Once dominated by fossil fuels, long-term energy investment has switched to renewables –the energy transition has redrawn the global investment map. Back in 2005, renewables accounted for just a fraction of global FDI, fossil fuels for over one fifth. Remarkably, renewables have overtaken fossil fuels as top FDI destination since 2019. As of 2021 fossil fuels made up a fraction of global FDI, renewables – about 15%. The implications of this switch are far-reaching.
The generation of electricity through the use of renewable energy sources (RES) and smart systems to store and distribute it have become the biggest magnet of global FDI. FDI into renewables peaked at $117bn in 2019, eclipsing for the first time fossil fuels, which attracted $116bn in that same year. The trend of increased renewable energy investments and decreasing fossil fuel investments held strong in the next two years, as the Covid-19 crisis enhanced the case for a more sustainable economy. Although not spared by the pandemic, FDI into renewables stood at $97 bn in 2020 and $91bn in 2021, below the record high touched in 2019, but above the $67bn annual average of the 2010s. Meanwhile, foreign investments into coal, oil and gas plummeted to $48bn in 2020 only to touch a new record low at $16bn in 2021.
The energy transition and renewables penetration have also had an effect on the labour markets. The estimated number of jobs created by cross-border renewable energy projects has eclipsed those generated by coal, oil and gas – once a major source of employment across geographies. In 2020, FDI into renewables created twice as many jobs as FDI into fossil fuels; five times as many in 2021. Total active jobs in the RES value chain increased to 12 million in 2020, according to Irena, up by 40% from 7 million in 2012. The geography 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 $146bn 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 $115bn, more evenly spread mostly between solar, wind and other RES.
Similarly, Australia’s RES attracted $61bn 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. Among emerging markets, Latin American countries (in particular, Chile and Brazil) emerged as major destinations of FDI into renewables, attracting, respectively, a total of $43bn and $49bn between 2005 and 2022. India and South Africa followed a similar trajectory with, respectively, $43bn and $20bn.
While concentrated in a few geographies in the 2010s, FDI into renewables has now become a truly global play. The technology breakdown As solar panels and cells became cheaper, solar FDI first exceeded wind investment in 2010, and then again in 2013, gaining a lead it has retained to date. Overall, between 2005 and 2022, solar FDI made up 37.5% of foreign investment into renewables, wind 35%. Further efforts to decarbonise and electrify personal and public transport boosted investments into batteries – the energy carriers needed to replace internal combustion engines (ICEs).
From 2015 to 2022, foreign investment into the production of batteries increased to $17bn in 2021, from $1.1bn in 2015 (including US interstate investment). Green hydrogen has also emerged as a popular alternative for turning RES-generated power into a stable energy source for hard-to-abate sectors (aviation, heavy-duty transport, shipping etc.). The foreign investment announcements into green hydrogen projects surpassed $25bn mark in 2021. FDI into renewables held strong in the first quarter of 2022 standing at $25bn, particularly thanks to major investment announcements in capital-intensive offshore wind and hydrogen projects. IRENA estimates that installed capacity of renewable energy has to grow by a factor of 10 to limit global temperature rise to 1.5 °C and bring CO2 emissions to net-zero by 2050. That would require a total of $131tn of total investment into renewable energy and energy efficiency technologies. Provided short-term headwinds are withstood, FDI into renewables faces a steep upward trajectory ahead as the world strives for energy sustainability and energy security.