The Great Reallocation

Capital expenditure on energy production

Please find attached our latest report at RMI on capex in the energy transition.

Contrary to popular belief, the buildout of renewable energy supply does not require a surge in capital expenditure (capex). As fossil fuel capex falls, the net growth in capex is only 2% a year, in line with the past seven years, and much lower than in the decade after 2000.

Mainstream framing compares apples and pears. The standard formulation by the International Energy Agency (IEA) or the International Renewable Energy Agency (IRENA) is that a surge in capex is required to build the renewable energy system. However, they include the growth in end-use capex for renewables but not the decline in end-use capex for fossil technologies. To compare like with like we restate the data to look only at capex on energy supply.

The great reallocation. Energy supply capex on renewables and fossil fuels in 2023 was about the same, at US$1.1 trillion each. Over the next seven years, renewable capex will roughly double and fossil fuel capex will roughly halve under the core IEA scenarios of Announced Pledges (APS) and Net Zero Emissions (NZE). Falling fossil fuel capex will therefore provide half of the growth in renewable capex.

Growth in renewable capex. Renewable capex has been growing at 6% a year since 2015, and to get to the IEA’s APS scenario of $1.8 trillion in 2030, capex will need to grow at 7% a year. Given the superior economics of renewables, that seems very achievable.

Decline in fossil fuel capex. Fossil fuel capex has been falling at 3% a year since 2015, and to get to the IEA’s APS scenario of $0.7 trillion in 2030, capex will need to fall at 5% a year. In light of the increasing evidence of peaking of fossil fuel demand, that seems reasonable.

We have the money. Total 2030 energy supply capex under the APS scenario is $2.5 trillion, which would require annual growth in capex of 2% from 2023 levels of $2.2 trillion, lower than expected GDP growth of 3%, and lower than the annual increase in energy supply capex from 2000–2010 of 9%. Meanwhile, global capital formation in 2022 was $27 trillion, so the additional capex of $360 billion is only 1% of global capex.

Why is change possible. The falling cost of renewable technologies and the decline in fossil fuel capex help smooth the path to the transition. Meanwhile, fossil fuel companies are paying out high dividends, and this helps investors reallocate the capital.

Most of the growth happens this decade. The main increase in renewable capex will take place this decade, stabilize in the 2030s and then fall back as capex moves from expansionary to maintenance.

There is still work to be done. The key now is to ensure that capex moves from generation to grids, and from developed markets to emerging markets. The primary impediments to change are policy and expertise rather than the volume or availability of capital.

Why does this matter? The transition to a more distributed, secure, low-carbon energy system is coming and the capital requirements are far more manageable than orthodox analysis suggests.

Investment in energy supply under IEA’s APS (billion $)