Clearing the pathway for foreign investment in Australia’s energy transition

Foreign investment has been the foundation of many of Australia’s wealth-generating industries for decades. Coal, iron ore and natural gas have all seen outstanding growth thanks to inflows of foreign capital. But as emissions-intensive sectors look to go green, Australia – like the rest of the world – finds itself amid a low carbon energy transition. And it is in need of foreign capital.

That has sparked a new, more positive dynamic for investors seeking net-zero investment opportunities in Australia. This new dynamic is evidenced in what we call ‘net-zero exceptionalism’: the trend towards Australian governments (federal and state), regulators and industry supporting and expediting decisions to enable the delivery of energy transition and decarbonisation projects. In the past year, this exceptionalism has facilitated new tranches of funding, incentivised private investment, enabled regulatory approvals and given rise to policies unseen in other sectors of the economy.

We’re in the early stages of this dynamic. It comes at a time when foreign investors have experienced challenges deploying capital in Australia. For the first time since the 1980s, Australia is a net exporter rather than importer of capital. Some commentators say this is because capital inflows have been hampered by mounting regulatory factors and fewer bankable projects.

Offshore investors, including those from long-standing trading partners such as the US, Canada and Korea, have reported feeling a cold shoulder from Australia over recent years. Australia has dropped down foreign direct investment league tables, and investment from the country’s biggest source of foreign capital, the US, has decreased due to the perception that Australia is not an easy place to do business.

Public funds are insufficient to meet the scale of the energy transition, with higher borrowing costs and inflationary pressures contributing to tightened budgets and a slimmed-down pipeline of infrastructure commitments.

What’s more, the challenges faced by foreign investors have piled upon each other: regulatory delays and taxation measures – necessary guardrails – are challenges that impede capital deployment. Australia’s Foreign Investment Review Board process can also delay investment timelines, with some finding the process increasingly lengthy, repetitive and expensive.

Recognising these challenges, Australian governments, regulators and industry have begun to accelerate their efforts to mobilise private capital towards the energy transition, launching incentives designed to facilitate both domestic and foreign investment.

Enticing offshore investors

If Australia is to hit its targets of 43 percent emissions reduction and 82 percent renewable energy generation by 2030, federal and state treasuries need more private capital and, in particular, offshore capital.

Investors and asset managers in Asia, the US, EU and Latin America are now weighing up opportunities further afield. Australia is seen as a strong emerging market, and prospective foreign investors are watching how Australia’s new dynamic unfolds.

Globally, competition to attract international capital into the energy transition is heating up. Investors eager to capitalise on the opportunity are funnelling capital into energy transition infrastructure faster than ever.

Investor appetite for infrastructure assets has also risen in the face of variable economic conditions. The longer-term nature of energy transition investment suits private capital, with global FDI in renewable energy investments up more than 40 percent since 2019.

In Australia, private capital raised in clean and climate tech-related sectors rose from $631.5 million in 2018 to $5.86 billion in 2023, more than doubling Australia’s position in the global market. These figures are impressive, but much of the private capital earmarked for energy transition investments is yet to be deployed.

While Australia’s ranking on overall FDI league tables has declined, there was a doubling of foreign-funded energy transition projects in the country between 2019 and 2022, before slowing in 2023. It isn’t enough.

To compete for capital and resources for the energy transition, federal and state governments have accelerated efforts to enable this capital deployment. They are rapidly rolling out policies and incentives to unlock private capital. Regulatory decisions are being made with a greater emphasis on net-zero exceptionalism, with emissions reduction trumping other concerns, such as competition in a recent case.

The government is also taking steps to address some of the broader economic barriers to investment. Among other changes, amendments to existing policies aim to balance energy transition infrastructure investment risks and facilitate FDIs.

The Capacity Investment Scheme, for example, provides revenue underwriting for new power generation and storage projects, while the government’s Rewiring the Nation programme helps bridge the cost gap in transmission projects connecting renewables to the grid. Mandatory climate-related financial disclosures are also expected to commence in January 2025. Combined with the priorities outlined in the Government’s proposed Sustainable Finance Strategy and its new sovereign green bond framework, these initiatives and reforms are enticing foreign investors at a critical moment.

Clear investment pathway

Whether Australia meets its energy transition targets depends on how effectively government and industry incentivise offshore private capital. This requires continuing efforts to create a more amenable environment and clearly demonstrating Australia’s commitment to the sector.

“While international investors have faced hurdles in the past, Australia’s new dynamic when it comes to deploying foreign capital sends a strong signal to would-be investors”

It’s clear a pathway is being laid by government. There is now a clearer mandate at the federal level, and investors can see this willingness to make Australia more attractive to overseas investors and companies. But there are other strategies that would keep the foreign investment pathway clear.

According to international investors, a more level playing field could speed up the pace of investment. Some AAA-rated investors that regularly undergo FIRB and Australian Competition and Consumer Commission approvals have also suggested that Australia consider a fast track or pre-approval function to speed up capital deployment in priority areas like decarbonisation.

At a time when capital and supply constraints are thwarting Australian infrastructure projects, making the case for net-zero exceptionalism is increasingly important to mobilise the international capital and resources needed to accelerate the energy transition. While international investors have faced hurdles in the past, Australia’s new dynamic for deploying foreign capital sends a strong signal to would-be investors.

Meeting Australia’s 2030 targets for emissions reduction and renewable energy generation requires unprecedented investment in renewable energy generation and transmission infrastructure. If Australia is to become a global green energy superpower and not fall behind in the race to net zero, it will need to find ways to reduce barriers to investment.

Claire Smith and Stuart MacGregor are partners at law firm Clayton Utz in Australia