Investors turn to renewable energy projects, coal financing costs rise

Investors shift towards increasingly mainstream renewable energy projects is driving up financing costs for those focused on coal.

According to new Oxford University research tracking how the financing costs for energy projects, measured through loan spreads, have changed over the past 20 years, investors are choosing more and more to invest in greener options and shunning fossil fuels.

Investors typically require wind and solar energy projects to make returns of at least 10.0% to 11.0%, reflecting the perceived low risk of such investments. The required rate of return on investments in coal on the other hand has rocketed to 40%, due to the need to justify what is seen as the ever rising risk around high-polluting projects.

Comparing 2007-10 with 2017-20, renewables had seen their loan spreads fall by an average of 12 percentage points in the case of onshore wind and by 24 points for offshore wind. That trend had accelerated since 2015, as the deployment of renewables increased, with solar photovoltaic, onshore wind, and offshore wind financing costs falling by 20%, 15% and 33%, respectively, if one compared 2010-14 with 2015-20.

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

Loan spreads in oil and gas production meanwhile had been largely stable, rising by only 3%.

According to the same study, 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 explained: "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."