1. Energy Investment Outlook – implications of financial crisis
Dr. Fatih Birol
Chief Economist
International Energy Agency 1

2. World primary energy demand in the Reference Scenario: this is unsustainable!
18 000
Mtoe
Other renewables
16 000
Hydro
14 000
Nuclear
12 000
Biomass
10 000
8 000
Gas
6 000
Coal
4 000
Oil
2 000
RS takes account of those government policies and measures that were enacted or adopted up to mid-2008, but not new ones, providing a baseline against which we can quantify the extent to which we need to change course.
World primary energy demand projected in RS grows by 45% from 2006 to 2030, average annual increase of 1.6% per year – driven by rising population and GDP. Demand reaches 17 billion toe in 2030 up from 11.7 btoe in 2006.
Demand grows at a slower rate than projected in WEO-2007, mainly due to higher energy prices and slightly slower economic growth - as well as new government policies to curb demand and emissions growth introduced in the past year.
All fuels increase in absolute terms:
- Oil remains single largest fuel in the global primary energy mix, growing 1% year.
- Coal grows fastest among fossil fuels (2% p.a.).
- Demand for gas grows 1.8% p.a.
- Modern renewable technologies grow most rapidly, by 7.2% p.a. (excl biomass), overtaking gas to become the second-largest source of electricity, behind coal, soon after 2010.
These trends are patently unsustainable – economically, socially and environmentally. Rising oil and gas demand would lead to higher imports and reliance on OPEC, heightening concerns about energy sectuiry, while increased use of fossil fuels would worsen climate change.
World GDP is assumed to grow by an average of 3.3% per year over the period This is lower than assumed in last year’s Outlook (3.6%), in part because of the impact of higher energy prices and weaker prospects for global economic growth in the near term.
The average IEA crude oil import price is assumed to average $100 per barrel (in real year-2007 dollars) through to 2015 and then rise again slowly thereafter, reaching $110 in 2020 and $122 in 2030 ($206 in nominal terms)
1980
1990
2000
2010
2020
2030
World energy demand expands by 45% between now and 2030 – an average rate of increase of 1.6% per year – with coal accounting for more than a third of the overall rise

3. The continuing importance of coal in world primary energy demand0%
20%
40%
60%
80%
100%
Non-OECD
OECD
All other fuels
Coal
Shares of incremental energy demand Reference Scenario,
Increase in primary demand,
100
200
300
400
500
600
700
800
900
1 000
Coal
Oil
Gas
Renewables
Nuclear
4.8%
1.6%
2.6%
2.2%
0.8%
% = average annual rate of growth
Mtoe
Coal consolidates it position as the world’s 2nd most important energy source after oil.
Since 2000, global coal consumption has grown faster than any other fuel, despite higher prices, by 4.9% per year between 2000 and Most of this growth occurred in non-OECD countries.
[CLICK TO REVEAL RIGHT CHART] In the RS, coal demand advances by 2% a year on average, its share in global energy demand climbing from 26% in 2006 to 29% in Coal accounts for well over a third of the increase in total energy demand.
Non-OECD countries account for 97% of the increase in global coal demand over the Outlook period, with China alone accounting for two-thirds of the increase &India for a further 19%.
Most of the increase in demand in all regions comes form power generation. In fact, 85% of the increase in global coal demand comes from the power sector in China & India alone.
Demand for coal has been growing faster than any other energy source & is projected to account for more than a third of incremental global energy demand to 2030

4. Change in oil demand by region in the Reference Scenario, 2007-2030
OECD Pacific
OECD Europe
OECD North America
Africa
E. Europe/Eurasia
Latin America
Other Asia
India
Middle East
Global primary demand for oil (excl biofuels) rises by 1% per year on average, from 85 million barrels per day in 2007 to 106 mb/d in 2030.
Its share of world energy use drops, from 34% to 30%.
Oil demand in 2030 has been revised downwards by 10 mb/d since last year’s Outlook.
All of the projected increase in world oil demand comes from non-OECD countries:
- Over four-fifths of increase comes from China, India & Middle East
- OECD oil demand falls slightly, due largely to declining non-transport oil demand.
“In 1980, non-OECD accounted for 35% of world oil demand, today for 43% and by 2030 for 58%. In 2015, non-OECD oil demand surpasses OECD.”
China -2 2 4 6 8 10
mb/d
All of the growth in oil demand comes from non-OECD, with China contributing 43%, the Middle East & India each about 20% & other emerging Asian economies most of the rest

5. World oil production by OPEC/non-OPEC in the Reference Scenario
120
38%
40%
42%
44%
46%
48%
50%
52%
OPEC - other
mb/d
100
OPEC - Middle East 80
Non-OPEC - non-
conventional 60
Non-OPEC -
conventional 40
OPEC share 20 .
2000
2007
2015
2030
Production rises to 104 mb/d in 2030, with Middle East OPEC taking the lion’s share of oil market growth as conventional non-OPEC production declines

6. World natural gas reserves and Gas Exporting Countries Forum (GECF)
World total: 179 Tcm (2008)
The 11 members of GECF account for close to three quarters of global gas reserves,
while just 2 of them – Russia & Iran – account for over 40% .

7. Energy-related CO2 emissions in the Reference Scenario45
International
marine bunkers
and aviation
Non-OECD - gas
Non-OECD - oil
Non-OECD - coal
Gigatonnes 40 35 30
OECD - gas
OECD - oil
OECD - coal 25 20 15 10
Rising global fossil energy use will continue to drive up energy-related CO2 emissions over the projection period. In the Reference Scenario, world emissions jump by 45% between 2006 and 2030 to 40.6 gigatonnes, an average rate of growth of 1.6 % per year. By comparison, emissions grew by 1.8% per year over
Coal remains the biggest contributor to global emissions throughout the projection period. Coal’s share of emissions increases over time. Coal overtook oil as the leading source of emissions in 2004.
Emissions in 2030 in the Reference Scenario are 1.4 Gt lower than in last year’s Outlook, mainly because of higher fuel prices, lower GDP growth and therefore lower fossil fuel consumption.
Nevertheless, this trajectory puts the world on track for a long-term concentration of greenhouse-gases in the atmosphere of over 750 ppm of CO2 or parts per million of CO2 equivalent. Based on the IPCC’s 4th Assessment Report, this could result in a global temperature increase of around 6 degrees, with very profound consequences for the planet. 5
1980
1990
2000
2010
2020
2030
97% of the projected increase in emissions between now & 2030 comes from non-OECD countries – three-quarters from China, India & the Middle East alone

8. Power sector CO2 emissions in the Reference Scenario
Fossil fuel power plants emitted 11.4 Gt of CO2 in 2006, 41% of the world total. This share has been rising steadily, from 36% in 1990 and 39% in 2000, and continues to grow in the Reference Scenario, to 44% in 2020 and 45% in Power sector CO2 emissions reach 16 Gt in 2020 and 18 Gt in Cumulatively, power generation contributes over half the increase in energy-related CO2 emissions to 2030 in the Reference Scenario. This growth is driven by the relatively rapid growth in demand for electricity and the growing share of fossil fuels, especially coal, in the power generation fuel mix (see Chapter 6). Emissions from coal-fired power plants reached 8.3 Gt in 2006 and are projected to rise further to 12.1 Gt by 2020 and 13.5 Gt by 2030 – nearly three-quarters of total power sector emissions.
Nearly all of the increase in power-sector CO2 emissions is expected to come from non-OECD countries, where rising electricity demand and increased reliance on coal are particularly pronounced (Figure 16.8). Having emitted 6.5 Gt of CO2 in 2006, non‑OECD power sector emissions are projected to double by In the OECD, CO2 emissions rise by only a small percentage over the projection period because electricity demand growth is more restrained than in non‑OECD countries and because more gas and renewable energy enters the fuel mix at the expense of coal. The projected total increase for the OECD between 2006 and 2030 – 0.4 Gt – is less than the increase in emissions from China’s power plants in the past two years.
The power sector is the most important contributor to global carbon dioxide emissions – with its share expected to remain at around 40% of the total through to 2030

9. Electricity supply and investment prospects

10. The Reference Scenario: Electricity demand annual growth rates0% 1% 2% 3% 4% 5% 6% 7% 8%
OECD
Russia
Brazil
Africa
Middle
East
China
Indonesia
India
Non-OECD countries account for most of the projected growth in world electricity demand. In the OECD, electricity demand is projected to rise by just 1.1% per year on average, increasing by around 30% between 2006 and By contrast, demand in non-OECD countries grows by 146% over the same period, averaging 3.8% per year. Demand grows fastest in Asia (Figure 6.1). China’s electricity demand has been growing at an average annual rate of 14% since This high rate is expected to slow over time. It drops to 7.6% per year in the period to 2015 and averages 4.6% per year over the entire Outlook period. The projected slowdown results primarily from a shift in the economic structure from heavy industry towards less energy-intensive lighter industry and services. Even at lower growth rates, China soon becomes the biggest electricity consumer in the world leaving behind the United States and the European Union. In Russia, electricity demand is likely to grow at a rate slightly above that of the OECD; growth in demand there is driven by increased electrification in industry and rising household income, which boosts the use of appliances.
Globally, industrial demand for electricity grows faster than demand for electricity by households and the services sector, driven primarily by rapid industrialisation in non-OECD countries. In OECD countries, demand for electricity in industry grows at a modest 0.6% per year, reflecting a long-term trend toward lighter manufacturing.
World electricity demand expands at an average rate of 3.2% per year to 2015, slowing to 2% in , with most of the projected growth coming from non-OECD countries

11. The Reference Scenario: World electricity generation
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
2006
2030
TWh
Coal
Oil
Gas
Nuclear
Hydro
Biomass
Wind
Rest of renewables
In the Reference Scenario, global electricity generation rises from 18 921 TWh in 2006 to 24 970 TWh by 2015 and to 33 265 TWh by The largest increase is in non-OECD countries where electricity generation in aggregate matches that of the OECD countries soon after 2010 and by 2030 is almost 50% higher.
Coal remains the main fuel for power generation worldwide throughout the period to On the back of strong growth in non-OECD countries, its share increases from 41% to 44% (Figure 6.3). The share of natural gas in total generation falls slightly, as a result of higher prices. The share of oil drops to about 2% by 2030, as high oil prices make oil burning extremely expensive. Nuclear power, constrained by the assumption of unchanged government policies, also loses market share, which drops from 15% in 2006 to 13% by 2015 and further to 10% by 2030, as nuclear power capacity does not increase as rapidly as demand for electricity. Nuclear electricity generation increases from 2 793 TWh in 2006 to almost 3 460 TWh in The share of renewables rises considerably, from 18% in 2006 to 20% in 2015 and 23% in Electricity generation includes final consumption of electricity, network losses and own use of electricity at power plants. Electricity generation figures exceed those for demand (final consumption) because of network losses and own use of electricity at power plants.
Coal remains the main source of electricity generaration with the increase coming mainly from non-OECD Asia

12. Impact of financial crisis on energy investments
Two climate-policy scenarios are considered
550 Policy Scenario – greenhouse-gas concentration stabilised at 550 ppm CO2-equvialent, implying a temperature rise of c.3oC
450 Policy Scenario – concentration stabilised at 450 ppm (c.2oC)
We’ve specifically focused on the role of the energy sector, concentrating on the period to 2030, but set this in a context of long-term trajectories and action in other sectors as indicated by other studies.
Both scenarios assume hybrid policy approach
Cap-and-trade
Sectoral agreements
National policies & measures
Three distinct country groupings: OECD+, Other Major Economies, Other Countries.
Both scenarios call for a huge shift in investment, credible regulatory framework, global carbon market & big increase in energy R&D
International energy prices are generally lower, but retail prices higher – mainly due to carbon penalties

13. Cumulative energy-supply investment in the Reference Scenario, 2007-2030
Coal 3%
Biofuels
<1%
$0.7 trillion
$0.2 trillion
Power
52%
Oil
24%
Gas
21%
$13.6 trillion
$6.3 trillion
$5.5 trillion
Shipping 4%
Shipping &
Refining
ports
16%
Transmission 9%
Transmission
Power
& distribution
Exploration &
& distribution
generation
31%
development
50%
50%
Exploration and
61%
Huge inflows of capital are needed to expand supply capacity to meet demand in this scenario rising demand, as well as to replace existing and future supply facilities that will be retired during the projection period.
Our Reference Scenario projections call for cumulative investment in energy-supply infrastructure of $26.3 trillion (in year-2007 dollars) over This is around $4.4 trillion higher than in WEO-2007, because of an upward revision in assumed unit costs, which have continued to soar in the last year. Of the cumulative investment of $26.3 trillion, 63% is needed in non-OECD countries.
More than half of global investment, or $13.6 trillion goes towards the power sector. Oil- and gas-sector investments total $11.7 trillion.
Coal-industry investments (not including transportation) are much smaller, totaling less than $730 billion, or 3% of total energy investment.
There are major concerns about whether all of this investment will in fact be forthcoming – particularly in the near term in view of the current financial crisis.
development
LNG chain
Mining
80% 8%
91%
Investment of $26 trillion, or over $1 trillion/year, is needed, but the credit squeeze could delay spending, potentially setting up a supply-crunch once the economy recovers

14. of which 3/4 are within China, India and the OECD
Cumulative power-supply investment in the Reference Scenario,
500
1 000
1 500
2 000
2 500
3 000
3 500
Billion dollars (2007)
China
OECD North America
OECD Europe
India
E. Europe/Eurasia
OECD Pacific
Rest of Asia
Latin America
Middle East
Africa
Over 50% of total energy-supply investments, $13.6 trillion, are in the power sector alone,
of which 3/4 are within China, India and the OECD

15. How is the financial & economic crisis affecting the energy outlook?
Financial crisis
Reduced investment
Financing constraints and lower demand lead to lower investment and reduced capacity
Economic recession
Reduced energy demand
Lower income cuts energy demand in near term, but might discourage spending on energy efficiency in long term
Impact on energy prices & security?
Lower prices in short term as demand stalls, but could be higher in medium term if investment recovers too slowly to meet demand with economic recovery
Environmental impact?
lower emissions in short term, but less investment in low-carbon energy could lead to higher emissions in long term
Nonetheless it is already clear that investment in energy-supply infrastructure is being affected in three main ways by the financial and economic crisis:
Firstly, energy companies are finding it much harder than in the past to obtain credit for both ongoing operations and to raise fresh capital for new projects, because of tighter credit markets.
Secondly, falling demand for energy caused by the economic slowdown has reduced the need for suppliers to invest in new capacity; and
Finally, the slump in energy prices resulting from weak demand has made new investments generally less profitable.
These will all have important implications for energy security and also an environmental impact:
Energy Security: In the near term at least, weaker demand than previously expected is likely to result in an increase in spare or reserve production capacity. But there is a danger that investment in the coming months and years is reduced too much, leading to a shortage of capacity and another spike in prices several years later when the economy is on the road to recovery.
Environment: In the near term, slower economic growth will undoubtedly curb the growth in emissions. But in the longer term, lower fossil-energy prices and financing difficulties could result in lower investment in clean energy technologies, increasing the need for fossil-fuelled capacity and putting the world onto a higher emissions trajectory than might otherwise have been the case. There are good reasons to believe that this may indeed prove to be the case: renewable and nuclear energy projects are generally much more capital intensive, are less able to compete in a low energy price environment, have longer lead times and are subject to greater technology and market risk
The crisis is driving down demand, prices and investment for now, but an unexpectedly rapid economic recovery could squeeze supply capacity in the medium term

16. Impact of the crisis on electricity investment (1)
Impact varies depending on the region and on the regulatory regime (much bigger in deregulated markets)
Uncertainty about future electricity demand is a key risk factor that influences company’s investment decisions
Cost of capital has substantially increased due to higher perceived risk
Renewables & nuclear especially vulnerable to financing difficulties & lower fossil-fuel prices

17. Impact of financial crisis on global investment in renewable energy
$175 bln
180
160
Billion dollars
140
$106 bln
$109 bln
120
100 80
$63 bln 60 40
$25 bln
Annual renewable energy investment increased sevenfold between
Sharp decline in annual investments estimated for 2008, reduced by 38% relative to year 2007 levels despite high oiland gas prices
Key reason financial crisis? 20
2004
2005
2006
2007
2008
Annual investment in renewables increased sevenfold between 2004 and 2007,
but fell by 38% in 2008

18. Impact of the crisis on electricity investment (2)
Impact much bigger on large-scale capital-intensive power plants with long lead times, such as nuclear
Renewables projects also being hit depending on the government policy framework (smaller impact with high feed-in tariffs)
Many wind developers are small (BBB-type rated) and some are facing problem to raise finance
If credit crunch lasts longer and fossil-fuel prices remain low, investments may shift to coal- and gas- fired plants in the longer term

19. Summary & conclusions

20. Summary & conclusions
Current energy trends pose twin challenges – increasing risks to energy security and a growing climate threat
Energy and geopolitics will be increasingly interconnected
Globally we need $1 trillion of energy investment annually – this is largely concentrated in the power sector in developing countries
The financial crisis has had a particularly severe impact on the energy sector due to its capital intensive nature
Governments need to address financing constraints for energy investment