Alternative Energy Investment to Shift to Asia: Report
About a week ago the Pew Environment Group published a report outlining growth rates and drivers of renewable energy in G20 countries. The report, ‘Who’s Winning the Clean Energy Race? – G20 Investment Powering Forward’ is interesting both for what it says, and what it doesn’t say.
The report identifies a 30% investment growth increase in 2010 from 2009. 90% of all renewable energy investment takes place in the G20. While Europe currently leads, Pew expects that Asia will become the ‘centre of gravity’ for clean energy investment. It notes growth and dynamism. In terms of technology investment categories, distributed solar stands out.
However, of the $198 billion investment identified in the G20, $75 billion comes from government stimulus policies following the GFC. Government research and development, and VC investment, comes in south of $40 billion. In effect, all of the investment growth is attributable to one-off government stimulus.
What’s the point we’re making?
Asia will overtake Europe this year in renewable energy investment. Much of the funding that has driven investment in OECD G20 has been government-driven in 2010: either direct stimulus, or through other deployment program subsidies. The evidence of the latter is the success of solar in the EU, directly attributable to various national Feed-in-Tariffs. (However, EU government clean energy stimulus pales in significance next to that for some emerging markets including China and South Korea).
Now, OECD G20 nations are broke, and can’t afford to subsidise any further. The technologies still don’t, for the most part, pay for themselves without such subsidies. Over the last few months a number of subsidy wind-backs have been announced in the EU. Competition for good deals in both VC and projects is now fierce, with options for good margins rarer. Power Generation investment growth is largely aneamic.
Alternative energy investment will increasingly shift to Asia, if not necessarily VC and R&D (overwhelmingly dominated by the US), then for asset finance (by far the largest component of investment in the sector at nearly $120 billion for the G20). Why will investment continue to shift to emerging markets?
The bottom line is the focus on fundamentals: don’t rely on uncertain government subsidies, instead focus on those with the need and the means to pay.
Non-OECD G20 countries have the means, and the fundamental need, to invest in alternative energy, and they already dominate the investment growth rate tables in the Pew report.
Take Indonesia as an example: one of the businesses we are working with is currently trying to raise investment into their renewable energy business there. The Indonesian government is cashed-up, and needs Independent Power Producers: already, a third of their power generation comes from IPPs. The country is power-hungry: only 65% of the population has electricity, and the booming economy needs juice to keep it going. The country has one of the most aggressive electricity generation investment programs in the world, with a large chunk of this directed to renewable energy: much of it geothermal, but also hydropower. Indonesia comes fourth for five-year investment growth rate (89%) in the Pew report.
Equity and project returns outstrip anything that can typically be found in OECD countries. There are project opportunities everywhere. Regulatory and tariff conditions are overwhelmingly positive. FDI to build out this infrastructure is badly needed.
However, progress has been slow. Conventional wisdom among many desk-bound OECD fund managers appears not to have changed: their strategy is to stick with anglo-teutonic markets because that’s what they’re comfortable with, and that’s what everyone else is doing. They appear to have an unfounded belief that their approach constitutes risk-aversion. The expression ‘safe as houses’ has been exposed as a sham through the GFC. The same re-valuation of risk needs to take place as far as energy security, and investment strategy, are concerned.
Investors and fund managers who continue to hide behind the excuse that non-OECD Asia is risky need rapidly to change their tunes and come up with ways to manage their perceived risks. Those that don’t are sheep and will largely generate diminishing returns that won’t justify their management fees. To quote Gordon Gekko (Wall Street, 1987), sheep get slaughtered.