Several studies converge towards the conclusion that massive capital expenditures on energy infrastructure will be required in the coming years. The requirements are different for industrialized and developing countries, but all face barriers to investment.

Demand for energy has exploded since the beginning of the 20^th century, in tandem with the world’s rising population and economic growth. More than 6 billion people live on earth today. The International Energy Agency (IEA) estimates that world demand for primary energy could reach 17.1 billion metric tons of oil equivalent by 2030, based on an average economic growth rate of 3.2% and a world population of 8.1 billion people, with 80% of whom living in developing countries. By comparison, world demand for primary energy was 11.2 billion metric tons of oil equivalent in 2004. Meeting this growing demand will require massive investment in energy supply infrastructure, including power plants, power grids, oil exploration and production, gas and oil pipelines, natural gas terminals, renewable energies and nuclear power. But will there be sufficient capital everywhere it is needed?

More than $20 trillion…

According to the reference scenario in the latest edition of the World Energy Outlook, the reference book published by the International Energy Agency¹, slightly more than $20 trillion in capital expenditures will be required over the 2005-2030 period. Electricity would absorb 56% of that total. In fact, the IEA forecasts that demand for electricity will double by 2030 and another 5,087 gigawatts of capacity will be needed to meet rising demand and replace old infrastructure. By 2030, more than $6 trillion will have to be invested in power transmission and distribution and approximately $5 trillion in power generation. As indicated by the IEA, “Production capacity margins are declining in most OECD countries, thus confirming the need for new investments. Power outages in Europe and North America in the summer of 2006 focused attention on the insufficient link between production capacities and capital invested in network infrastructure.” OECD countries will need to allocate $2.248 trillion to power plant construction (40% to replace coal-fired and first generation nuclear plants) and $1.992 trillion to transmission and distribution systems, for a total of $4.24 trillion. Developing countries – including China and India, according to the IEA classification system – will need to invest a combined total of $6.446 trillion in the electricity sector.

The IEA expects cumulative capital expenditures in coal mining, transportation and coal-fired power plants to reach $560 billion, i.e. only 3% of all investments. Most of this (59%) should be invested in developing countries. Investment in hydrocarbons (i.e. oil) should amount to $4.26 trillion over the 2005-2030 period, with three-quarters of the total going to exploration and production. The majority of the capital expenditures in hydrocarbons will go to developing countries (52%), with the balance going to OECD countries (27%) and countries in transition, such as Russia (15%). The remainder will go to inter-regional transportation infrastructure. Investment in the front end (exploration and production) should contribute to a modest increase in world crude oil production capacity through 2010. However, capacity increases could be less than the forecasts due to a lack of qualified manpower and equipment, cost inflation, rapid depletion of existing reserves or geopolitical instability, endemic in certain producing countries. Investment in natural gas should be slightly less over the same period, for a total of $3.9 trillion (56% in exploration and production).

The IEA thinks that it is not at all certain that major oil and gas producing countries have the capacity or the will to increase their investments to satisfy growing world demand. This is what drives the volume and the cost of imports in consumer countries. For instance, the IEA wonders if capital expenditures in the Russian natural gas industry will be sufficient to maintain the current level of exports to Europe while beginning to supply Asia.

Investing in poor countries

Ideally, more than half of the world’s total investment in energy should be made in developing countries, where demand is growing most rapidly. China alone needs to invest $3.7 trillion, or 18% of the world total. But the position of the economic “giants” made up of China and India is very different from that of the poorest countries, where public sector resources are insufficient and private investment is absolutely necessary. The African continent needs to invest $1.4 trillion in all forms of energy combined. Capital expenditures of the same magnitude – about $1.37 trillion – will be needed in Latin America. “Financing the investments of non-OECD countries is the biggest challenge and the greatest source of uncertainty,” acknowledges the IEA. Unlike western countries, providing energy services at a price close to cost will probably be out of reach for the poorest populations.

In those countries, private investment will depend largely on the local government’s ability to create a business climate and procedures attractive to investors. In the IEA’s view, if nothing is done at the international level, then 1.4 billion people will still have no access to electricity in 2030, compared with 1.6 billion people today. At the 2005 Gleneagles summit in Scotland, the G8 member countries asked the World Bank to cooperate with other multilateral financial institutions to establis a road map for accelerated investment in clean energy in developing countries. The Clean Energy Investment Framework (CEIF) established for this purpose has three main objectives: to increase access to energy, especially in sub Saharan Africa, to accelerate the transition to a low-carbon economy and, last but not least, to help countries adapt to climate change and variability. The World Bank’s financial commitments for energy should exceed $10 billion over the 2006-2008 period, up 40% from the previous three-year period.

Uncertain investments

The IEA report considers that “there is no certainty that all investments required will be made, even in western countries.” Incentives and decisions by government-owned and private companies to invest or not in the various segments of the energy supply chain will be influenced by a variety of factors, including political decisions made at the level of each country, geopolitical factors, new technologies, and unforeseen changes in unit costs and prices. But investment is not the only consideration. As indicated in the European Commission’s March 2006² Green Book, energy efficiency is set to improve and could produce a 20% reduction in electricity demand by 2020. This beneficial impact would also be felt in terms of security of supply and CO2 emission reduction.

1. International Energy Agency, World Energy Outlook 2006.
2. The European Commission’s Green Book: A safe, competitive, and sustainable energy (March 2006).