Energy shock will increase diversification, electrification — IEA

The second global energy crisis in four years will “reinforce a strong prioritisation of energy security” for governments around the world, with a heavy focus on diversification and resilience, according to a new report from the International Energy Agency (IEA).

“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,” said IEA Executive Director Fatih Birol.

“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,” he added.

Global investment in renewables, nuclear energy, grids, battery storage, efficiency and electrification will reach USD$2.2 trillion in 2026, compared to just USD$1.2 trillion in fossil fuels, according to the Paris-based IEA’s World Energy Investment 2026 report.

The agency added that the full impacts of the crisis in the Strait of Hormuz have yet to be felt — the investment flows for 2026 are mostly locked in, the result of decisions made months ago. As a result, the disruption to oil and gas trade flows from the Middle East will have reverberations over the coming years.

The gas sector may experience two contradicting trends at the same time. Upstream supply outside of the Middle East could garner more interest. Investment is expected to rise to USD$330 billion this year, the highest level in ten years.

However, the second major gas crisis in four years “is affecting consumer sentiment among prospective gas importers in Asia,” the IEA said. And it is in Asia where most of the long-term growth for LNG has been expected. With Asian energy markets facing upheaval, long-term demand scenarios for LNG need to be rewritten.

Instead, many countries are looking to diversify away from the LNG trade, which requires globe-spanning supply chains prone to geopolitical disruption. For example, the Philippines declared a national energy emergency in March after the Strait of Hormuz was shuttered. In the first quarter, it was the largest destination for exports of Chinese solar panels among emerging market countries. Solar shipments trebled from year-ago levels.

In Africa, a group of 15 countries imported more than USD$400 million worth of solar panels from China in the first three months of the year, up from USD$650 for all of 2025.

“Households and businesses can insulate themselves in part from energy shocks by installing solar panels and batteries, especially if they rely on diesel to run small-scale generators,” the IEA said in its report.

Solar plus battery storage already provides “firm” round-the-clock electricity at price levels cheaper than fossil fuels in many parts of the world.

The IEA pointed to Thailand, the Philippines and Vietnam as countries that have explicitly committed to scaling up solar in order to cut their imports of fossil fuels. All three countries were supposed to be key LNG growth markets.

Age of Electricity

Another important trend identified by the IEA is the surging investment in electricity and electrification, which may kick into a higher gear due to the oil and gas crisis.

“If it prompts a faster pace of electrification, the conflict will bring the Age of Electricity even more clearly into view,” the agency said.

Investment in electricity supply is expected to reach USD$1.6 trillion in 2026, and up to USD$2 trillion after including end-use electrification. EV sales are surging, including in emerging markets. Investment in grids specifically could jump by 20 percent this year, in contrast to previous trends that saw investment flow only into new electricity generation at the expense of grid infrastructure. Battery storage alone could see investment top USD$100 billion.

The gas sector is still seeing strong demand from data centres, particularly in the U.S. where gas remains relatively cheap. Orders for gas-fired power plants topped 130 gigawatts in 2025, a 25-year high.

However, the downside for the sector is that AI/data centre spending in the U.S. is straining the supply of gas turbines to such a degree that it is limiting the availability of turbines everywhere else in the world. That includes LNG importing countries, which may not be able to build gas-fired power plants because of the backlog for turbines.

In other words, not only is the fuel expensive, but the scarcity of equipment to build gas-fired power plants may limit the upside for gas demand in Asia.

It’s not all smooth-sailing for clean tech. Interest rates are one such headwind, ironically made worse by an oil and gas crisis in the Middle East. Soaring fossil fuel prices are driving up inflation, which will prevent interest rate cuts by central banks. The higher cost of capital will weigh on clean energy deployment and will also disadvantage emerging markets.

But the IEA made clear that the world is facing sudden and dramatic change in the energy sector, a once-in-a-generation energy crisis that will likely result in structural transformation.

“We are in the midst of the largest energy security crisis the world has ever faced – and I believe this will reshape investment strategies globally, with parallels to the major changes the energy world witnessed after the oil shocks of the 1970s,” Birol said.

(Writing by Nick Cunningham; editing by Sophie Davies)