Energy investment worldwide is plunging in the face of a tougher financing environment, weakening final demand for energy and falling cash flows – the result, primarily, of the global financial crisis and the worst recession since the Second World War. This is the main conclusion of a gloomy new report by the International Energy Agency (IEA): The impact of the financial and economic crisis on global energy investment. However, there are moves by governments to support energy efficiency and clean energy.

Reliable data on recent trends in capital spending and demand are still coming in, but there is clear evidence that energy investment in most regions and sectors will drop sharply in 2009, says the report. Preliminary data points to sharp falls in demand for energy, especially in the OECD, contributing to the recent sharp decline in the international prices of oil, natural gas and coal.

Power-sector investment is expected to be severely affected by financing difficulties, as well as by weak demand. The IEA estimates that global electricity consumption could drop by as much as 3.5% in 2009 – the first annual contraction since the end of the Second World War. In the OECD, electricity demand in the first quarter of 2009 fell by 4.9% on a year-on-year basis. Non-OECD regions have also seen weaker demand: in China, for example, demand fell by 7.1% in the fourth quarter of 2008 and by a further 4% in the first quarter of 2009.

Weak demand growth is reducing the immediate need for new capacity additions. At the same time, commercial borrowing has become more difficult and the cost of capital has risen markedly; venture capital and private equity investment has fallen sharply, says the IEA. If a recovery takes longer than expected, and energy prices remain at depressed levels relative to recent peaks, it would expect to see a shift to coal- and gas-fired plants at the expense of more capital-intensive options such as nuclear and renewables, although this will depend on the policies and support mechanisms individual countries and regions have in place.

IEA urges governments to act on economic, energy security and environmental goals
These concerns justify government action to support investment in energy efficiency and clean energy. Many countries recognise this: a small but significant share of the additional public spending in short-term economic stimulus packages announced to date (about 5% of a total of $2.6 trillion) is directed at energy efficiency and clean energy, says the report. This is either direct investment or fiscal incentives for low-carbon power technologies and the development and commercialisation of more energy-efficient end-use technologies. These moves are a positive step in the right direction, potentially killing three birds with one stone: tackling climate change, enhancing energy security and combating the recession.