What is the International Energy Agency (IEA)?
The International Energy Agency (IEA) is an intergovernmental agency providing authoritative analysis, data, policy recommendations, and real-world solutions to help countries provide secure and sustainable energy for all. Created in 1974, the IEA originally helped co-ordinate a collective response to major disruptions in the supply of oil. Nowadays, oil security remains a key aspect of its work. In addition, the IEA advocates policies enhancing the reliability, affordability and sustainability of energy – taking an all-fuels, all-technology approach that included renewables, oil, gas and coal supply and demand, energy efficiency, clean energy technologies, electricity systems and markets, access to energy, demand-side management, and much more.
IEA is well known for the World Energy Outlook. Simon Bennett explains that they have started the modelling for this year’s outlook, and it has already revealed a number of uncertainties and challenges relating to the crisis arising from the Covid-19 pandemic. The major developments in the modelling over the last decade include outcomes of technology innovation, such as the costs of renewable energy coming down, as well as policy developments. This modelling helps IEA generate different scenarios that can be used by governments and investors to understand how energy futures might unfold.
The History of the World Energy Investment
To understand world energy investment, Dr. Simon Bennett suggests first to look back in time as “it’s good to remind ourselves where we have come from.”
In 1919, societies relied mainly on two resources, wood and coal. Oil was not really in the picture as it was mainly used for lighting. In 1950, there was a rise in motor car use which raised the demand for oil, while petrochemicals were still under development. Coal continued to provide electricity but wood went down. This trend really accelerated up to 1974, which is when the IEA was formed in the time of the first oil crisis. At the same time, natural gas started to show its worth as well, especially from the aviation sector’s gas turbines which led onto more large-scale power generation. But we had to wait until the year 2000, just 20 years ago, before we started to notice the introduction of modern renewables like wind and solar.
If you look then at 2018, the breakdown of our sources of energy is quite similar compared to the time of the oil crisis, with only an increase in renewables which don’t have a big impact. But the most impressive observation is the massive increase in the amount of energy use, over a century. Global energy use is ten times higher than in 1919, the global economy is 20 times bigger and the world population grew from 2 billion to 7 billion.
Future World Energy Investment depends on investments in innovation
According to the IEA’s projection, this trend is going to continue to grow under governments’ stated policies and without additional policy change it is unlikely that the world will meet the climate challenge. This increase in energy demand also affects other critical policy goals: energy security, but also air pollution, and full access to energy for the developing world. There is a large number of challenges, and new technologies can help to meet them.
There is a need for innovation across the energy sector and for cost reduction. This is not just about brand-new technologies. It is a gradual improvement of the technologies we already have to squeeze out the energy needs that we have. There has been tremendous progress, especially leading to improvements in energy efficiency.
World Energy Investment by sector and region
Energy investments do not happen in a vacuum. If they did then many models would prefer to invest in nuclear power because the costs per unit of energy can be low despite the large upfront capital cost and political challenges. But anticipating how investments can unfold in future requires an understanding of how new technologies fit with economic, social and political contexts.
In aviation, there is a need to produce sustainable biofuels that would not have a negative impact while having the right attributes to fulfil energy needs. This requires innovation in the biotech sector, but also in crop production and crop processing. Also, if we want to bring more electric power to airplanes, we need batteries that have higher specific energy densities and lighter airplanes. The innovation needed to deliver these technologies varies considerably between these sectors, and the contexts in different regions is not the same.
World Energy Investment: Reducing the cost
The IEA has been looking at indicators like small unit scale technologies that can be modular and mass produced, and for which you might go through multiple generations of designs in the time it takes to deploy one generation of a large-scale engineering solution. In solar PV, the price lowered considerably when it started to be mass produced. Unsurprisingly the amount of energy produced by those means have gone up. Policies that supported the private market to invest in PV created the business case for investors to take risks in larger and larger factories over the past 50 years.
If you can bundle up smaller projects in order to attract funding, the business model is different and you can reduce the cost of capital. In time we could have something that allows us to reward people for charging their car at the right time of the day and create value for all these small decisions in aggregate. Governments can address some of the barriers and encourage companies to try and find the best business models, compete with others, and work with companies, governments, investors to get the best solutions to customers. In this way, regulation can support innovation by pressing companies to move towards sustainability and efficiency.
Innovation: who should lead the way?
Innovation is an inherently uncertain process. A small company could be the next Tesla. But they could also be absorbed by a large group and create a better future. It is hard to know where the next step is going to come from. Currently, a lot of investment is going into start-ups from the energy sector, including companies that hope to store energy in the form of hydrogen. This investment activity shows where people perceive the next big opportunity to be. This is coming a lot from the transport and the digital industry.
In this field of innovation, it can be necessary and actually productive to compress time, and instead of thinking “how long will it take”, reverse the situation and ask how long do we have?
Today, digital technologies tend to have much more turnover, so we might see some true breakthroughs that we didn’t expect.
Covid-19: what does the crisis hold for clean technologies?
Covid-19 raises a lot of questions. Clean energy investment has remained at 40% of total energy investment in the past few years. This share will likely increase in 2020, but it is not necessarily a good sign as the share of clean energies is only increasing because the absolute amount of investment in fossil fuels is going down. The uncertainty brought on by the crisis carries a lot of risks and this has displaced fossil fuels where clean energy technologies have remained somewhat more resilient. All eyes are on the way governments respond to the Covid-19 challenge.
In a disrupted world, could we actually replace fossil fuels faster with the help of technology? A lot of governments are announcing that they want to invest in green recovery plans, this sounds a little bit like after the economic crisis, except that this time, they have more experience. In response to Covid-19, R&D spending is likely to suffer without additional stimulus. Companies are signalling commitment to clean energy goals and R&D can be expected to be much less affected than capital expenditures, but corporate R&D is likely to be cut nonetheless.
Governmental action & World Energy Investment
Governments make the market rules that shape all of the investments. They set the agenda and they can change the incentives. Particularly in innovation they have long helped to correct for market failures by investing in Universities and Research Centres but their actions to stimulate innovation can take many other forms.
The IEA has published their “sustainable recovery plan”, which looks at sectors that could absorb capital and create jobs. Energy efficiency and construction manufacturing could get 9 million additional jobs in the energy sector to displace all the 5 million jobs that we think are at risk.
Hydrogen-based technologies: what role for them in the future energy scenarios according to the IEA?
Something that is surprising everybody is the scale of interest and investment in hydrogen, just compared to 5 or 10 years ago. But it continues to face uncertainties, especially in the current context. Everybody looks at Hydrogen as a really sustainable source of energy, but for now it is a source of emissions. To what extent is it a real solution? And who are the competitors going to be? We do see resilient investment in hydrogen though. Signals from countries like Germany, Australia and the European Union this year. But the speed of deployment and the speed with which hydrogen production contributes to sustainability remain uncertain. Good energy policy can incentivise innovation and more sustainable values chains.
About the speaker
Dr. Simon Bennett is Technology Analyst at the International Energy Agency. After working as a researcher for various structures, including the European Commission, he is now acting within the IEA. With a strong background of a decade of international experience working on technical and policy aspects of energy, he now co-leads work on energy technology innovation policy and investment. His position makes him responsible for tracking investment in demand side topics and new technologies. During this Impact Week, he came to give a talk highlighting his work and the related challenges we have in the next 50 years.