Rising energy security concerns and trade flow reliability due to the ongoing energy supply crisis is prompting a rethink of energy investment strategies, with electricity and diversification emerging as growth drivers, the International Energy Agency said in its annual World Energy Investment report Thursday.
The current energy crisis, resulting from the effective closure of the vital Strait of Hormuz since the onset of the Iran war, has come close on the heels of the crisis perpetuated by Russia's invasion of Ukraine in 2022.
"Today's supply shock is expected to leave a lasting imprint on future investment priorities, particularly in Asia and the Middle East, where the impacts of the disruptions to shipping flows through the Strait of Hormuz have been felt most acutely," the IEA said.
Global energy investment is expected to register a small year-on-year growth to reach to $3.4 trillion in 2026. Of this amount, about $2.2 trillion is likely to be invested in grids, storage, low-emissions fuels, nuclear, renewables, efficiency and electrification, while oil, natural gas and coal will account for the remaining $1.2 trillion, the report said.
About $1.6 trillion of the total investment is expected to be diverted towards electricity supply and infrastructure in 2026, with the figure rising to $2 trillion when including end-use electrification. At an estimated $550 billion, expenditure on electricity grids are expected to rise 20% year-on-year, while battery storage investment is likely to surpass $100 billion, the report said.
Investment in oil is likely to decline for the third straight year, with the amount projected to fall below $500 billion in 2026, despite the recent spike in oil, with near term spending outside the Middle east being curbed by price volatility, longer project lead times, supply chain limitations, and tighter offshore rig markets, the report said.
Meanwhile, a surge in new projects especially in the US and Qatar is expected to lead to a $330 billion investment in natural gas, marking the highest in the decade, the report said.
"We are already seeing intensified efforts by both producer and consumer countries to diversify trade routes and energy sources - such as advancing new pipelines and other supply infrastructure, on the one hand, and turning more to domestically available resources, on the other," IEA Executive Director Fatih Birol said.
"These range from renewables and nuclear to coal, oil and gas, in some cases - as well as broader measures to strengthen electricity systems, expand electrification and accelerate energy efficiency," Birol added.
In 2026, renewable power projects are expected to attract investments to the tune of $665 billion, with the solar industry projected to account for $365 billion of this amount, while investment in nuclear power is expected to surpass $80 billion.
Meanwhile, investment in coal is expected to increase to its highest levels since 2012 to $180 billion this year.
"The conflict has triggered volatility within financial markets, slowing investment decisions in the short term and pushing up long-term financing costs. This could disproportionately affect capital-intensive energy technologies," the report said, especially those in emerging and developing economies where financing costs are already significantly compared to advanced economies.