As Congress continues debate on an energy policy designed to help increase investment in the U.S. power grid, it is becoming increasingly clear that the United States is not alone in its investment needs for energy. According to the World Energy Outlook 2002, a report by the International Energy Agency released last November, the total investment requirement for energy-supply infrastructure worldwide over the period 2001-30 is $16 trillion, which is based on a demand increase of 1.7 percent per year. Of these funds, power generation, transmission, and distribution will absorb almost $10 trillion.

According to the report, 51 percent of investment in energy production will be needed simply to replace or maintain existing and future capacity. oil and gas wells are becoming depleted, and electric transmission and distribution lines need replacing. The remaining 49 percent will be spent on capacity to meet rising demand. Primary demand for natural gas will grow fastest among the fossil fuels, at 2.4 percent per year, while oil and coal demand is expected to rise by 1.6 percent and 1.4 percent per year, respectively. Electricity demand will also grow at a brisk annual rate of 2.4 percent.

Of the $10 trillion needed in the electricity sector, about $4.5 trillion will go toward power generation, according to the report-2,000 gigawatts of which will be gas-fired. Worldwide, transmission and distribution call for $5.3 trillion.

Developing countries will require almost half of global investment. Most is needed in Africa, which will require 4 percent of its gross domestic product for energy investment, and Russia, which will need 5 percent. China alone will need to invest $2.3 trillion, or 14 percent of the world total, as will the rest of Asia, including India and Indonesia.

And despite the fact the United States and Canada have among the most advanced electric systems in the world, they will require more investment than any other region except for China. The five largest countries in the world-China, Russia, India, Indonesia, and Brazil-will require about a third of global electricity investment.

But one of the greatest challenges, according to IEA, is creating the right climate and conditions for generating that investment.

Capital Needed

The most important source of capital is domestic savings, which largely exceeds the energy-financing requirements. In the case of electricity, the capital needed will be nearly three times greater than in the past. Investment needs will be the largest in the United States and Canada-$3.2 trillion. But in some regions, energycapital needs are very large relative to total savings. In Africa, the share is half.

Generating enough investment and enabling the energy industry to compete for capital should be at the top of the list of priorities for both industry and government, says IEA. There are enough global financial resources, though the conditions need to be right for investment to take place. Governments should play a key role by enacting policies that address legal, regulatory, and other impediments to investment, according to IEA.

The risks faced by investors in energy projects are formidable and changing, according to IEA. Most investors require a return related to their perceived risk. If they do not see that being achieved, they will invest elsewhere. The energy sector has, in most cases, been able to mobilize the required financing in the past. It will be able to do so in the future only if financing mechanisms are in place, returns are high enough, and investment conditions are appealing, says IEA.

Financing the required investments in developing countries is another challenge. More capital for energy projects will have to come from private and foreign sources than in the past, according to the report. In general, investment risks are great in these countries, particularly for domestic electricity and downstream gas projects. Few governments could fully fund the necessary investment, even if they wanted to. It is especially pressing for more developed countries to create an investment framework and climate that will enable less developed nations to mobilise the necessary capital, according to IEA. Africa needs to raise $665 billion from now to 2030, a goal that will not be achievable without major political and economic reforms.

Still, even with the projected rate of growth in investment and supply, there still will be 1.4 billion people without access to electricity in 2030.

Gas and New Technologies

The investment picture for gas is colored by uncertainty and risks. Energy-market reforms, complex supply chains, and growing international trade in gas will result in shifts in gas-investment risks, required returns, and financing costs. Again, the private sector will be called upon to provide financing that governments will be unable to provide.

According to the report, $3.1 trillion will be needed in the natural gas supply chain, more than half of it in exploration and development. A lot of this investment will go towards expanding the liquid natural gas (LNG) infrastructure, which promises to be a major source of new gas in years ahead-by 2030, half of interregional gas trade is projected to be LNG.

Among the new technologies that will affect the outlook for electricity are carbon-sequestration technologies, which could increase investment in developed countries’ generation sector by 25 percent. IEA does not forecast that hydrogen in the form of fuel cells in cars will play as large a role as some might hope: Large cost reductions in the production of fuel cell vehicles would first have to be achieved. But advanced nuclear generation systems and improved electricity transmission and distribution are other areas where technical advancements could transform the sector.

Risky Business

There are a number of factors that make investment in electricity more risky, according to the report. For one, the transition to competitive markets increases risks to investors. The blackout in August in the United States and Canada and blackouts in Europe emphasize the importance of a reliable transmission and distribution system. Increased trade over lines built for a regulated industry also puts a strain on the system. More reliance on intermittent renewables, uncertainty about the progress of deregulation, and siting difficulties all contribute to what IEA sees as a challenging investment climate.

According to IEA, uncertainties remain about how to make competitive markets function so that security of supply is ensured in a cost-effective manner. Governments should monitor developments closely and create more stable, transparent and predictable regulatory conditions in order to enable players in competitive markets to evaluate those risks and to ensure that market structures do not impede economically viable investments.

Copyright Edison Electric Institute Jan/Feb 2004

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