A publication of Site Selection
July 20, 2009
Vol. 1, Issue 4

 

Harnessing the Sun and the Winds – New Energy for Foreign Direct Investment

by Michel Lemagnen
editor bounce@conway.com
Michel Lemagnen
Michel Lemagnen is
research director at U.K.-based Oxford Intelligence.
R
enewable energy companies are here to stay and to prosper, providing impetus for job creation and a welcome drive to foreign direct investment activity. According to a recent report into the international business development plans of global renewable companies, 86 percent of senior executives have firm international investment plans (creation of jobs and facilities) through to 2010, and 60 percent in the five-year time frame. Michel Lemagnen, author of “Renewable Energies: International Investment Strategies & Key Investors” and Research Director at U.K. consulting firm Oxford Intelligence, provides an overview of the global wave to a cleaner and greener world of business.
       Renewable energy, despite its rapid development, accounted for a mere 6.4 percent of Total Primary Energy Supply in 2007 in the 30 OECD (Organization for Economic Cooperation and Development) countries, a slight increase since 1990. The International Energy Agency forecasts that renewable energy consumption is expected to increase from about 1,475 Mtoe (Million tonnes of oil equivalent) in 2003 to 2,349 Mtoe in 2030, a rise of more than 60 percent.

 
Foreign Direct Investment Context
      Combined foreign direct investment (FDI) and M&A data from 2003-2007 shows that there were 618 international cross-border projects by renewable energy companies in that time, from 56 in 2003 to 228 deals in 2007, a rise of 300 percent.
Solar Panel Array
“It's very important to be able to understand what's happening in the market, what are the rules; building and licence regulations and also to support companies in the finding of strategic partners.”
—CEO of a biomass company
       Between 2003 and 2007, Oxford Intelligence estimates that there were 480 FDI renewable energy projects worldwide, of which 71 percent were investments in Europe. Solar, wind and biofuels accounted for nearly 76 percent of all projects.
       The level of FDI activity in and around Europe has been historically high, largely due to the pro-renewable energy policies pursued at both country and European Union levels – some of the world´s most dynamic firms in this sector are from Germany, Spain, Denmark and the Netherlands. Today, renewable energy is becoming truly global as governments across the world respond to growing energy needs and environmental concerns, and business develops and markets new technologies.
       Manufacturing projects are still very prominent in the renewable energy FDI investment mix in all the global regions, accounting for 59 percent of all projects globally between 2003 and 2007. However, in terms of absolute numbers, Europe (193 projects) secured a commanding majority, accounting for 68 percent of all renewable energy manufacturing projects. This was followed by Asia-Pacific with 45 projects and North America with 29.

 
Future FDI Outlook
Wind Farm Zeeland Kreekrak, The Netherlands
“In a five-year time frame, the USA will be the biggest winner of cross-border investment projects, closing the gap with Europe.”
      CEOs and senior management in renewable energy firms have a significant interest in all major global regions over the next two years. In the short term, the focus will be on Western Europe and North America with a strong interest in Latin American and developing Asian markets. Companies consider the U.S., Brazil, Canada and the U.K. as the most popular markets for foreign direct investment with Germany, Italy, Spain and France also attracting significant interest in the two-year time frame.
       In a five-year time frame, company executives see the U.S. as the single most important investment location, with Mexico, India and China increasing in importance. The biggest winner over the next five years will be North America, in particular the U.S., closing the gap with Europe. North America´s share of FDI deals will grow from 11 percent of deals undertaken in 2007 to 32 percent of deals by 2012. In contrast, Europe´s share will decline from 77 percent to 54 percent over the same forecast period.
      Manufacturing projects are very prominent in the renewable energy FDI investment mix in all global regions with around 63 percent of executives saying they had plans for future manufacturing investment projects and 27 percent for sales and marketing projects. A further 17 percent of executives had plans for energy-generation projects and some 13 percent of companies were intending to establish R&D facilities.
       The preferred mode of expansion is overwhelmingly by organic growth — mentioned by 72 percent of interviewees. This is backed by the FDI track record which shows that 77 percent of past overseas moves have been via organic growth rather than through acquisitions.
       Despite the current downturn, we forecast continued growth in the cross-border deals of renewable technology companies, even though at a slower rate of 15 percent in both 2009 and 2010 – but it will pick up again to over 20 percent per year in both 2011 and 2012.
       Wind, biomass and biofuels will be the strongest growth areas through 2010 in terms of new job creation. In the longer term, 2020 scenario, solar thermal, photovoltaic and biofuels are expected to be the most significant job creators. The EREC estimates that the renewable energy sector in the EU-15 countries alone will employ the full-time equivalent of more than 1 million employees by 2010 and around 2 million by 2020, and that the highest levels of capital investment will be in wind, solar thermal, biomass and photovoltaic.

 
The Role of Government & Economic Developers
“Companies will be drawn to those locations and communities where there is commitment to investing in renewable energy and a regulatory framework to match.”
      Renewable energy policy is one area where companies think that there has to be clear government policy. For CEOs and Senior VPs, this remains the most important factor and main motor for the successful implementation of international growth strategies. Companies will be drawn to those locations and communities where there is commitment to investing in renewable energy and a regulatory framework to match.
       Forty-three percent of companies used the services of an economic developer or agency in making their international move. This is significantly higher than our 2004 study, where the figure was 26 percent. Forty-two percent of respondents who made contact with a development agency did so at an early stage when they were first considering all international options. What’s even better is that 82 percent said they would either “definitely” or “very likely” recommend the organization to a colleague or business partner. But the use of other specialised advisors and intermediaries, in planning their international expansions, has also grown to be much more significant.
      Generally as the industry matures, renewable energy companies are beginning to accept that they are engaged in a much more open competitive market than previously and are looking to expand their core competencies globally. In the longer term there will also be further consolidation, primarily via mergers and acquisitions, and integration both vertically and horizontally within the industry. Outsourcing is also expected to become more important.
       Renewable energies are here to stay and companies will be creating jobs and investing across borders in order to provide the alternative energy solutions of the future, but government needs to provide support and back them.



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