Financing costs and the competitiveness of renewable power

Area of Science:

• Energy Economics
• Renewable Energy Policy
• Climate Change Mitigation

Background:

• Renewable energy costs are highly sensitive to the cost of capital (CoC), unlike fossil fuels.
• Global interest rate increases since 2022 have elevated financing costs for power generation.

Purpose of the Study:

• To analyze the impact of fluctuating financing costs on renewable power competitiveness.
• To evaluate the effectiveness of policies aimed at reducing the cost of capital for renewables.

Main Methods:

• Comparative analysis of Levelized Cost of Electricity (LCOE) for different energy technologies.
• Modeling the impact of changes in the cost of capital (CoC) on LCOE across various regions.

Main Results:

• In the U.S., rising interest rates increased LCOE by 9% for gas turbines and 18% for solar PV (12% with tax credits).
• Reductions in CoC could help U.S., China, and India achieve LCOE parity between renewables and fossil fuels.
• Policies increasing fossil fuel CoC are less effective due to lower financing cost sensitivity.

Conclusions:

• Policies that lower the cost of capital for renewable energy are crucial for accelerating cost parity with fossil fuels.
• Targeted financial incentives can enhance the competitiveness of renewable power sources in major economies.