Renewables FDI boom hit by Covid-19

The renewable energy sector has seen strong and fairly consistent FDI since 2007, according to figures from greenfield investment monitor fDi Markets. It says in 2019, investment flows into the sector witnessed an all-time high, however, with renewable energy companies undertaking a total 516 projects abroad – 38% more than the previous year. This spree amounted to $92.1bn of spending, a new record for greenfield FDI in the market. 

These figures are not unexpected. Investor appetite for green energy projects has never been higher and far outstrips supply, not least as many new geographies are opening up their markets, says Dario Traum, head of policy for Europe, the Middle East and Africa at BloombergNEF. 

“This is because clean energy projects typically offer at least some level of revenue certainty through power purchasing agreements or government support schemes. This makes most clean energy projects a low-risk asset with a yield that is close to, but still higher than, interest rates in OECD countries,” he adds.

Solar flares

The lion’s share of crossborder investment in renewable energy in 2019 went to solar energy, accounting for a little over 50% of all projects, according to fDi Markets. It says foreign investment in the sub-sector has grown almost exponentially since 2004, since solar technology has moved extremely fast in recent decades. Meanwhile, wind energy – the second top destination for foreign investment in 2019 – has seen more stable and linear FDI over the years. Another clear trend relates to biomass and hydroelectric power, both of which have seen decreasing flows of foreign investment over the past two decades. 

In terms of the leading destinations for FDI in renewables, 2019 saw some novel results. For the first time, Latin America was the world's second most attractive destination for foreign investment in renewables, behind Europe, both in terms of capital expenditure and number of projects, thereby disrupting what has been for many years a competition between Asia-Pacific and Europe, according to fDi Markets. Within Latin America, Brazil, Chile and Mexico stand out. All three are among the world’s top five destinations for foreign investment in renewables, in terms of project numbers since January 2018, alongside Spain and the US.

“The increased focus on environmental, social and corporate governance-compliant investment of large investors, combined with corporate sustainability pledges and continued cost reduction for clean energy technologies, is supporting activity around the globe, in particular in the secondary market,” says Mr Traum. “From an FDI in emerging markets perspective, Latin America has led the way in this trend. Conducive policies in countries such as Mexico, Brazil or Chile created a large pipeline of projects with regulated revenues paid out in US dollars, backed by a government guarantee.”  

Emerging opportunities 

As a result, renewable energy infrastructure assets represent a low-risk investment in emerging economies, compared with many other forms of exposure. For example, in 2018 Italy’s Enel Green Power sold 1.8 gigawatts of green energy facilities to Canadian pension fund CDPQ for $1.35bn. 

“Energy sector investors are looking to replicate these successes in more geographies, such as sub-Saharan Africa, where cheap solar energy and policy support are opening up new opportunities,” says Mr Traum.

Like Latin America, Africa also saw unprecedented foreign investment in renewables in 2019, according to fDi Markets. The majority of foreign investment to the two regions, and the world for that matter, came from European companies. 

Is the party over?

It looks likely, however, that the coronavirus outbreak will halt the FDI boom in renewables, and the global transition to green energy more generally. Though the decline in business, consumer and industrial activity has created a short-term drop in greenhouse gas emissions, Covid-19 seems to bring bad news for the environment. 

With much of the world under lockdown, many prospective or half-complete renewable energy projects face logistical and financial challenges, especially if they are foreign investments. BloombergNEF recently downgraded its forecast for the solar and battery markets in 2020, which is set to see the first fall in global solar power growth since the 1980s. 

Similarly, Norway’s Rystad Energy recently suggested the global expansion of wind and solar power plants could be “wiped out” for at least a year, as construction time frames feel the impact of government restrictions on movement, and foreign exchange markets contract around the world. 

Some projects in the procurement phase will face a huge increase in capital costs, and therefore have to pause, as currencies take a hit from Covid-19. Those most impacted by all of this are emerging markets in Asia, Latin America, the Middle East and India, where the bulk of solar growth had been expected this year, according to Rystad Energy.

Cheap carbon

The coronavirus pandemic is also making renewable energy less competitive against fossil fuel alternatives, which are usually more expensive. In most economies that have implemented concerted lockdowns, electricity demand has declined by about 15%, largely as a result of factories and businesses halting operations, said Fatih Birol, executive director of the International Energy Association, in a recent blog post.

Weaker demand has meant cheaper electricity, thereby pushing down the price of traditional energy sources. The EU Emissions Trading System shows that carbon prices have dropped from bout $30 per ton in mid-2019, to about $16 in March 2020. This puts fossil fuels on an increasingly level playing field with renewables, decreasing demand for the latter. The historic and ongoing drop in oil prices is exacerbating this situation.

On top of this, as billions of dollars from the world’s largest energy oil companies are wiped out by the oil collapse, even more of their spending will likely be directed towards the protection of existing oil and gas investments, rather than to renewables.

Some analysts, however, are more concerned about the direction of government policies, since attention risks being diverted away from clean energy to more immediate concerns. In March, Mr Birol publicly urged governments around the world to invest in renewables as part of their coronavirus stimulus plans, thereby bringing “the twin benefits of stimulating economies and accelerating clean energy transitions”.

For example, with oil prices so low, governments have an opportunity to withdraw fossil-fuel subsidies – which account for $5000bn of spending a year, globally – and redirect them into green energy development. Whether countries and companies will consider the long-term health of the environment in their response to a short-term pandemic remains to be seen, however.

This article first appeared in the April-June edition of fDi Magazine.