Publications

Energy Policy Scenarios to 2050

10.1.5. Investment and Finance

Over the coming decades, estimates of investment requirements in the energy sector are huge - on a scale never before seen. Published investment requirements total USD 20 trillion over the next 25 years and are likely to be considerably greater by 2050. This investment is required across the value chain and for all energy carriers, although it is expected that slightly more than half is required in electricity generation and the remainder mostly in oil and gas.

There is consensus that this investment can be achieved over time, although there is much to do to facilitate this investment, particularly in emerging markets. The private sector, multi-lateral agencies, and governments are all in agreement that while the scale of the challenge is enormous, there are sufficient funds available. It is however important to understand that these funds compete for the best projects within the energy sector and also with other infrastructure projects.

However, in making investments, a number of critical factors must be actively considered, with some requiring attention so that they do not become barriers:

• Economic and political stability in the country of investment
• Stable regulation of the business environment
• Institutional climate (e.g., contract law)
• Labour availability
• Efficient financial system
• Personal security
• Environmental regulation stability.
  

Discussions with potential financiers continually suggest that their most preferred investment is one contracted with credit-worthy counterparts in an open and transparent market place established in law. Such requirements are clearly not evident in countries with an uncertain regulatory framework, an unproven market model, as well as in emerging markets, and as such, will undoubtedly require considerable further effort to make investments acceptable.

A sound framework to attract these funds is based on two pillars. First, the regulatory environment needs to be robust. Regulatory risk is one of the key risks in the energy sector and has many faces:

• Discretionary exercise of powers - arbitrary change of quality standards
• Will the tariff and other key parameters allow investors to reach their return objectives?
• Impartial dispute resolution
• CO2 market after Kyoto?

The key requirements for a regulatory framework are that it should protect both public and investors' short-term and long-term interests and be transparent, stable, and predictable over the long-term and independent from political authorities, which pleads for national rather than local regulation.

The second pillar is the predictability of revenues, a cornerstone for financing such efforts.

Energy markets must be organised to offer predictability. A number of solutions, however, exist to this seemingly intractable position. These solutions (especially for electricity power) reflect differing levels of market evolution:

• "Energy Only" - effectively free trade and competitive market solutions
• "Capacity Payments" - a way to foster provision/availability of capacity, with variable rewards following those of the Energy-Only option
• "PPA" model - long-term contracts are signed for the purchase of electricity, providing clarity and certainty.

Each potential market model has its place in all countries, although precise solutions depend on the level of political will and the ability to support market development. Without such models (and possibly in countries where such models exist), further political and credit support will still be required. It should, however, be acknowledged that credit support to emerging markets through aid mechanisms should be closely tied to a commitment by the host government to put in place the above referred predictable legal, political, and commercial framework. This credit support should thus be seen as a catalyst, enabling the transition toward subsequent non-subsidised investments.

Overall, there are clearly sufficient funds and there has been sufficient thought on solutions. The key is for all of the stakeholders to work together to develop an appropriate system that is robust and above all transparent.