium-ion battery wave of construction necessities around the world. If all capacity announcements are implemented, 5.2 TWh of new capacity will be available by 2030.

Currently, China is a major player in all stages of global battery production, with the exception of basic mineral extraction. The announced production plans will somewhat weaken that position. By 2022, more than 75% of existing battery production capacity will be located in China. However, despite a two-thirds annual global capacity increase by 2030, China's share of global capacity could fall by nearly 10 percentage points by the end of the decade.

A key question for battery manufacturers is whether supply of base minerals can meet demand. Investments in basic minerals mining grow by 30% in 2022 due to high prices and increased political support. Exploration spending also increased, particularly for lithium, copper and nickel, led by Canada and Australia, with increased activity in Brazil and resource-rich countries in Africa. However, it can take more than 10 years to move from exploration to new production, and there is still widespread concern that critical mineral investment will limit production and clean technology development.

Critical minerals and batteries are areas where clean technology innovation is key. Public spending on research and development is constantly increasing, as is business spending. However, clean energy venture capital financing faces difficulties in a more challenging macroeconomic environment after the 2022 peak.

For a decade, cheap capital lowered the barriers to investing in risky bets, covering the fundamental weaknesses of the innovation system. As the cost of capital rises, the health of these systems and the level of public support will be key factors in determining the speed at which new technological ideas continue to flow.

International Energy AgencyWorld Energy Outlook 2021, we wrote: "The world is not investing enough to meet its future energy needs [...] The IEA's analysis has repeatedly pointed out that increasing spending to spur the development of clean energy technologies and infrastructure offers a way out of this impasse, but it must happen quickly, otherwise global energy markets face periods of instability and volatility.”

That is starting to change: global energy investment is rising, with clean energy investment growth leading the way from 2021, outpacing fossil fuel investment growth by almost three to one. Clean electricity is leading the way. If it continues to grow at the rate it has been growing since 2021, total consumption in 2030 of low-emission electricity, grid and storage, and end-use electrification will exceed the levels needed to meet global climate commitments (GCC). For some technologies, especially solar, this will correspond to the investment needed to achieve a global average temperature stabilization of 1.5°C (NZE scenario).

However, progress has been uneven. Investments in expanding and modernizing networks are lagging behind in many countries. With the increase in the share of solar and wind energy, investments are needed in technologies that enable greater flexibility of the power system. Supply chain and skills bottlenecks can limit growth. Most importantly, geographic investment imbalances need to be addressed, as many emerging and developing economies experience slow growth in clean energy investment and large numbers of people without access to modern energy services.

Other pillars of the transition to clean energy have not yet shown the same positive momentum as clean electrification. Investments in energy efficiency have increased, but are far below more ambitious climate scenarios. New policy measures encourage investment in low-emission fuels, but from a very low base.

Fossil fuel consumption is better aligned with 2030 needs that reflect the current policy environment (STEPS), but manufacturers need to closely monitor clean energy consumption developments, particularly as clean electrification affects demand for electricity generation fuels, as well as mobility and heat. The risks of locking in fossil fuel use are clear: fossil fuel investment in 2023 is now more than double the level needed to meet the much lower demand in the NZE scenario.

A key unanswered question is how quickly clean energy investment will increase in emerging and developing economies, where supportive strategies and policies must be accompanied by improved access to finance. Currently, sustainable financial instruments remain concentrated in advanced economies, accounting for nearly 80% of sustainable debt issuance in 2022. Issuance elsewhere (outside China) has grown from a low base, with India's successful first green bond issuance an industry milestone. Scaling up these instruments and mobilizing more support from development financial institutions will be critical to continue scaling up and accelerating the clean energy transition.