Summary: The new U.S. administration’s policies will result in a temporary decline in investment in renewable energy in the United States. This will prove a boon to emerging markets, hungry for more capital. But perhaps most significant is that these decisions open the door to what may be the most significant geopolitical opportunity of the 21st century: leadership in clean energy.
About the Author: Carlos St. James is Managing Director of Santiago & Sinclair, LLC, a research and financial advisory firm to energy investors in emerging markets. He is a co-founder of the Argentine Renewable Energies Chamber; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; and publishes the Latin American Energy Review in his free time.
He will speak at next year’s LAC-CORE Finance Summit to be held in June 2017 in Miami, Florida.
The Trump administration is likely to wreak havoc on the U.S.’s position as leader of development of clean energy technologies. It will also result – albeit temporarily — in less investment in clean energy inside the walls it will build. But it will do its greatest damage to the planet because of decisions on climate change. It is a fundamental negation of a leadership role that will need to be taken up by another nation.
The U.S.’s decrease in investment will be someone else’s gain, as capital shifts to new geographies at an accelerating pace.
What the Trump administration doesn’t understand is that renewable energy has passed the critical Tipping Point. Renewables have crossed the Chasm (16% adoption rate of a new technology, after Innovators and Early Adopters have fully embraced it, according to Rogers Innovation Curve, click on graph to enlarge); the industry is now well into its Early Majority stage and there is no going back. Conservative Trump followers would fall in the category of Laggards: slow to adopt new ideas. To paraphrase Simon Sinek, the only reason they don’t buy rotary phones is because they are no longer available.
But the wheels of business must continue to grind on, so wherein lie the opportunities? How will this come about?
Emerging Markets to the Rescue
Over the last twelve years, the United States’ annual investment in renewables has averaged just under 17% of total global investment. Close to a fifth of all world investment – but importantly, home of the Innovators and Early Adopters mentioned above (you never want to lose those!). It actually has stayed within a fairly narrow band of between 13-19% each year without too much deviation. One glaring exception: in 2006 the U.S. received 26% of global investment, but that was back when biofuels were in vogue.
Last year it received over $44 billion in renewable energy investment. This figure will be a high water mark for some years, since 2016 is a year of overall decreased global investment in the sector and the U.S. is feeling its effects too. The new Trump administration, with its support of oil, gas and coal, all but assures this is the beginning of downward trend for U.S. renewables investment for a few years.
During this same twelve year period, investment in developing countries (a.k.a. emerging economies) as a whole has been greater than in the U.S. — but perhaps more importantly has been growing rapidly: whereas the U.S. has always been around 17% of the total, emerging markets attracted 19% in 2004 and last year represented 55% of total global investment. Yes: in 2015 investment in emerging economies surpassed investment in mature economies, reaching a combined $156 billion (see graph). This should surprise no one in the industry, since investment in Europe has been declining consistently since 2011, a trend the U.S. will now join.
If those $44 billion are no longer welcome in the United States, much of it will look for a new home, and herein lies the opportunity for emerging markets — and especially Latin America, which attracted $20 billion in investment last year and needs far more. The question is, Can developing countries see this massive opportunity and make the most of it? Which countries will welcome that newly orphaned capital with the most open arms, sign one-on-one trade agreements that open the floodgates to U.S. capital and technology desperate to find new markets?
Ernst & Young regularly publishes its Renewable Energy Country Attractiveness Index (RECAI), and the latest ranking includes nine emerging market countries in the top 20 alone. The United States holds the #1 position; it is unlikely to remain there much longer. Latin American countries made up four of the top 20 (Chile, Mexico, Brazil and rising star Argentina). Investing in any of these is still more complex than investing in the U.S. (for example, see here a recent analysis on Chile and another on Argentina), but what investors need to realize is that this is the new norm: investing in more complex environments. The sooner investors acquire these skills and understanding, the better for all. The importance of training and getting good research and advisory services is more crucial than ever.
The U.S. Department of Commerce’s International Trade Administration also has some suggestions. Earlier this year they published their 2016 Top Markets Report: Renewable Energy, which focuses on potential U.S. technology exports. Not surprisingly, 23 of the top 30 countries (77%) are emerging markets, and 13 of those 23 are Latin American countries: almost half of the best renewables markets are in Latin America, according to the U.S. government.
New Leadership Opportunities
But perhaps most significantly, the Trump administration’s decisions open the door to what may prove to be the most significant geopolitical opportunity of the 21st century: leadership in clean energy. This is what is most perplexing: a country walking away from its hard-earned leadership position.
Germany or a Scandinavian country like Denmark have the capital and brainpower to take the reins. Canada could take a deep breath, attract more Innovators from next door, and become a leader. But it seems to me that this is an opportunity for an emerging country, as global power this century increasingly shifts towards developing nations.
In the last decade Brazil made a serious run at entering the big leagues as part of the BRIC club, but has shown it is not up to the task. China could be an option as formal champion of clean energy but lacks the credibility: it is a major polluter and will have a hard time persuading anyone that it really cares about anything other than selling more solar panels. India is simply too large and unmanageable to harness such a leadership role.
No, the opportunity here is for a dark horse candidate. Argentina theoretically could rise to the challenge. It is a large economy, has an abundance of natural resources and a population that believes in clean energy — but is short on political maturity and has a long way to go to recuperate international credibility. Mexico could make the most of its soon-to-be-reduced NAFTA role and show the U.S. its mettle. It may have received only a tenth of the renewables investment that the U.S. received last year, but this was more than double from the year before and it is just beginning to gain traction. Gulf countries like the United Arab Emirates or even Saudi Arabia could make a run for that role; they have already shown a willingness to throw money at the problem but are inexperienced in leadership.
In the end, the new U.S. administration will hurt its own citizens more than any foreign nation could and others will gladly take the additional renewables business. As its power and influence continues to decline, the opportunity for new leadership in the most important industry of the 21st century opens. Who will take up the cause?
© Latin American Energy Review 2016
About the Author: Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, a US-based financial advisory firm focused on renewables in emerging markets. Carlos co-founded the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first President until 2011; is a board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); is the founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.