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A history of renewable energy and FDI

A look at the rise in popularity of wind and solar energy among foreign investors.

Solar and wind farms have driven the rise in popularity of renewable energy. (Photo by Manan Vatsyayana/AFP via Getty Images)

Renewable energy has been harnessed by humans for thousands of years, and yet it is only in the past couple of decades that wind and solar have been taken seriously as major power sources.

So what changed to make solar parks and wind farms attractive to governments and investors, leading to a remarkable and exponential rise in renewable energy development?

According to the International Renewable Energy Agency (Irena), global renewable energy power capacity more than doubled between 2010 and 2019 to total more than 2.5 terawatts (TW). The International Energy Agency (IEA) predicts that total renewables capacity could increase by another 50% by 2024 to reach 3.7TW.

A private push

The accelerated deployment of renewable energy has been fuelled by private investment dramatically driving costs down for solar and wind, coupled with increased awareness of environmental issues.

Data from Irena shows that the total investment value for the 88 gigawatts (GW) of new renewables capacity additions in 2010 totalled $210bn. Thanks to plummeting costs, by 2019 twice that level of new renewable power generation capacity was commissioned, but cumulative investment had increased by only one-fifth to $253bn.

Irena says that costs for electricity from utility-scale solar photovoltaics (PV) alone fell 82% between 2010 and 2019.

Solar PV and wind have contributed the bulk of new capacity additions over the past decade, primarily through utility-scale projects funded through private debt and equity. So what did it take for private capital to finally get comfortable with the risks associated with developing these projects?

Government policy has been the main catalyst, but specific market conditions have also played a crucial role in the roll-out of renewables.

Ancient history

While the energy potential of sunlight and wind has been available throughout history and has long been understood, technologies to harness this efficiently and at low cost were not perfected until the late 20th century.

While other renewable technologies have a longer history at utility scale, notably hydropower, which is still the largest contributor of renewable energy capacity globally, this article will look at how wind and solar technologies moved from concept to global deployment.

Below are brief histories of wind and solar power technologies.


• Wind power has been used for sea vessel propulsion for thousands of years, at least as far back as 4,000BCE by Phoenicians and Egyptians using cloth sails.

• The first windmills to grind grain and pump water were developed in what is now Iran, Afghanistan and Pakistan in the 9th century AD.

• Skip forward a thousand years and the first wind turbines used for electricity production were built in the US and Denmark in the late 19th century, and by the early 20th century small wind turbines were being used across those two countries to pump water and power batteries on farms.

• One of the pioneers of this period, Paul la Cour, used a wind farm to produce hydrogen in Denmark, predating the recent ‘green hydrogen’ initiatives by more than 100 years.

• The world’s first megawatt (MW)-scale wind farm was erected at a place called Grandpa’s Knob (no sniggering at the back) in Vermont in 1941 by the S Morgan Smith Company thanks to a design by war veteran and MIT graduate Palmer Cosslett Putnam. It had a generating capacity of 1.25MW and operated for four years before one of its blades broke off.

• Due to low coal, oil and eventually gas fuel prices, no one tried to build another wind farm of an equivalent size for almost 40 years.

• NASA began a wind power programme in 1975 that developed many of the design features of modern turbines. GE and Boeing were both involved in the programme. Manufacturing stopped when competing energy prices plummeted in the 1980s, and none of these turbines are still in operation (the last one stopped spinning in Oahu, Hawaii, in 1996).

• Meanwhile, in Scandinavia, the first multi-MW turbine was built in 1978 in Tvind in Denmark and still operates today.

• Vestas built its first wind farm in 1978 and by 1986 it stopped work on all other types of technology to focus solely on wind generation. Enercon, Germany’s biggest turbine manufacturer, was formed two years earlier in 1984.

• The first offshore wind farm, the 5MW Vindeby project, was erected in 1991 in Denmark.


• French scientist Edmond Becquerel discovered the photovoltaic effect in 1839, the operating principle of the solar cell.

• In 1954, Americans Daryl Chapin, Calvin Fuller and Gerald Pearson developed the silicon PV cell at Bell Labs – the first solar cell capable of converting enough of the sun’s energy into power to run small electrical equipment. Bell Telephone Laboratories produced a silicon solar cell with 4% efficiency and later achieved 11% efficiency.

• Various innovations and efficiencies were achieved over the next two decades, assisted by the US space programme, which incorporated silicon solar cells into its spacecraft from the late 1950s, and by 1970 Dr Elliot Berman, with help from Exxon Corporation, had designed a solar cell that brought the price of producing solar power down from $100 a watt (W) to $20/W.

• The first photovoltaic MW-scale power station was built by ARCO Solar in Hisperia, California, in 1982.

• Also in 1982, the US government completed the 10MW Solar One, the first large-scale thermal solar plant.

Since the Industrial Revolution, the global economy had been powered by burning fossil fuels, which were readily available and technically straightforward to utilise for electricity generation.

The oil price shocks of the 1970s forced Western governments, particularly the US, to invest in alternative energy research. This led to many of the technical breakthroughs that would allow solar and wind to be built at utility scale, yet a subsequent stabilisation of energy prices stalled progress.

California incentivised the construction of a number of wind farms through 30-year standard offer contracts – the first feed-in tariffs anywhere in the world. Though many of those original wind farms are still operational, the last of those contracts was signed in 1984 as global oil prices began to drop.

Early progress in the US may have been halted, but some European governments in the 1990s sought to introduce their own incentives for renewables to try and kick-start things.

Wind picks up

Initial attempts to support renewable energy in Europe included the Non-Fossil Fuel Obligation (NFFO) scheme in the UK introduced in the 1989 Electricity Act, and Germany’s first attempt at a feed-in tariff under its Electricity Feed-In Law (EFL) of 1991.

The NFFO required electricity supply companies to purchase a certain amount of new generating capacity from non-fossil fuel sources, including nuclear. Energy generators competed for contracts in tenders.

Germany’s original feed-in tariff scheme guaranteed grid access for electricity generated from renewable energy sources, and made suppliers buy this power at premium prices.

Neither scheme entailed direct government funding, with costs instead borne by the suppliers and, ultimately, bill payers.

These early schemes laid the foundations for wind and solar farms to be taken seriously by the investment community, particularly the EFL, which led to an acceleration of developments through the 1990s. This growth in projects was further amplified by the introduction of Germany’s Erneuerbare-Energien-Gesetz (EEG, or Renewable Energy Sources Act) on 1 April 2000.

“The introduction of the EEG really was the birthplace of how renewables got fundable from an institutional perspective,” says Peter Bachmann, a fund manager at Gresham House who has been involved in renewable energy investments for more than 15 years. “Without that, the price you could sell power for into the grid was not enough to make these things bankable.

“If that hadn’t happened, I don’t think the modern renewables market would have happened at all.”

The EEG saw the obligation to provide grid access at premium prices switch from utilities to grid operators, and instead of being annually assessed and changed, power prices were now fixed long term, providing certainty to potential investors.

The EEG is credited with setting a template for renewables subsidies schemes around the world. Power produced in Germany from onshore wind in 1990 was just 71 gigawatt hours (GWh); by 2000 this had risen to 9,513GWh and after the introduction of the EEG this roll-out accelerated to more than 37,000GWh, according to Germany’s federal government.

Global head of power at Société Générale Allan Baker says: “If you look at the development of renewables in Europe, it was initially policy driven. For onshore renewables to take off in Germany, the government had to take a very bold stand in being willing to pay what was then a pretty expensive price for renewable power.”

Around the same time, the UK was undergoing market reforms that would also support the fledgling renewables market.

The New Electricity Trading Arrangements introduced in March 2001 allowed electricity to be traded on a wholesale market virtually in real time, and led to baseload prices falling 20 per cent and peak prices 27% a year after its introduction.

The Renewable Obligation (RO) scheme was then introduced by the UK government. It set steadily increasing renewables targets for suppliers while introducing tradable certificates for meeting those targets.

Renewable energy was now becoming increasingly attractive to investors, who were looking for new assets given other market conditions.

At the very beginning of the 21st century there was excess power capacity, there had been a surge in the oil price, and the world’s largest trader of electricity and gas, Enron, had gone bust.

While investors and lenders were scrambling to restructure distressed gas-fired power projects, wind and solar plants, while still entirely dependent on subsidies, had become a viable long-term investment alternative.

Mark Henderson, chief investment officer at Gridserve Sustainable Energy and a former project finance banker, says: “The rise in renewables has been driven by the accessibility of long-term project finance, which reduces the amount of equity investment needed by the project sponsors. Crucial has been the banks gaining confidence in renewables, whether that is through government support systems, technological improvements, or a lack of other opportunities.”

Schemes such as the EEG in Germany and RO in the UK created a pipeline for investors. A virtuous circle was created whereby developers were incentivised to find efficiencies, bringing costs down and making the assets even more attractive to investors.

Bachmann says: “Once you got that demand into the market, manufacturers started to increase the size of the rotors and make the generators more efficient, so the marginal cost of energy for that type of product comes down.”

Solar heats up

The roll-out of solar generation had trailed that of wind up until this point due to it being a far more expensive technology. Things changed due to efforts by China to lead the market for solar panel manufacturing.

Responding to insatiable demand for panels in Germany, with roof-top solar becoming particularly popular, the Chinese government made renewable energy a strategic industry leading to a huge ramp up in production. Soon there was a glut of panels on the market leading to their cost falling by 80% between 2008 and 2013.

“Solar used to be very expensive and then the Chinese saw an opportunity to really become market leaders,” says Bachmann.

“Chinese companies created their own intellectual property from a pretty decent existing base and brought the cost of panels down at an exponential rate – panel price reduction has happened at a rate faster than Moore’s Law.”

Solar benefits from outputs being more predictable than wind, given the difficulties of producing accurate wind forecasts, and the maintenance required for operational solar farms has proved minimal.

From about 2009, both solar and wind deployment around the world accelerated quickly as more and more investors piled into the sector.

Between 2010 and 2019, the net generation from utility-scale wind farms in the US more than tripled, while for large-scale solar PV it grew from 423,000MWh to 69,017,000MWh over the same period.

Investor concerns over the main risks related to wind and solar power had been lessened. Technology risk had been reduced due to costs dropping and efficiencies of scale, while market risk had been eased thanks to long-term subsidies producing predictable revenues.

Country risk meant most activity was still concentrated in richer jurisdictions where offtakers and governments were more trusted to pay their bills. Progress temporarily slowed in some markets, most notably Spain and Italy, when subsidies were changed or removed suddenly, but generating capacity has continued to grow at pace globally.

By 2017, former US president Barack Obama was arguing that the momentum of clean energy development was now irreversible.

Moving offshore

While Denmark had been building pilot offshore wind farms since the early 1990s, there were a number of challenges to achieving the same sort of accelerated development seen for onshore technology.

Building very large structures in the sea posed significant technical challenges, procedures for environmental approvals needed to be established, and with capital cost significantly higher, governments again would need to be bold to back a pipeline of development.

Initial developments would also be limited to countries with shallow coastal waters, as initial designs required the turbines to be built into the seabed.

The first standalone project financing for an offshore wind farm was Princess Amaila, 23km from the coast of Ijmuiden in the Netherlands. Despite the application to construct the project being submitted in 1999, the wind farm was not operational until 2008, at which point the model of turbines used for it had already been superseded by more efficient and larger models.

What the nascent offshore wind sector needed was the type of pipeline certainty that would give comfort to potential investors.

The UK government was probably the most effective at doing so, beginning discussions in 1998 with the Crown Estate, which owns most of the UK coastline, and eventually issuing licences to 17 developers in its first round of projects in 2001.

By 2011, the UK already had 1.3GW of offshore wind in operation, and the Westminster government was targeting 18GW by 2020 and as much as 40GW by 2030.

Baker says: “One of the things that really kick-started the UK offshore wind sector was government announcing that they wanted to deliver 10GW or more new capacity (recently updated to 40GW) backed by a strong and bankable incentive mechanism. This gave visibility to a huge potential market, something that banks had to take seriously.”

As the global economy started to recover from the banking crisis of 2007/08, bank and investor appetite for large capital projects returned quicker than governments’ willingness to commit state budgets to support them. Financial markets were now awash with capital, but there were not enough projects to invest in, which made banks and investors increasingly turn to the growing renewable energy sector.

Henderson says: “I can’t think of a single renewable energy project that went to the wall because of the financial crisis. In fact, it was a very good argument for the strength of project finance as a product, because even if the project owners went bankrupt, the projects survived.”

Institutional investors had been encouraged to invest more in energy and infrastructure projects, whose long-term and stable revenues matched their investment criteria but had always been seen as too risky. Slowly they became comfortable with the risk of construction being delayed or disrupted, which had also been a block on the financing of offshore wind projects.

Developers of offshore wind projects were reluctant to offer completion guarantees to lenders, and banks were not comfortable financing a project until it was operational. But with few other large capital projects to lend to or invest in, money soon started piling into offshore wind, even at the pre-construction stage.

Bachmann says: “Looking at an offshore wind project in 2010 you would have wanted probably 15–20%-type equity internal rate of return, because in that sector you had quite a lot of risk in relation to building projects offshore. Whereas now, you could probably get primary finance for a construction offshore wind project at 6%.”

The introduction in the UK of a contract for difference (CfD) to replace feed-in tariffs, with the first CfD auction for renewables held in March 2015, was a further accelerator of offshore wind development. The subsidy scheme guarantees generators an economically viable strike price when wholesale prices are low, but when wholesale prices are above the strike price the difference is paid back.

Backing winners

According to Irena, 179GW of renewable generation capacity was added globally in 2019. Solar and wind accounted for 157GW of that new capacity.

Offshore wind, like onshore wind and solar before it, has now established itself as an attractive asset to a range of investors driving the development of new capacity. This was only achieved once the technology was proven, government support had created a pipeline and revenue certainty, and costs were driven down through technical experience and innovation.

Not all renewable technologies have had the same success. Thermal solar, which concentrates solar power to create steam to drive a turbine, has not had the success of PV, with technology costs still high. Only 600MW of concentrated solar power capacity was added globally in 2019, a 20% decrease on 2018.

Similarly, tidal and wave power technologies have not been deployed at utility scale due to technical difficulties, high costs and a lack of government backing.

Any new or emerging clean energy technologies will likely need the government backing and the favourable market conditions enjoyed by wind and solar during their formative years if they are going to succeed.