Europe: No. 1 in Sustainable Energy

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Behind much of the growing interest in alternative energy is European Commission policy. The EC outlined plans early this year to produce 20% of the EU's energy from renewable sources by 2020. Such regulatory certainty has helped to reassure investors, who still face significant risks developing new types of energy technology. According to New Carbon Finance's Chief Editor Angus McCrone, subsidies from European governments have made the EU the No. 1 investment destination in the sector, although other countries, particularly the U.S., are quickly catching up.

Global Markets for Sustainable Energy

As sustainable energy becomes more mainstream, Europe's tight hold on the sector could be threatened. Simon Shaw, managing director of London-based EEA Fund Management, which has more than $1.5 billion invested in renewable projects, believes North America will soon attract more investment than Europe. "Regulatory regimes around the world have shifted towards alternative energy," Shaw says. "Over the next 10 years, the majority of governments will support this technology."

Despite the growing threat from competitors, European companies remain out front for now and hope to stay ahead by focusing new growth in international markets. Ocean Power Delivery, a Scottish company that has designed a turbine powered by wave energy, has targeted North America as a key battleground. Growth in the U.S., according to the company's Business Development Director Max Carcas, could propel the wave-power sector to a $10 billion-per-year industry by 2012. Similarly, Germany's Q-Cells, which has gone from employing 19 people in 2000 to a projected 5,000 in 2010, is trying to diversify into Asian markets, which are expected to be worth $36.1 billion by 2010. For many companies, the rising awareness—and growing competition—for alternative energy is good for business as emerging markets offer new commercial opportunities. Investment in sustainable energy in India, for example, has jumped 160% over the last three years, while cash for such projects in China has increased by a staggering 2033%, to $6.1 billion, in the same period.

Expanding Capacity

Along with overseas markets, European companies have a steady supply of projects in their home countries to help shore up their bottom lines. Currently more than 25,000 wind farms are operating throughout Europe, and capacity is expected to double by 2015. According to the European Wind Energy Assn., the industry will be worth $109 billion by 2020. Similarly, solar panel capacity in Germany, the world's largest market with annual sales over $5 billion, is expected to reach 4,500 megawatts by 2010—the equivalent of almost six coal-fired power stations. Government subsidies and beneficial electricity tariffs are also making energy from marine and biomass technologies increasingly cost-effective.

The rapid increase in investment over recent years has made such advances possible. For as the public's imagination has been caught by the fight against climate change, so too have European companies been won over by the high rates of return offered by the renewable energy sector. No one would say firms are making investment decisions simply to save the planet, but if that's a by-product of the growing investment in alternative energy, so much the better.

Scott is a reporter in BusinessWeek's London bureau. Flanagan is an intern in BusinessWeek's Paris bureau.