Global energy investment fell by 12% in 2016, the second consecutive year of decline, as increased spending on energy efficiency and electricity networks was more than offset by a continued drop in upstream oil and gas spending, according to the International Energy Agency’s annual World Energy Investment report.

Global energy investment amounted to USD 1.7 trillion in 2016, or 2.2% of global GDP. For the first time, spending on the electricity sector around the world exceeded the combined spending on oil, gas and coal supply. The share of clean-energy spending reached 43% of total supply investment, a record high.

China, the world’s largest energy investor, saw a 25% decline in coal-fired power investment last year and is increasingly driven by clean electricity generation and networks, as well as energy efficiency investment. The United States saw a sharp decline in oil and gas investment, and accounted for 16% of global spending. India was the fastest-growing major energy investment market, with spending up 7% thanks to a strong government push to modernize and expand the power sector.

“Our analysis shows that smart investment decisions are more critical than ever for maintaining energy security and meeting environmental goals,” said Dr Fatih Birol, the IEA’s Executive Director. “As the oil and gas industry refocuses on shorter-cycle projects, the need for policymakers to keep an eye on the long-term adequacy of supply is more important. Even with ambitious climate-mitigation goals, current investment activity in oil and gas will have to rise from its current slump.”

Dr Birol added: “The good news is that in spite of low energy prices, energy efficiency spending is rising thanks to strong government policies in key markets.”

For the first time, the report tracks investment financing sources across the entire energy sector. More than 90% of investments are financed from the balance sheets of companies, governments and households, reinforcing the importance of sustainable industry earnings in funding the energy sector.

After two years of unprecedented decline, global upstream oil and gas investment is expected to stabilise in 2017. However, an upswing in US shale spending contrasts with stagnation in the rest of the world, signalling a two-speed oil market. At the same time, the oil and gas industry overall is transforming itself by delivering large cost savings and focusing more on technology development and efficient project execution.

Global electricity investment was nearly flat at USD 718 billion, with growing network spending mostly offset by fewer coal-power additions. Investment in renewable-based power capacity, the largest area of electricity spending, fell 3% to USD 297 billion. While renewable investment is also 3% lower compared with five years ago, it will generate 35% more power thanks to cost declines and technology improvements in solar PV and wind.

Energy-efficiency investment rose 9% to USD 231 billion with China, the fastest-growing region, accounting for 27% of the total last year. At this rate, China could overtake Europe, the largest spender on energy efficiency, within a few years. More than half of the global investment in energy efficiency went to buildings, including efficient appliances, which account for a third of the world’s total energy demand.

For the first time, the IEA tracked global energy sector research and development spending. It estimated that over USD 65 billion was spent on R&D worldwide in 2015, based on a bottom-up assessment of spending by public and private bodies. Energy R&D is split about evenly between private money and public funding, but when it comes to low-carbon technologies the public sector takes a higher share. While the clean energy transition hinges on scaling up innovation, overall energy R&D expenditure has not risen in the past four years, nor has the clean energy component in particular. China has overtaken Japan as the world’s top spender on energy R&D as a share of GDP.

The IEA report also found that while carbon emissions stagnated in 2016 for the third year, investment in clean electricity generation was not keeping pace with demand growth. Growth in new wind and solar PV generation growth is almost entirely offset by a slowdown in final investment decisions for new nuclear and hydropower expected in the coming years. Consequently, investment in new low-carbon generation needs to accelerate just to keep pace with electricity demand growth. With well over 90% of electricity sector investments funded with regulated pricing or contracts to manage revenue risks, government policies and new business models will play a preeminent role in attracting more financing.