Investments are the lifeblood of the global energy system and will eventually determine how successful we are in changing it into a less CO₂-intensive one. There’s a monumental gap between the flexible, renewables-driven and CO₂-aware energy system we need, and the reality of today’s energy system in which reliance on fossil fuels remains stubbornly high. The green energy transition we’ve been talking about for some time is disappointingly slow.
Annual energy sector investments amount to about $2 trillion, which provides an important indicator of the way the system is evolving. In recent years, most of these investments have been related to the supply side of fossil fuels. Between 2014–2018, average annual investments in fossil fuels have been about $1 trillion, while investments in renewables have been some $0.3 trillion.
Unfortunately, current country commitments are not in line with the requirements necessary for an energy system transition. The Nationally Determined Contributions (NDCs) made under the Paris Agreement and domestic energy policy plans fail to bring about a sufficiently rapid transition. Based on the IEA Stated Policies Scenario, these commitments will lead to a steady increase of energy-related CO₂ emissions. Such a trajectory is consistent with limiting the temperature increase to below 2.7°C above pre-industrial averages with a 50 per cent probability, or below 3.2°C with a 66 per cent probability. Moreover, based on UNEP’s most recent Production Gap Report, countries are planning to increase fossil fuel production to levels that exceed those consistent with fulfilment of their nationally determined contributions. This overinvestment in coal, oil, and gas supply locks in place a fossil fuel infrastructure, that will make emissions reductions even harder to achieve.
Investment patterns must change. Based on the International Renewable Energy Agency’s (IRENA) Energy Transformation scenario, $3.2 trillion (2 per cent of global GDP) must be invested annually for the next three decades mainly in renewables, energy efficiency measures and end-use electrification to achieve the required low-carbon energy transition. This is about $0.5 trillion more than in the current plans. These investments include investments in wind- and solar-based power generation capacity, power grid extension and reinforcement, energy efficiency efforts in end-use sectors, electrification of end-use sectors, as well as direct applications of renewables. In IRENA’s scenario, the annual average fossil fuel investments over the same period must fall to $0.5 trillion – about half of what fossil fuel investments have been in recent years.
There are good reasons to believe that current policies and mitigation tools are far from what we need. They are not strong enough to achieve the objective of the Paris Climate Agreement of limiting global warming to well below 2°C.
Direct electrification of the road transport sector is a positive development, but it does not really address the global energy challenge as it stands today.