Fall in cost of financing renewable projects: Oxford University


When comparing 2007-10 with 2017-20 renewables have seen their loan spreads fall by an average of 12 per cent for onshore wind and 24 per cent for offshore wind. This has accelerated since 2015 as renewables deployment has increased, with solar PV, onshore wind, and offshore wind financing costs falling by 20 per cent, 15 per cent and 33 per cent (comparing 2010-14 with 2015-20).

The research also observes regional differences. Over this time period, there was a 39 per cent reduction in financing costs for offshore wind in Europe; 41 per cent, 14 per cent, and 11 per cent reductions for onshore wind in Australia, North America, and Europe respectively; and 32 per cent and 27 per cent reductions for solar PV in North America and Europe respectively.

In contrast to renewables, comparing 2007-10 with 2017-20, coal power stations and coal mines have seen their loan spreads increase sharply, at 38 per cent and 54 per cent respectively. This trend holds when comparing 2000-10 with 2011-20, with loan spreads rising 56 per cent and 65 per cent respectively.

It finds that the financing costs for coal mines increased the most in developed countries, with loan spreads increasing by 80 per cent in North America, 134 per cent in Europe, and 71 per cent in Australia when comparing 2000-10 with 2011-20.

However, in oil and gas, changes to financing costs are much more mixed and have in many cases decelerated over the last decade. For example, while loan spreads for gas-fired power stations rose by 68 per cent from 2000-10 to 2011-20, an increase of just seven per cent occurred over the past decade whereas coal power rose 38 per cent (comparing 2007-10 with 2017-20).

Across regions, there have been large differences: Gas-fired power saw a 23 per cent reduction in loan spreads in ASEAN but a 16 per cent increase in North America when comparing 2000-10 with 2011-20. But over the past decade, loan spreads for gas-fired power have decreased by 28 per cent in North America (comparing 2007-10 with 2017-20).

In terms of oil and gas production, while financing costs worsened if you compare 2000-10 with 2011-20, over the past decade, loan spreads have been largely stable, rising by only three per cent for oil and gas production.

In fact, loan spreads for certain sub-sectors fell over this period, such as minus 41 per cent for offshore oil. This suggests that financial constraints on oil and gas have not materialised in the same manner as coal.

Ben Caldecott, co-author and Director of the Oxford Sustainable Finance Programme and the Lombard Odier Associate Professor of Sustainable Finance at the University of Oxford said, “This is good news for the cost of renewables, as financing costs are a key determinant of overall costs.

“Falling loan spreads for renewables mean these projects will become even cheaper for ratepayers and taxpayers, which is a good thing for rapidly decarbonising the energy sector.”

Xiaoyan Zhou, Lead for Sustainable Investment Performance at the Oxford Sustainable Finance Programme and the lead author said, “If these observed trends continue and we see the cost of capital for oil and gas go the way of coal, this could have very significant implications for the economics of oil and gas projects around the world. This could result in stranded assets and introduce substantial re-financing risks.”

Caldecott added, “Climate-related transition risks in the energy sector are sometimes viewed as distant, long-term risks. Our findings support the conclusion that they are being priced today: increasing costs for coal and reducing them for renewables. The challenge is that this isn’t happening evenly and certainly isn’t occurring at the pace required to tackle climate change.

“In particular, financing costs will need to rise for oil and gas projects.”

–IANS

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