- The cost of loans related to coal power plants are on the rise.
- Meaning that the cost to finance one is the highest it has ever been.
- The loan spread for coal mines and coal-fired power plants rose 38% and 54% between 2010 and 2020, as the global economies look for more sustainable investment.
For decades, infrastructure for coal, oil, and gas was seen as a relatively safe investment delivering strong returns, and renewables barely attracted the private sector’s attention. While banks put up trillions of dollars financing new fossil-fuel assets, from mines to power plants, government funds furnished about 50% of the annual investment (pdf) in America’s solar sector as recently as 2004.
Today, that equation is reversing. The cost to finance new fossil-fuel infrastructure, especially coal, is rising, while the cost for new renewables is falling fast, according to a new study by the Sustainable Finance Programme at Oxford University in the UK.
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The study focused on the cost of debt, since that’s the biggest cost factor for new energy projects. The researchers measured something called the loan spread, or the difference between lending and borrowing rates. Effectively, this is the gap between what a bank pays to depositors versus the interest rate it charges borrowers. It reflects how much risk the lenders to energy firms (85% of them are banks) are willing to accept to make loans: the bigger the spread, the higher the risk.
Lenders now appear to be charging for climate risk
High-carbon businesses are borrowing money at much higher rates in 2020 compared to 2010. Over that decade, the loan spread for coal mines and coal-fired power plants rose 38% and 54%, respectively. Over this same period, renewables saw a steep drop in their loan spread, with average declines of 12% for onshore wind, 24% for offshore wind, and 20%, for solar photovoltaics. Only offshore oil bucked the trends for fossil fuels.
The Oxford researchers analyzed loans for 2,072 energy deals in 118 countries between 2000 and 2020. They found that money for wind and solar projects came with a loan spread of about 200 basis points (bps)—about half the cost of those for a coal power plant (364 bps) or a coal mine (426 bps).
A higher cost of capital for fossil-fuel assets
“Changes to the cost of capital reflect changes in real and perceived risks by lenders and investors,” says study co-author Ben Caldecott, a professor who directs the UK Centre for Greening Finance & Investment at Oxford University. “We believe it is energy transition risks, including climate-related risks, that are a big driver of these changes in financing costs,” while renewables are benefiting from greater familiarity and experience.
What's the World Economic Forum doing about the transition to clean energy?
Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.
Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.
Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.
Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.
To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.
Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.
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For now, oil and gas have emerged relatively unscathed, seeing only moderate increases in lending costs. Caldecott theorizes this is because of coal’s rapid displacement by natural gas, along with a divestment trend among institutions, activist campaigns against coal, and the industry’s vulnerability to any future carbon pricing or regulation. “We don’t see anywhere near the same coherence or stringency of policy packages targeting oil and gas production or gas-fired power generation as we do with coal,” Caldecott notes.
That may change, though. At least one-fifth of the world’s 2,000 largest public companies have already committed to achieving net-zero emissions, according to the nonprofit Energy and Climate Intelligence Unit. Europe, China, and the US have all announced (with various degrees of certainty) targets to eliminate their net emissions within the next three decades. A push to phase out carbon emissions any faster will force banks to charge oil and gas far more to take their money.