Can cleaner energy providers access cheaper capital?
An Oxford Sustainable Finance Group report provides a comprehensive analysis of how the energy transition affects the cost of capital across different regions and sectors.
They highlight striking differences across regions and industries, including:
- Renewable electric utilities globally have a lower cost of capital, with a debt cost of 6%. Similarly, the cost of equity is lower for renewable utilities (15.2%) compared to fossil fuel utilities (16.4%).
- Coal mining has the highest cost of capital within the energy sector, with the cost of debt increasing to 7.9%.
- In Europe, low-carbon electric utilities consistently have a lower cost of capital than high-carbon peers, indicating successful climate change policies.
- In North America, the cost of capital for low-carbon and high-carbon electric utilities is similar, continuing a trend observed in previous reports.
- In China, low-carbon utilities have a higher cost of capital than high-carbon peers, reversing trends in other regions.
- Policies play a significant role in influencing the cost of capital: in regions with strong climate change policies, such as Europe, the cost of capital for renewable firms is lower.
These results imply that climate-friendly actions have effectively decreased the risk for low-carbon generation.
They highlight the importance of policy interventions in shaping the financial landscape for renewable energy and underscore the financial challenges fossil fuel-based utilities face, especially coal mining.
Critics might question the extent to which policy alone can influence the cost of capital, suggesting that other factors, such as market demand for renewables, also play critical roles.