Ep 8 World Energy Investment with Jonathan Coppel

Yiou: Welcome to sustainable energy Asia. A Podcast hosted by benjamin Pan

Ben: Hi, everyone it's been today. I'm interviewing Jonathan Cooper, who is the head of the energy investment team at the international energy agency, or I a. And we are going to talk about one of the fracture reports, the energy investment 2022. Which has been published recently. Um, I guess not so recently because it took me quite some time just to. But, , anyway. I will link the reporting, the show notes. And the two main takeaways of the report are one good news and one bad news. The good news is in 2022. She investment is expected to grow by 8%. Compared to just 1% on average in the four previous years. And the bad news is that it is fast, short from the levels that would work quiet to meet our cabinet copes. We then going to talk about. A few investment, clean energy investment, battery storage. And, sustainable finance. And as always, if you want to have the show, Just to give a rating and a review on your podcast provider. It helps other listeners to find the show. Thanks very much.

Ben: So Han welcome to the show. You are leading the energy investment team at DIA. Could you briefly introduce the international energy agency and give us some context about, the world energy investment publication, which we are going to talk about.

Jonathan: Sure. So let me start with the AEAs mission, which is one to work with governments and industry to help shape a secure and sustainable energy future for all. , We carry out this mission through our in depth analysis, through the provision of data, policy recommendations, And also offering real world solutions.

We've come a long way. Since the IA was created in 1974, back then it was intended to help coordinate a collective response to major disruptions in the supply of oil, oil, security remained a key aspect of our work. But the IEA has evolved and expanded significantly since its foundation. But today our work takes on all fuels, considers all technologies and it examines a full spectrum of energy related issues.

We launched the world energy investment report series, because we felt that the world lacked a comprehensive look at the capital, flowing into the energy sector who is investing in which technologies and in which countries. So what this report does is essentially provide a full set of accounts, a balance sheet. If you like. And it's important because if we understand where the money is going, then we can also get a clear sense about the prospects of affordability, sustainability, and security of energy supply. So it gets back to the I's mission.

We're still developing the approach. Different methods and formats are being experimented with and the feedback we're getting from the reports are very positive, which is encouraging

Ben: And it has been the seventh publication of that report. Could you talk about your career and give us some perspective about how you came to specialize on energy related issue type of work.

Jonathan: Well, I, I came to work on energy issues in a roundabout manner. I studied economics at the Australian national university in Canberra, and I also did graduate studies at Columbia university in New York city. And then when I completed my studies, I worked at the Australian treasury, which is a macroeconomic agency, but then after about three years, there was an opportunity that I saw at the O E C D in Paris and the IEA being part of the O C D family made me an offer to work on the energy outlook model. So my task then was to extend the model to cover the former communist block countries. It was also the time of the Brentland report, which brought political attention to the issue of global warming for the first time. The IA model was also used to simulate scenarios of emission mitigation and for pioneering work on the economics of climate change, I then moved to the O E C D where I continued this work for a couple of years. And then moved on to other projects. And just prior to joining the IEA, I was a commissioner at the Australian productivity commission and it was while I was there that I led several energy related projects, climate change, adaptation, mineral barriers to mineral exploration. So I've only been at the IA for a few months as the head of the energy investment unit. But it's never been a dull moment in that, in that time. I'm very much looking forward to leading the unit and providing, guidance to future world energy investment reports.

That's interesting. Some study my carrier, working with the French surgery so, so today we are going to talk about is a world energy investment publication 2022, which has been. Published recently. And I must say it's really outstanding work it's a lengthy report, but the messages are communicated very clearly and who, I just want to structure discussions first to focus on the key two takeaways from the reports. And then we can focus on a couple of questions which I found interesting and some insights from the reports. So if we start with these two main takeaways, one is about the overall energy spending trend. The World energy Investment starts with energy spending and clean energy spending you talk about how these spendings have evolved, recently and maybe define what's sold under energy spending and also discuss the underlying reason you have identified for the evolution of these spending.

Sure. So. The best place to start is with the big picture. And it is against, the backdrop of the global energy crisis that we are anticipating that global energy investment to pick up by 8% in 2022, that would bring it to USD 2.4 trillion which is well above the pre COVID levels. In terms of what that covers. It's essentially everything gets taken into account investment in power, all aspects of fuel supply efficiency and end users. And we also see the energy investment increasing in all parts of the sector, but the main boost is coming from power, particularly in renewables and grids. And we are also seeing quite a pickup in spending on improvements to get efficiency gains. I think some of that driving factors are high prices, for fossil fuels, there's an increasing cost competitiveness of many of the clean energy technologies. And there's also been policy and fiscal measures enacted to support clean energy transitions, especially in the advanced economies.

Before I get onto the second point, there is one big caveat, to that 8% number. And that is that we estimate around about half of the increases coming from increase in the capital spending is coming from higher costs. And these themselves are linked to a number of things. Supply chain pressures are continuing there are tight markets, particularly for some of the specialized labor needed for these projects and the broader effects of higher energy prices on essential construction materials, like concrete and steel. And. Concerns about inflation and higher costs are, are an issue because it can act to dent the willingness of companies to increase spending, not withstanding the strong price signals. I guess the, the other point I'd like to make relates to overall energy investment in the clean energy category. Now the clean energy category is also quite expansive. It includes renewables, nuclear improvements to efficiency. Electric vehicles, clean fuels and infrastructure that supports the transition.

Now this category after flat lining for several years is actually set to pick up. Quite rapidly by 12% in 2022, it'll reach about 1.4 trillion in 2022. And here the driving forces are coming also from renewable power efficiency and electrical and electric vehicles. So 1.4 of the 2.4 trillion is in clean energy projects. So Benjamin that that 12% figure is a big step up from the 2% per year that was recorded in the five years, since the signature of the Paris agreement. So overall a broadly positive story here.

Ben: So is the first key may surgery? That's. The Energy investment has been increasing this year and that is a good news. But the second takeaway is maybe a bit more negative is about investment gap that exists between what is investing today and what needs to be invested to meet the climate goals. So my question is how far are we from the level that will be sufficient and what could be done to close the investment gap

Jonathan: that that's right. Benjamin, investment to bring more clean energy into the system is rising, but it's not rising quickly enough, to forward your path towards, near zero by mid-century. We estimate that the anticipated spending in 2022, at 1.4 trillion number would need to triple to well over.

4 trillion by 2030 in order to get on track to cap global warming at one and a half degrees. If you are looking at the amounts that are needed to meet the pledges that countries have actually made at the cop 26 and, and elsewhere the increase is lower, but it's, we're still talking about a doubling in spending on transitions worldwide. these deficits or these gaps are visible across the board. But they're particularly large in emerging and developing economies. We can also look at the investment in fossil fuel supply and see how that's tracking in terms of our climate commitments. And there it's roughly aligned at a global level where it would need to be in 2030 in a scenario, that hits these worlds these worlds collective, climate initiatives, climate pledgers. But if you're talking about the one and a half degree scenario capping global warming then the key message that comes from our report is that something needs to change in order for us to find a way out. From our perspective, we think the answer is clear and that is a, an acceleration in clean energy transitions. And that in itself means really a surge in spending across a range of technologies, and infrastructure.

Ben: So we discuss about the two main takeaways of the reports. No, let's focus on some areas in the report that I found. Interesting. first, let's start with, your funding about fossil fuel investments. One of your main finding was that. It was a ratio has invasion of Ukraine has highlighted the importance of energy security around the work. Could you explain who this is impacting investment in socio fuel. and i'm especially thinking about coal investments in countries like india and china

Jonathan: well, Russia's invasion of Ukraine has certainly upended, the fuel investment landscape and it's also intensified a commodity price shock. And as you would expect there has been a supply response to higher prices. But there's also been some hesitation. Overall upstream oil and gas investment is rising but higher costs are really explaining a great deal of that. In terms of upstream oil and gas, we're still at around the level of capital outlay, about half the level of capital that was outlaid in 2014, which was a near term peak. And today we well below pre-crisis levels. So you're right. The fuel to really watch out for is coal and their investments in coal supply are picking up, especially in emerging Asia. We anticipate, a 10% increase in coal investment to expand supply this year. And, and that follows on a similar 10% increase last year. most of this is being led by China and India. They are. By far the two dominant players in global coal. And the increase is in response to the energy security concerns that have been heightened by some of the repercussions from that invasion of Ukraine.

Ben: And steal read due to call one of your funding, that the link between coal investments and coal prices seems to be weakening. Could you expand a little bit on that

Jonathan: Well, as with most things, there is a positive link between their price and, supply and to induce additional supply. You do typically need investment and coal is no exception to that and we've seen an unprecedented rise in coal prices in 2022. So the big question is whether that will trigger a new wave of investment in the coal supply chain. And we think that outside of China and India, it is not clear that it'll actually do so especially in the short term. And the reason for this is because investment in Greenfield cold that's new fields together. Follows long development cycles. It means that investors, need to take a long term view on demand beyond the current price cycle.

And if you take into consideration the need for clean energy transitions, that future puts a bit of a dampener on what the expected price is in 5, 10, 15 years from today. However Higher prices Could stimulate some near term investment in existing capacity. What's also called brownfield investment. And there, for Australia, we identified a, a correlation between the lag of the coal price and investment spending. And to give an idea of this, as a ready reckoner you can think of each additional $10 increment in price for coal, would encourage capital spending in the order of one and a half billion. But if you were to apply that correlation or that ready reckon to what's been happening in 2022 with record increases in prices that would translate into capital investment of around 13 and a half billion. This year whereas our estimated investment spending in Australia is about half that. And the reason of course is because correlations are very simplistic. They cannot, and they do not capture some of the other factors such as the financial and regulatory environment. And these are factors that have become increasingly restrictive toward investment in coal.

Ben: So we talk about. A few investment. No, let's speak about clean technology investments. So declining costs for clean technology has been reversing. Recently due to supply chain disruption, and The CT of critical material. Such as silicone. Lithium cobalt. , could you explain how these supply chain, disruption and the Scottish city of the critical material. Uh, impacting the cost of solar PV. wind turbine and lithium ion batteries

Jonathan: So renewable energy technologies, are capital intensive. So not surprisingly the biggest single cost variable with these sorts of projects is the financing cost. We estimate that the financing costs represent up to 60% of the total levelized cost of energy, in emerging markets and developing economies for solar PV and wind projects in advanced economies it's closer to 30%. And in terms of the change in solar TV, and wind project costs in the last two years That would translate into financing costs, accounting for about 75% of the overall cost increase that we've seen in this period. So that's easily number one, the biggest driver raw materials.

As you've mentioned are another sizeable cost item. And here we have seen considerable rises in, things like steel, aluminum, poly Silicon lithium prices in recent years. And we're also observing that, the manufacturers of renewable equipment, are passing on some of these costs, with increases in the price of solar, PV panels, uh, wind turbines.

And those increases in price are in the order of 10 to 20%. There's also, on the upside, prices for lithium iron batteries in 2021, they registered a small decline. But they too are likely to see a major uptick in 2022. I think it's possible for further reductions in the cost of clean energy technologies but they are gonna require a redoubling of efforts to seek out efficiency improvements to get economies of scale. And most importantly through technology innovation and here we are seeing some positive developments on the innovation front. For example, there are larger turbines and rotors for wind manufacturers. More efficient solar PV cells and also new chemistries for batteries. So all in all, despite these cost pressures at the moment, renewables are still the most competitive sources of electricity in the majority of regions.

Ben: And now let's talk about B battery investment. Cause for me storage is one of the critical issue in the energy world and, your founding was , 2022 will be a takeoff year for investment in grid, scale battery storage with, a doubling of spending from 2021. Could you break down this investment by geography and also discuss where these investment are front or behind the meters and identifies main application of these grid scale battery storage.

Jonathan: So if we start with the breaking down of the investment by geography it is the United States and China that are clearly leading investment in battery energy storage. They count for more than 60% of the total investments in 2021 and 2022. There's also quite a large pipeline of projects. China, for example, is targeting around 30 gigawatts of non hydro energy storage capacity by 2025 and the United States has more than 20 gigawatt of grid scale projects that are either planned or currently under construction. The sector is gaining in other markets too including Europe, but also Korea, Japan and Australia. And like with clean energy investments, there's also geographical divide and again, advanced economies are accounting for more than 90% of the total spending in these systems. With respect to whether the investments are more front or behind the meter. The answer is that most investments are front of the meter and they've been led by grid scale deployment. These investments I account for about 70% of total spending in 2021. And what it reflects is the great versatility, that comes with grid, scale, battery, energy storage systems. They've primarily been used

for frequency control regulation. So accountable about 60% of the capacity deployed. During most of the 20 teens. But as the market has grown and matured, they're now being devoted to things like load shifting energy arbitrage, and firm capacity procurement. The co-location of batteries with renewables is also becoming mainstream. And this format is being underpinned by cost competitive advantages, regulatory incentives, incentives. Innovative auction and prepurchase agreement designed., and they themselves have been used a lot in places like India, Germany, Australia, and the United States, as for behind the meter it's lagging behind, and it's been more affected by some of those supply chain pressures that we talked about earlier, as well as broader inflation pressure.

Ben: It's really encouraging that battery, scared storage are scaling up. Who I see it is the term ion battery has been using laptop and phone, and that has expanded and scaled up and cost has gone down. The same process has been going on with Evie. And no it's reengaging to see the same trend going on. It was agreed. Scale battery storage. Let's just discuss now about, financing related issues. especially about sustainable finance, one of your finding was that the rise of sustainable finance represent major opportunity to fund find energy transition. but the. Effect are really concentrated in advanced economy. Can you maybe just define, what type of product falls under the term of sustainable finance and discuss you key funding about the, the evolution of sustainable finance.

Jonathan: Most of the clean energy investments, since the Paris agreement was signed,, have been advanced economies in China. And that means that certainly much more needs to be done, to bridge the gap between emerging and developing economies, they account for one fifth. Global clean energy investment, and yet they represent two thirds of the global population. And so sustainable finance does offer the potential to narrow that divide. Sustainable finance as a category that covers a wide range of products some are closely related to each other. Green bonds and sustainable bonds it relates to projects for green projects and lots of mechanisms like passive ESG exchange tradeable funds, actively managed funds. In its broadest conceptual sense. To me, it's a bit like a ecosystem of products and initiatives to support cleaning transitions, and more broadly sustainable investments. Now among them sustainable debt seems to have proven as an effective way for emerging markets and developing economies to access capital. But again, the absolute values are still low compared to advanced economies. I think it's also fair to say that the current energy crisis, has also been a bit of a crisis of sorts for ESG investing. The concept is. Simultaneously being decried from different quarters as being ineffective, think of legitimizing greenwashing, and by others as being too effective, you can think here of, the sustainable finance, being accused of starving funds from, from Emitt, but still essential sectors. Some. The work that we've done in terms of the policy messaging is that there are several avenues for further work. Above all, I think there's a need to align ESG taxonomies to standardize the reporting frameworks. And in some countries they're going further and mandating reporting.

Ben: And you, identified several factors that might hinders a finance of new energy project in the emerging developing world. Could you expand on what these factor are and how can the energy financing capability be improved?

Jonathan: Well, I think the first point is that there are plenty of viable, clean energy projects. But very often they fail to access the capital that's needed to make them happen. And one of the main obstacles is the high cost of capital in emerging and developing economies. And, that cost of capital can be up to six times the cost in advanced economies. So this makes it very hard for projects to get up. Now, things like blended finance, risk reduction and sharing. The allocation of risk are some of the ways in which you can lower that cost of capital. I think another channel is by improving some of the framework conditions for private sector development here. For example, I can think of streamlining and shorten, shortening regulatory approval processes for major projects, these all help to one way or another bear on the risk of projects and that, and has consequences for the cost of capital. But such measures will only get you part of the way because in emerging markets and developing economies, the state plays, a much more significant role in the energy sector, and faces, macroeconomic obstacles, financing, new energy projects. In fact, States are the largest public providers of energy finance. Like they accounted for about 60% of energy investment in China and about 40% in other emerging markets and developing economies. So they play a particularly prominent role in coal, fossil fuel power, and they also play a prominent role in grids and storage. However and despite that prominence, state owned utilities in developing. Markets are often highly indebted. And if you couple that with the worsening global economic conditions, that risks reducing government's ability to fund energy projects. So the current economic conjunction makes it more challenging, partly due to the fact of the role that, state owned enterprises play in some of these C. We've already seen debt levels rise across emerging markets and developing economies. And that means that governments are facing rising debt servicing costs either been accentuated by a strengthening us dollar and at the same time, increasing bond yields. This in turn is driving, default risks upwards and with rising debt levels, that too is severely reducing the avail, the available public capital, and is also limiting. And this is a very important point. The ability of those governments to provide guarantees to state enterprises or private investors. What it means is that we'll probably see a greater emphasis on stability or the need for the stability oriented macro management. It will certainly play a big part in the challenging period ahead that is needed to unlock funds for clean energy projects in the emerging markets and developing economies.

Ben: Thank you so much for your time, Jeanette and,