World Energy Trilemma 2014

Three Conditions To Attract Energy Investments

At a time of unprecedented developments within energy, the energy industry, financial sector and policymakers must work together to attract the necessary capital for sustainable and resilient energy systems.

To help policymakers and the energy industry attract the necessary capital, the 2014 annual World Energy Trilemma   report by Oliver Wyman and the World Energy Council focuses on the challenges and opportunities of scaling up investments in energy infrastructure.

Building on the findings of the 2012 and 2013 editions that captured the views of the global energy sector and policymakers respectively, the 2014 report captures the views of financial sector. Drawing on 50 interviews with executives from leading commercial banks, multilateral development banks, pension funds, and institutional investors covering all geographic regions, the report identifies measures that must be taken to ensure the necessary capital is attracted to build and expand secure, affordable and environmentally sustainable energy systems.

Financing the estimated USD$48 trillion necessary investment in the energy industry offers significant opportunities for the finance community over the coming decades. Meeting these needs will also bring tremendous gains for economic competiveness and economic and social development across the globe. Taking advantage of the opportunities to expand, transform and update the world’s energy infrastructure will require actions from policymakers and the financial and energy industries.

The urgency of the investment requirements are highlighted by the 2014 Energy Trilemma Index. The Index comparatively ranks 129 countries on their success in balancing the energy trilemma. The top ranking countries overall and by energy security, affordability and sustainability are shown below. To learn more and access regional and country profiles, click here   for the in-depth Index report.

Energy Trilemma Index

World Energy Trilemma 2014

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World Energy Trilemma 2014

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For Francois Austin, Partner and Head of Oliver Wyman’s Energy practice Answers 5 Questions
  • 1What does the 2014 Energy Trilemma Index tell us?

    The findings highlight that all countries are facing the “Energy Trilemma” - the challenge of delivering policies which simultaneously ensure secure, affordable and environmentally sensitive production and use of energy. The annual Energy Trilemma Index (“Index”) aims to quantitatively understand relative energy performance by country on the trilemma and balance the three dimensions. The Index shows that few countries are able to effectively maintain a balance of all three dimensions and that a country’s trilemma can change, either negatively or positively over time. For example, countries that are trying to navigate the transformation of their aging and carbon-intense energy systems, such as Germany, Japan or the UK, may see a reduction in their Index rankings over the next few years. Other countries have moved up the Index rankings. One example, the Philippines, has continued its upward trend with constant improvements on all dimensions, including an increased diversity of electricity fuel mix. Our analysis also highlights five distinct profile groups in the Index, such as the “Pack leaders,” “Fossil fuelled” and the “Back of pack,” with countries in each profile facing similar policy challenges.

  • 2What are the impacts of these policy challenges?

    In many cases, the policy uncertainty and other regulatory challenges are stalling or freezing the much-needed investment to meet our global energy needs. As the world economy and population grows, global energy demand is predicted to increase and even double by 2050. Transforming, updating and expanding energy systems around the world requires an estimated USD$48 trillion over the next 20 years. Added to the challenge is the global policy uncertainty resulting from the lack of an over-arching climate framework, the tremendous technological developments across all elements of the energy sector, the scale and complexity of many energy projects, and the continued politicization of energy policies in many countries. Together, energy investments face a “perfect storm” of political and regulatory uncertainty, changing technology, commodity price risk, capital intensity and long duration.

  • 3How do these challenges inhibit capital flowing to the energy sector?

    Our interviews found that the capital necessary for the needed energy investments exists. The question is whether that capital will be attracted to the energy industry. Across the board, the financial sector noted the numbing effect of policy uncertainty for energy infrastructure and the extreme sensitivity of capital to perceived political and regulatory risks. In the global competition for capital, a reduction in policy uncertainty is a prerequisite for increasing investment in the energy sector and decreasing the cost of capital. Governments and policy makers must clearly indicate their energy strategy and set in place coherent, predictable, long-term, and transparent regulatory and policy frameworks.

  • 4What else is needed to support capital flows?

    The financial community is vital to ensuring that projects can be financed as they come to market. Unlocking the trillions of dollars necessary will depend in part on evolutions in the financial sector, and its collaboration and exchange of information within and outside of the financial sector. The finance community has to help policymakers and the energy sector understand what the role of different financial investors and instruments is in funding energy infrastructure projects at various stages of a project life cycle. This will allow those who seek capital to attract the right kind of funding. There are many other voids to be filled, including the lack of aggregation platforms for bundling of smaller-scale energy projects, standardised processes to rate energy and other infrastructure projects, and support in cultivating domestic financial markets in developing or emerging economies. The financial sector will also need to step outside its “comfort zone” with fossil fuel projects to take advantage of and support the opportunities presented by non-traditional renewable technologies.

  • 5What does the energy sector need to do to attract capital on this scale?

    A huge barrier to financing more energy projects – especially in emerging economies - is the lack of “bankable projects” or a steady project pipeline. Indeed, this absence is resulting in a “crowding‐out” of private investors. As one investor told us, “it is not the lack of finance, but the lack of financeable deals.” There are many factors blocking the project pipeline. In some instances, there are constraints due to restrictions on foreign direct investments, but the larger challenge is the lack of human capital to develop all the necessary analysis to support project financing and initiation. For example, preparing a project and arranging for funding can account for between 5–10% of a project’s costs and add several years to the project’s development. There also needs to be a focus on the development of technical, financial and management skill sets to support and execute energy projects around the world – the sector is facing a real shortage of human capital. Thus, it is critical to increase the number of projects and the velocity at which they are developed. The energy sector can establish standard procedures and best practices on the type of information, such as technical assessments for wind power projects, as well as financial information required to allow investors to effectively and efficiently assess projects.