Renewable financing costs tumble suggests Oxford study

Coal financing costs have surged over the last decade, while the cost of investing renewables has fallen sharply, according to a new report from the  Oxford Sustainable Finance Programme.

According to the study, investors are demanding returns four times as high as the payoff required from renewable energy projects to justify the risk of investing in fossil fuels, as the world moves towards cleaner energy sources.

The University of Oxford study found that over the same period, the cost of investing in renewable energy sources such as windfarms has tumbled as clean energy technologies prove they can be cost-effective and lucrative investments.

The research analysed the cost of financing energy projects by tracking the ‘loan spreads’ offered by lenders which determine how high they expect their returns to be to cover the risk of investing.

The report collated financing costs for renewable energy over a five-year period from 2010 to 2014 compared with loan costs between 2015 and 2020. It found that the cost of financing solar farms has fallen by 20%, while the cost of financing onshore and offshore windfarms has fallen by 15% and 33%, respectively.

The research also showed that investors typically require wind and solar energy projects to make returns of at least 10% to 11% to account for the low risk of the investment.

But for investments in coal, returns need to rise to 40% to justify the rising risk that a high-polluting project might be left stranded as governments increase their climate action ambitions.

Investors are demanding higher returns from coal projects, which has caused their financing costs to climb. Loan spreads for power stations and coalmines have increased sharply, at 38% and 54%, respectively.

Dr Ben Caldecott, the director of the Oxford Sustainable Finance Programme and a co-author of the report, said lower loan spreads for renewable energy projects means they could become “even cheaper for ratepayers and taxpayers”.

While European projects have led the way in falling costs for offshore windfarms, Australia has taken the lead in driving down financing costs for onshore wind, and solar financing costs fell fastest in North America.

The report also found that the cost of financing gas-fired power plants climbed 7% over the last decade, but for coal plants costs have surged by 38% over a similar period.

While the financing costs linked to coal mining have climbed by 58%, the cost of financing oil and gas production has climbed by only 3% over the last decade. In the case of offshore oil production, costs have fallen by over 40%.

Dr Xiaoyan Zhou, also from the Oxford Sustainable Finance Programme and the lead author of the report, said that the trend toward climate-conscious investing could see the cost of capital for oil and gas “go the way of coal”, which 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 refinancing risks,” she said.