The Geoeconomics of. Sovereign Wealth Funds and Renewable Energy

Transcription

1 The Geoeconomics of Sovereign Wealth Funds and Renewable Energy Towards a New Energy Paradigm in the Euro-Mediterranean region By Simone Tagliapietra Researcher, FEEM, Italy The world will go through a period of profound change over the next decade as geo-economic, geo-political and energy pressures converge to reshape the international order. This wave of change will particularly affect the enlarged Mediterranean region, as its Northern part is facing an unprecedented sovereign-debt crisis and its Southern part is experiencing a political transition that has changed the geopolitical equilibrium of the region but whose long-term prospects are largely uncertain. The current global financial and economic crisis dominates the economic and political international debate, overshadowing a number of other global challenges such as the energy transition, the scarcity of natural resources, and climate change. However, once the economic crisis will be over these issues will likely re-emerge in all their urgency. For this reason, the book The Geoeconomics of Sovereign Wealth Funds and Renewable Energy tries to move beyond the current economic debate, proposing an innovative vision on the development process of the enlarged Mediterranean region. Triangulating the Gulf Cooperation Council (GCC), Southern and Eastern Mediterranean Countries (SEMCs) and the European Union (EU) into a unique cooperation scheme, the book highlights the strong complementarity that exists between these three areas in the field of renewable energy. The wide availability of capital in the GCC, the great renewable energy potential of the Southern and Eastern Mediterranean, and the institutional support of the EU, are the three vertices of a future triangle of growth that place finance, energy and institutions into a unique win-win-win cooperation scheme. Sovereign Wealth Funds (SWFs), defined as state-owned investment vehicles that manage portfolios of financial activities, are among the most dynamic actors in the emerging international financial landscape. In 2011 the size of SWFs amounted to about US$ 4.9 trillion, of which 2.8 trillion by commodity-based SWFs and 2.1 trillion by non-commodity based SWFs. The GCC owns eleven SWFs, for a total asset value of US$ billion in Although interest in SWFs has increased only in recent years, they have existed for decades. The oldest SWF was established in 1953 and over time many governments have established a variety of financial vehicles to manage state-owned financial assets. This trend accelerated in early 2000 primarily because of growing oil prices and rising current account surpluses in Asia. The majority of the countries owning SWFs have a positive trade balance with the rest of the world, reflecting either large receipts from oil exports or exported manufactured 75

2 goods. Moreover, the growth of SWFs is largely associated with the rise in foreign exchange reserves that in certain countries have reached a level that is well beyond what is required for monetary policy or contingency motives. On the basis of this logic the book also presents an estimate of SWFs total assets growth up to 2015 that set SWFs to grow by 17% per annum over the period , from the total assets volume of US$ 4 trillion in 2010 to US$ 9.1 trillion in This demonstrates that it is possible to situate SWFs among the investors that are better equipped to navigate financial markets in the aftermath of the global economic crisis. Besides the traditional activity on financial services and real estate, SWFs have recently shifted their attention to other two target sectors: natural resources (oil, natural gas, coal and metals) and their associated industries (renewable energy, energy transmission). Driven by the economic needs of sovereign owners, funds from resource-scarce countries in Asia mainly focused on hydrocarbon exploration while, driven by the need to diversify their Recent investment agendas of Gulf countries aim to transform oil wealth into global leadership in renewable energy hydrocarbon-based economies, funds from the GCC primarily focused on renewable energy. As the most part of SWFs were clearly established to manage their nation s wealth for the benefit of future generations in the spirit of assuring intergenerational equity, for many of them it is necessary to consider the consequences of their current investment behaviour on the long-term GCC s SWFs in 2011 Country Fund Name Total assets (US$ billion) Abu Investment Authority $627 Saudi Arabia SAMA Foreign Holdings $532.8 Kuwait Qatar UAE Dubai Bahrain Oman Kuwait Investment Authority Qatar Investment Authority Investment Corporation of Dubai International Petroleum Investment Company Mubadala Development Company Mumtalakat Holding Company State General Reserve Fund $296 $100 $70 $58 $27.1 $9.1 $8.2 Saudi Arabia Public Investment Fund $5.3 UAE - Ras Al Khaimah RAK Investment Authority $1.2 TOTAL GCC $1.734 SWF Institute, accessed April 2012 availability of natural resources. For this reason a number of SWFs have begun to advance natural resources in their investment agenda more actively. With regard to the GCC, the United Arab Emirates invests through its SWF in the Abu Future Energy Company and in the Masdar Initiative. Qatar invests through its SWF in Iberdrola and Energias de Portugal. These examples provide a first sign that hydrocarbon-rich GCC countries are starting to invest in renewable energy, notably in research and development, with the aim to diversify their hydrocarbon-based economies through the creation of a world-class renewable energy technology center. Such a development would allow these countries to lead the transition from a 20 th century carbon-based economy into a 21 st century sustainable economy, transforming oil wealth into global leadership in renewable energy. A number of major economic reasons stand behind this 76

3 USS Billion Africa Americas Asia Middle East Europe Other Years SWFs outlook: regional trend Source: own elaboration on Sovereign Wealth Funds Institute and IMF World Economic Outlook trend: the rising domestic energy demand due to population growth and greater urbanization; the high level of unemployment and the related job-creation potential of renewable energy projects in the region; and the positive spillover on the regional oil and gas market. Outlined the interest of GCC countries in investing in renewable energy technology, the book moves forward, focusing on the area that holds the world s highest renewable energy Large-scale renewable energy projects could initially be devoted to satisfying the domestic demand, freeing up natural gas for additional exports to Europe potential: the Southern and Eastern Mediterranean. The installed power generation capacity from renewable energy in the area could rise from 22 GW in 2009 to 54 GW in 2020 and to 94 GW in This great potential has already given rise to two major large-scale renewable energy projects: the Mediterranean Solar Plan -launched within the framework of the Union for the Mediterranean with the primary objective to provide 20 GW of installed capacity from renewable sources by and Desertec - an industrial initiative aimed at generating 50 GW of installed CSP capacity by 2050, to cover 15% of the European electricity demand. The development of large-scale renewable energy projects in SEMCs would have a wide variety of benefits: (i) Large-scale renewable energy projects in SEMCs could initially be primarily devoted to satisfying the rapidly increasing domestic power demand, thus freeing up natural gas alternatively used in the domestic power generation sector for additional exports to Europe. Considering that an important but partly underutilized gas infrastructure connecting North Africa with Europe is already in place, this choice would have an immediate significant economic return for SEMCs just because of the growth in export value of gas stocks; (ii) Part of the renewable electricity could be exported to Europe via HVDC electricity interconnections. This will allow SEMCs renewable electricity to take advantage of European feed-in tariffs. Such a scheme will allow to attain European targets to renewable energy at a lower cost; (iii) Largescale renewable energy projects could develop a major new industry leading to local job creation 77

4 Desertec Source: Desertec Foundation and manufacturing developments. By sharing manufacturing facilities and therefore exploiting larger economies of scale, South-South cooperation could be promoted. This is particularly important in a region which presently has a low level of intra-regional trade; (iv) Largescale renewable energy projects, with its intermittency problems, need to be integrated in larger interconnected electricity markets, therefore further fostering the integration of the Southern and Eastern Mediterranean area; (v) Large-scale renewable energy projects in SEMCs could become a stimulus for an enhanced Euro-Mediterranean socio-economic cooperation; (vi) The economic development consequent to the implementation of largescale renewable energy projects in SEMCs could have several positive spillovers for the European Union, such as preventing migratory flows towards Europe, creating new markets and securing the existing energy infrastructure in the Mediterranean. Such large-scale renewable energy projects will be implemented only through substantial investments, both in terms of R&D and business development. In the current global economic landscape, only SWFs seem to have the financial power to afford such capital intensive and long-term investments. However, in order to ease GCC investments in large-scale renewable energy projects in the Southern and Eastern Mediterranean area it is necessary to overcome a number of barriers concerning public finance schemes, regulation and policy frameworks, technology transfer and development of local industrial capacities. The EU could play a key role in enhancing this dynamic, by providing institutional backup, a common regulatory framework able to provide investors such as SWFs with the long-term reliable and stable regulatory context that they need, and providing public financing mechanisms. A first concrete step in this direction was the establishment of MedReg, the association of Mediterranean energy regulators for electricity and gas, aimed at promoting clear, stable and harmonized legal and regulatory frameworks in the Mediterranean energy market. 78

5 THE GEOECONOMICS OF SOVEREIGN WEALTH FUNDS AND RENEWABLE EN- ERGY Towards a new energy paradigm in the Euro- Mediterranean region The purpose of this book is to propose an innovative vision on the development process of the enlarged Mediterranean region. Triangulating the Gulf Cooperation Council, North Africa and the European Union into a unique cooperation scheme, the book highlights the strong complementarity that exists between these regions in the field of renewable energy. The wide availability of Sovereign Wealth Funds capital in the Gulf Cooperation Council, the great renewable energy potential of North Africa and the institutional support of the European Union are the three main pillars of this cooperation scheme. This triangulation would enhance not only the energy outlook of the overall Mediterranean region, but also its socio-economic development, ultimately promoting an enlarged area of cooperation, stability and peace. About the author Simone Tagliapietra is Researcher at Fondazione Eni Enrico Mattei (FEEM), where he is involved in two research programmes: Energy: Resources and Markets and Economy and Society. Prior to joining FEEM in March 2011, Simone completed a six-month internship at the Sustainable Energy Division of the United Nations Economic Commission for Europe. Simone graduated in Political Science and International Relations from the Università Cattolica del Sacro Cuore, with a thesis on the political economy of Sovereign Wealth Funds. The Geoeconomics of sovereign wealth funds and renewable energy, Towards a new energy paradigm in the Euro-Mediterranean region by Simone Tagliapietra, Published November 2012 by Claeys & Casteels, ISBN: , RRP 75, Public financing mechanisms can play an important role in reducing risks of both private and institutional investors (such as SWFs) for entering specific markets, such as renewable energy. The EU can play an important role also in this regard, through its financial facilities devoted to the Mediterranean area such as the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), the Neighbourhood Investment Facility (NIF) and InfraMed. InfraMed is a long-term infrastructure investment fund launched in May 2010 by five major institutional investors: Cassa Depositi e Prestiti (Italy), Caisse des Dépôts et de Consignations (France), Caisse de Dépots et de Gestion (Morocco), EFG Hermes (Egypt) and the European Investment Bank. InfraMed s objective is to promote, within a market environment, equity investments in urban, energy, and transport infrastructure projects in SEMCs. Considering its long-term investment horizon, its public-private character and its inclusive nature, InfraMed could well work as a bridge between the GCC and SEMCs. InfraMed has all the requirements to play a key role in enhancing the strong complementarity between the GCC and SEMCs in the field of renewable energy and could well be considered as the most innovative bridgehead of the EU cooperation effort towards SEMCs. Among its conclusions, the book The Geoeconomics of Sovereign Wealth Funds and Renewable Energy suggests that the development of large-scale renewable energy projects in the Southern and Eastern Mediterranean area could trigger a process of economic and social integration in the overall enlarged Mediterranean area. SWFs from the GCC could provide the capital required to fully implement these large-scale renewable energy projects, while the EU could deliver the institutional backup and the public finance mechanisms required in the area. The GCC, the Southern and Eastern Mediterranean area and the EU could thus well represent the three vertices of a triangle of growth that, if fostered, would enhance not only the energy outlook of the overall Mediterranean region, but also its socio-economic development, ultimately promoting an enlarged area of cooperation, stability and peace. 79