© OECD/IEA 2016 © OECD/IEA 2016

Michael Waldron, Economics and Investment Office International Energy Agency

March 2017

Clean Energy Investment and Policies for the Low Carbon Transition

© OECD/IEA 2016

The context

Investors face new challenges and opportunities from recent trends

Future demand growth and relationship with economic growth are uncertainties

The energy sector faces accelerated technological change

Lower energy prices and increasing inter-fuel competition reshape investment

New business models and investors are transforming the electricity sector

Still, the transition to a low carbon power system faces market specific challenges for financing generation, networks and flexibility

Policy makers need to heighten commitments, providing clarity and certainty to investors

IEA is measuring progress and assessing the implications of the changing energy sector on energy security, environmental goals and energy access

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Power Generation

23% Biofuels and Solar

Heat 1%

Renewables 17%

USD 1.8 trillion

Investment flows signal a reorientation of the global energy system

An 8% reduction in 2015 global energy investment results from a $200 billion decline in fossil fuels, while the share of renewables, networks and efficiency expands

Oil & Gas 46%

Coal 4%

Electricity Networks

14%

Energy Efficiency

12%

Global Energy Investment, 2015

Thermal Power

7%

© OECD/IEA 2016

Capital cost developments across the energy spectrum

Massive cost deflation is reshaping competition between fuels and technologies

But some other technologies, such as nuclear power, carbon capture and storage and energy-efficient building renovations risk falling behind in the future

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20

40

60

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100

120

2008 2009 2010 2011 2012 2013 2014 2015 2016

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08

= 1

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Upstream oiland gas

Onshorewind

Grid-scalebatteries

Solar PV -utility scale

LEDs

g

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A two-speed world for demand and renewables growth

While renewables growth represents 60% of the global increase in electricity output, investment and integration challenges depend a lot on market context.

Electricity and renewable generation growth by country/region (2015-21)

Source: Total electricity generation from World Energy Outlook 2016.

0

200

400

600

800

1 000

1 200

1 400

China India ASEAN Africa EU28 United States Japan

TWh

Electricity generation growth (2015-21) Renewable generation growth (2015-21)

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Coal power still composes the largest part of generation investment in South-Southeast Asia

Investments in power generation, 2014-15

India and Southeast Asia accounted for 35% of global coal power investment in 2015 and were the largest regions for development outside of China.

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2014 2015 2014 2015 2014 2015

Coal generation Gas generation Renewables

UIS

D 2

01

5 b

illio

n

India Southeast Asia

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Outside India, renewables investment has been slow to ramp up in some markets in S-SE Asia

Hydropower investment, 2006-15

To date, most renewable development in Southeast Asia driven by hydropower in Vietnam, solar PV in Thailand and geothermal in Indonesia and the Philippines

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3

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5

6

7

8

9

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

USD

20

15

bill

ion

INDIA INDONESIA PHILIPPINES

THAILAND VIETNAM

Other renewables investment, 2006-15

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1

2

3

4

5

6

7

8

9

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

USD

20

15

bill

ion

INDIA INDONESIA PHILIPPINES

THAILAND VIETNAM

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Large upside potential for future renewable deployment in India

India renewable capacity growth, main and accelerate case forecasts (2015-21)

But the system integration of ambitious renewable targets requires investment in all forms of flexibility, and stable policies and measures to reduce financing costs.

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Main Case Accelerated Case

Capa

city ad

ditio

ns (GW

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Hydropower Bioenergy Onshore wind Offshore wind PV Geothermal CSP

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Renewables help diversify Southeast Asia’s electricity mix

ASEAN renewable capacity growth, main case forecast (2015-21)

Fossil fuels continue to dominate generation as ASEAN witnesses strong demand growth (5% CAAGR)

Hydro generation growth slows in most countries (except Viet Nam) while diversification needs help non-hydro renewables to pick up gradually

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1

2

3

4

5

6

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Indonesia Thailand Vietnam Other ASEAN

Capa

city ad

ditio

ns (GW

)

Hydropower Bioenergy Onshore wind Offshore wind PV Geothermal CSP

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Corporations emerge as new sources of credit worthy offtake for renewables

Final investment decisions for utility-scale renewables with corporate contracting

Technology companies have driven rapid growth, with increased momentum outside the US, but activity requires a robust centralised grid and market balancing.

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016Information & Communications TechnologyIndustryCommercial and Public

-

1

1

2

2

3

3

4

4

5

2010 2011 2012 2013 2014 2015 2016

GW

Other Asia Pacific Europe North America

Source: Calculations based on RMI, 2017; BNEF, 2017; WBCSD, 2016.

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The importance of the electricity network investment for integrating renewables

Global renewables deployment 2010-2015 (660 GW)

Distributed renewables can quickly scale to provide decentralised solutions, but over 85% of renewable additions the past five years interact with the centralised grid.

Distributed solar PV

14%

Utility-scale solar

PV 15%

Wind 36%

Hydro 29%

Other renewables

6%

Utility-scale = 85%

Utility-scale + variable = 50%

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2010 2011 2012 2013 2014 2015

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Strong interest in battery storage, though grids comprise most networks investment growth

Global grid-scale battery storage investment Total networks investment

x10

0.4%

Battery investments now mainly in demand shifting. Optimised network and policies would help monetise capacity, ancillary services, flexibility and avoided grid costs.

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Policies are playing an increasing role in the pricing of electricity

Global power generation investment by main business model

95% of generation investments rely on contracts or price regulation, with a narrower role for wholesale pricing, as regulators pursue adequacy and low carbon aims

Utility-scale renewables

(fixed or variable pricing)

Wholesale pricing

Distributed generation

Fossil fuel regulated (fixed pricing or VIU)

Nuclear (fixed pricing)

2010: USD 370 billion

Utility-scale renewables (fixed or variable pricing)

Wholesale pricing

Distributed generation

Fossil fuel regulated (fixed pricing or VIU)

Nuclear (fixed

pricing)

2015: USD 425 billion

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Cost reflective power system crucial for financing the electricity network

Cost components and tariff structure of selected retail electricity prices (average for Paris, Berlin and Amsterdam)

Cost reflective and transparent tariff design should reflect the underlying system costs level and structure in order to induce efficient and sustained investment.

Source: Repowering Markets, 2016

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Financial health of utilities and grid companies remains a key to power sector transition

Financial indicators for listed European power companies

Utilities will play an important role as sources of finance, reliable off takers and investors in robust and flexible networks and infrastructure to ensure electricity security.

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2006 2009 2012 2015

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Europe - utilities

Net debt Operating cash flow Capital expenditures

2006 2009 2012 2015

Europe - grid companies

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Enabling an electricity system of the future

Technology cost reductions have reshaped electricity business models, but best practices increasingly address the system value of low carbon generation.

A robust electricity network will act as a key enabler supported by cost reflective tariffs - governments play a key role in investment for ensuring supply security.

Reducing project risks and improving access to low cost debt financing will be important to spur greater private investment in generation and flexibility.

An integrated policy approach is needed, covering market design, investment policies, CO2 prices & system integration, including storage & demand response.

For markets with stable demand growth, measures include early retirement of surplus capacity incompatible with long-term goals and stronger interactions with heating and transport sectors and energy efficiency policies.

For emerging countries with rising demand, measures that facilitate financing and investment and the need for regulators to address system integration from the onset.