In June, the International Energy Agency (IEA) published a special report titled ‘World Energy Investment Outlook’ (WEIO). This document charts the financial investments needed to meet expected energy demand over the coming two decades. The numbers indicate starkly the magnitude of the task that lies ahead if energy security is to be maintained.

The IEA reports that global investment in new energy supply amounted to over $1600-billion last year (having doubled since 2000 in real terms), with an additional $130-billion spent on energy efficiency enhancements. The lion’s share of investment – $1 100-billion – was in the fossil fuel value chain, including the extraction, transport and refining of fuels, as well as the building of thermal power stations. Renewable-energy investments have grown rapidly, from $60-billion in 2000 to $250-billion in 2013 – but are still dwarfed by fossil fuel expenditure.

In its benchmark scenario, the IEA projects a need for cumulative investment in energy supply and energy efficiency amounting to a staggering $48-trillion by 2035. This is based on annual investments growing to $2.5-trillion, or roughly 2% of projected world gross domestic product. More than half of the investment in energy supply is merely to offset declining output from existing oil- and gasfields and to replace retiring power plants and other infrastructure.

Some two-thirds of the investment is earmarked for developing countries, although the replacement of old infrastructure and climate mitigation creates a need for substantial investments in industrialised countries as well. The headline figure includes $23-trillion in fossil fuel investments and just $6-trillion for renewable electricity. However, if the world is to have a reasonable chance of avoiding a global temperature rise of more than 2 oC, the required investment rises to $53-trillion, reflecting greater allocations for renewables and efficiency.

Energy investments are required from both the public and private sectors, although the IEA notes that government policies and incentives are increasingly dominating market signals. This is partly due to increasing concerns about energy security and climate change, but also reflects resource nationalism tendencies in certain countries.

Numerous risks and obstacles could thwart realisation of the required energy investments. Private-sector investors face uncertainties regarding both future rates of economic growth and interest rates, as well as regulatory and policy environments such as government initiatives to limit carbon emissions. Public investment in less developed countries could be constrained by a lack of financial resources or relevant skills and expertise, while many developed countries are facing high levels of public debt which are projected to rise even further as a consequence of ageing populations.

Some specific issues could hamper investment in energy efficiency. For example, power utilities (and municipalities) are in the business of making money by selling electricity, and therefore do not have an incentive to encourage end-user efficiency. Other factors likely to inhibit energy efficiency investments include fossil fuel subsidies, lack of access to finance and the absence of supportive policies.

Perhaps the gravest threat to adequate energy investments stems from the ongoing political turmoil in the Middle East. Until recently the IEA had high hopes for massively increased investment and oil production in Iraq, but the worsening sectarian conflict is rendering this increasingly unlikely. Some other countries in the region are spending large sums on social programmes to placate growing and increasingly restive populations, partly at the expense of investment in energy production.

Should sufficient energy investments not be forthcoming, there are several negative implications. First, inadequate oil investments in the Middle East and elsewhere would likely engender higher and more volatile oil prices, with potentially destabilising effects on the world economy.

Second, insufficient funds allocated to electricity generation would mean a continuation of power supply shortages as demand grows in many developing countries – a problem well known to South Africans. But richer countries are also at risk: the IEA’s chief economist, Fatih Birol, did not mince his words regarding Europe’s need to replace a quarter of its aging power stations in the coming decade: “In Europe we are facing the risk of the lights going off. This is not a joke.”

Thirdly, if huge investments in renewables and energy efficiency are not forthcoming the world risks exceeding the two degree temperature rise and thus more severe climate destabilisation with all its attendant impacts.

As detailed as it is, the IEA investment report nevertheless omits a crucial part of the energy investment story: the amount of energy – rather than financial – investment that is required to ensure adequate provision of energy services in the future. The depletion of high-quality, easy-to-access oil and gas reserves highlights the fact that a growing share of available energy has to be spent merely on delivering useful energy to consumers; the energy return on investment ratio for fossil fuels is falling. This makes investments in energy efficiency and developing improved energy technologies vital for our future prosperity.