Inside the global clean energy transition
Finance / Sustainable finance

Investment flows vindicate EU climate policy

Analysis of foreign direct renewable energy investment shows the EU accounting for a rapidly rising share of the global total.

The EU’s share of foreign direct investment (FDI) in renewables projects has risen from 15% of the global total in 2017 to 49% in the first half of 2020, shows research by Investment Monitor, a sister publication to Energy Monitor. The flows are a vindication of the EU’s decisive climate and energy policies, making the bloc the first choice for renewable energy investment, as investors position themselves for the low-carbon transition.

The sector is showing greater resilience in the wake of the Covid-19 pandemic than anticipated, and compared with other types of power generation, finds Investment Monitor. The research used data from Orbis Crossborder Investment to track transactions announced since 2017 that involved investment from one country into a renewable energy project based in a second country.

The findings are in contrast to predictions from the UN Conference on Trade and Development (UNCTAD). It estimated that FDI would decline by 40% across all sectors in 2020 as a result of the pandemic. It also predicted that FDI in renewable energy would be the least impacted of any sector, declining 26% over the full year.

However, FDI announcements for renewable energy in the second quarter of 2020, the period most impacted by Covid-19 lockdowns, were down just 24% year-on-year. This suggests that full-year activity is likely to outperform UNCTAD’s forecast.

This resilience demonstrates growing appetite among investors for assets aligned with international climate objectives, rising demand for clean energy among consumers, and the arrival of new sources of demand for projects, such as oil and gas companies.

However, what particularly stands out in the data is the extent to which Europe is attracting a much greater proportion of investment.

“These numbers are certainly impressive, though not entirely surprising,” says research partner at consultancy Cornwall Insight Daniel Atzori. “Through its EU Green Deal and Recovery Fund, the bloc has shown a remarkable degree of commitment to the transition towards a climate-neutral Europe by 2050.”

The EU Green Deal involves a commitment to reach net-zero emissions by 2050 and a proposal from the European Commission to raise the EU’s 2030 emissions reduction target to 55% below 1990 levels, up from a 40% target at present. The European Parliament has voted to increase this even higher, to 60%.

“Although the final deal reached in July has its limits, the strong message is that the EU sees no dichotomy between post-Covid-19 economic recovery and decarbonisation,” Atzori adds. “The EU’s clear direction of travel is arguably giving several international investors the confidence they need for their long-term investment decisions.”

Renewable energy investment visibility

“The clarity and strength of the EU’s position on climate change, and how to target it, provide investors with visibility and confidence that renewable technologies are going to be a big part of the transition,” agrees Guy Brindley, senior wind energy finance analyst at trade association WindEurope.

He also points to the “good track records” of European wind projects.

“Wind energy has proven to be a good investment for different types of investors, with institutional investors attracted by long-term stable returns which match well with pension and insurance liabilities,” he adds.

Part of Europe’s relative attractiveness is also due to other regions becoming relatively less attractive, argues Ben Warren, a partner at consultancy EY. The other big markets, the US and China, are both experiencing “teething problems” as they move away from subsidies, he says.

While renewable auctions around the world have repeatedly broken records for low prices bid, “overly competitive auctions… leave no value left” for developers, discouraging investment, says Warren, citing low prices in auctions in Argentina and Brazil, although he observes that auctions in Germany, too, have cleared at low prices.

In addition, he points to capital recycling, as European developers sell operating renewable energy projects on to investors, extracting value and providing the wherewithal to develop new projects. Large volumes of capital chasing low-risk operational renewable energy assets is encouraging operators to sell, Warren notes.

However, the EU and its constituent countries are likely to face growing competition for international capital to fund their transition away from fossil fuels. A victory for Joe Biden in November’s US presidential election would turbocharge the US renewable energy sector, while China’s recent commitment to reach net-zero carbon emissions by 2060 – while distant – will similarly require massive investment.

“The critical period is ahead,” says Atzori at Cornwall Insight. “It is now up to all individual member states to ensure their regulatory frameworks are conducive to investment.”