Foreign direct investment (FDI) is a powerful proxy for investors’ sentiment. Unlike fluid financial investment, where securities change hands in the blink of an eye, FDI requires companies to take the long-term view. Only projects that guarantee a degree of success over a 20- to 30-year period provide the business case for investors to move capital, equipment and employees across borders. While not an exact science, the analysis of global FDI outlines the main forces that are shaping up the economy and the geopolitics of the future, with the energy transition emerging as the most disruptive of them all.
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. No other sector currently attracts as much FDI as green energy technologies. Its rise has come at the expense of fossil fuels, which used to dominate global investment. The energy transition has prompted FDI to literally switch from one to the other. Power utilities have been building global portfolios of RES assets as they clean their energy matrix. Battery energy storage systems (BESS) have risen from the ashes of decommissioned coal and natural gas plants. Electric vehicles (EVs) are replacing traditional internal combustion engines (ICEs). Even oil and gas companies have started allocating multi-billion dollar budgets to the development of renewable energy, including green hydrogen.
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The data is unambiguous. FDI into renewables peaked at $116.6bn in 2019, eclipsing for the first time fossil fuels, which attracted $115.5bn 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 $96.7bn in 2020 and $90.8bn in 2021, below the record high touched in 2019, but above the $66.6bn annual average of the 2010s. Meanwhile, foreign investments into coal, oil and gas plummeted to $47.5bn in 2020 only to touch a new record low at $16.2bn 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 7.3 million in 2012.
The switch is not just about technology and jobs. It has changed the very dynamics of energy investment. FDI into fossil fuels inevitably chases large deposits of hydrocarbons that happen to be concentrated in specific geographies. Countries hosting those deposits have great leverage over prospect investors as there is little alternative. The renewables game is a very different one. Although potential still varies across geographies, RES are way more ubiquitous than hydrocarbons. Facing a much more level playing field, investors factor in other elements like the availability of specific RES regulations and incentives, as well as a stable business environment as a whole. In fact, those countries with the highest solar and wind energy potential are not necessarily those attracting the highest levels of RES investment. As a result, the switch has redrawn the whole geography of global energy investment.