The geography of the switch | fDi Intelligence – Your source for foreign direct investment information

For decades, the world’s energy map has been built on relations between Western consuming nations and oil producing and exporting countries. With 75% of the oil reserves located in the Middle East and North Africa and Venezuela and over 50% of the gas reserves in Russia, Iran and Qatar, the use of fossil fuels has created a map of global interdependencies – and connected geopolitical tensions – which have deepened with the entry of China and India into the global economy as fossil fuel consumers.

Renewable energy sources (RES) have turned this paradigm upside down. Given their ubiquitous nature, the dichotomy between importers and exporters becomes obsolete. Geographies the world over have a chance to harvest local RES to meet domestic energy demands and lessen their dependence on imports of fossil fuels, limiting the geopolitical value traditionally attached to the energy sector, but rather spurring cooperative patterns. In this perspective, the degree of success they can achieve hinges on their capacity to attract investment by international RES developers that have the capital and know-how to develop such projects for profit.

Rule of law, strong policy direction and public incentives thus put developed countries at the forefront of RES investment between 2005 and 2022. The UK and the US are cases in point. World-class RES potential, combined with consistent and rewarding government schemes, gained them a global leadership in renewables investment. Overall, the UK attracted $145.7bn in renewable energy FDI between 2005 and 2022, although its numbers are inflated by the wave of capital intensive offshore wind projects that mounted in the decade; the US $115.2bn, more evenly spread mostly between solar, wind and other RES. Similarly, Australia’s RES attracted $61.2bn in FDI in the period. Although no other country has installed as much green power as China in the period, the country’s RES development has been almost exclusively a domestic play with no FDI involved.

Despite this long-term trend, data suggest that RES investment came of age only in the wake of the global financial crisis. Shrinking public incentives in the West, combined with plummeting technology costs for solar and wind farms, gave RES developers a chance to look for alternatives in emerging economies that could combine a relatively stable business landscape with high RES potential. This new, more market-oriented phase saw FDI into renewables spread more evenly across geographies. Latin American countries of the likes of Chile and Brazil emerged as major destinations of FDI into renewables, attracting, respectively, a total of $43.3bn and $48.5bn between 2005 and 2022. India and South Africa followed a similar trajectory with, respectively, $43bn and $19.8bn. While concentrated in a few geographies in the 2010s, FDI into renewables has now become a truly global play.

If renewable energy projects spread more evenly across geographies than fossil fuels ones, at first glance the sources of capital and technology remains relatively concentrated, with European power utilities being the dominant force in the global RES market. Between 2005 and 2022, they accounted for 60% of global cross-border investment into renewables, followed at distance by their Asian (20%) and North American (14%) peers. More specifically, Italian Enel stood out as the biggest renewable energy investor in the period, with total investment commitments of $44.8bn, followed by Spanish Iberdrola with $38.8bn, French EDF with $24.6bn and German RWE with $23bn. The only non-European company in the top 10 is Singapore-based Sun Cable.

The leadership of European power utilities becomes more nuanced when considering that US developers are powerhouses on their own, but they mostly focus on the domestic market and generate relatively little FDI. At the same time, electricity generation remains formally or informally out of the reach of foreign companies in many countries, most notably in China, where domestic power companies dominate the market and are no match for foreign investors despite a gradual liberalisation of the market. Taking into account domestic investment, also the sources of investment into RES appear relatively global and distributed, which further breaks the close circle of interdependencies created by fossil fuels.

Equipment manufacturing is a different story, though. The international perspective of RES developments has created strong incentives for equipment manufacturers to seek efficiencies by linking to global value chains. With China emerging as the factory of the world in the period of hyperglobalization between 1990 and 2010, most of the production of RES equipment has localised within the Asian country.

China and Chinese companies dominate the supply chain for solar photovoltaic panels, with a 70% share of global manufacturing as of 2021, according to consultancy Wood Mackenzie. This uneven balance of manufacturing power not only risks recreating a pattern of dependency, it also falls foul of the new trade and geopolitical barriers between West and East. Despite notable public and private attempts to re-establish a strong supply chain in Europe, focusing on innovative and state-of-art technologies and processes, walking away from Chinese producers is no easy endeavour. The US introduced heavy tariffs on imports of PV panels from China in 2018. Three years later, 99% of solar PV panels used in solar parks in the US still came from Asia – not from China, but rather Malaysia, Vietnam, Thailand and South Korea, according to a Rystad report.

However, the report also highlights that modules originating in these countries are typically manufactured by Chinese enterprises “that have offshored the assembly phase, the last step in PV module production”, while the production of solar cells themselves remains located in China.

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