Financing costs and the competitiveness of renewable power

Relative to fossil fuels, the cost of renewables is more sensitive to the cost of capital (CoC). Here, we analyze the impact of changing financing costs on the competitiveness of renewable power. Following a decade of low rates, interest rate rises occurred in developed and developing economies from 2022. In the U.S., this added 9% to the levelized cost of electricity (LCOE) of combined cycle gas turbines, compared to 18% for solar photovoltaics (12% with tax credits). At present, reductions in CoC would have limited impact on competitiveness in Europe, given high fuel and carbon prices, but in the U.S., China, and India, reductions can facilitate convergence in LCOE between certain renewable technologies and lower-cost fossil fuel power. Consequently, policies reducing renewable CoC can accelerate cost parity with fossil fuels. However, policies that increase fossil fuel CoC are less effective, given the lower sensitivity to financing costs.