Investment needed to meet energy policy objectives

forumlogolargeDiminishing financial returns for utilities have put at risk the ability of the electricity sector in OECD markets to raise the estimated $7.6 trillion (€6.5 trillion) in investments needed by 2040 to meet energy policy objectives, according to a new report from the World Economic Forum. This investment is needed to simultaneously decarbonise the sector while maintaining energy security.

The Future of Electricity report offers guidance on transforming the electricity sector to a more sustainable, affordable and reliable system, and outlines recommendations for policy makers, regulators and businesses in developed markets to attract needed investment. It is part of a broader Future of Electricity initiative, which was launched at the World Economic Forum Annual Meeting 2014, and aims to provide countries, companies and societies with a platform for dialogue and learning amid the transition to a lower-carbon electricity system.

“Since 2000, OECD countries have invested more than $3 trillion (€2.6 trillion) in new renewables, conventional power plants and distribution structure, but about 20% more investment a year is still required over the next 15 years,” said Roberto Bocca, Head of the Energy Industries at the World Economic Forum. “Collaboration across stakeholders will be critical to achieving this goal and providing the holistic perspective needed to successfully make the low-carbon transition.”

“The electricity sector is at a crossroads. We are entering a period of unprecedented investment to meet our energy policy goals, but decreasing returns and increasing risk are raising questions over future investment,” added Julian Critchlow, a partner at Bain & Company, which collaborated with the Forum on the report. “OECD countries will need to take immediate action to ensure continued investment across the energy value chain.”

According to the report, root causes of the sector’s investment challenges include:

  • Suboptimal geographic deployment: Europe could have saved up to $140 billion (€120 billion) if deployment of renewables had been optimised within and across borders; for instance, by building more solar in southern Europe where there is more sun, and more wind farms in the north where wind factors are higher.
  • Lack of buy-in: Society recognises the need for an electricity system that produces less carbon, but has not yet fully bought into the value it brings and other positive impacts like job creation and security of supply.
  • Inadequate carbon price signalling: In the EU, the Emission Trading Scheme permits have fallen to a price that will not materially impact investment consistent with a decarbonisation programme.
  • Declining returns of conventional generation: Falling demand, significant overcapacity, reduced load factors and wholesale price declines have all contributed to a massive loss of value in generation assets.
  • Business model disruption: The traditional utility business model is being disrupted by technological innovation and customer trends at the end of the value chain, creating opportunities for new entrants and incumbent utilities.