As Investors Opt for Renewables, the Financing Costs for Coal have Surged - Nick Whittle

I was struck by an article in the British press last week, which may not yet have been reported elsewhere, that loan spreads for coal projects have increased substantially over the past ten years. A study released by the Oxford Sustainable Finance Program at the University of Oxford† found that the spreads required by lenders for such projects have risen by 54% over the period, because of the perceived risk that such fossil fuel projects now run counter to government climate policies and are in danger of becoming stranded assets.

The Director of the Oxford Sustainable Finance Programme and a co-author of the report, Dr Ben Caldecott, said that the jumps in financing costs for coal mines of 54%, and for coal-fired power plants of 38%, prove that as we transition to a renewable energy future the investment risk of fossil fuel projects are already priced in by markets, even when the current perception is that such risks remain distant. Dr Caldecott added that “the challenge is that this isn’t happening evenly and certainly isn’t occurring at the pace required to tackle climate change. In particular, financing costs will need to rise for oil and gas projects.”

Despite the clear message from the capital markets that coal is now viewed as a significantly higher risk investment than either oil and gas or renewables, the report also showed that financing costs for oil and gas service projects rose by only 3% and for oil and gas production projects have risen by 7% over the decade. The authors of the report point out that investors appear less ambivalent to oil and gas projects, which with average loan maturities of 4 years, exhibit less short-term transition risks than coal. Dr Xiaoyan Zhou, the report’s lead author, noted that the ESG trend in investment could drive the cost of capital for oil and gas projects to “go the way of coal,” and “this could result in stranded assets and introduce substantial refinancing risks.”

On a more positive note, the report also highlights that by comparison, financing costs for solar farms had fallen by 20%, while for onshore and offshore wind farms had declined by 15% and 33% respectively between 2015–2020 compared to the previous five-year period. These falls in loan costs for renewables have been uneven across the world, and reflect regional policy differences and climatic conditions. Capital costs for offshore wind farms declined the most in Europe, while Australia led the way in reducing loan costs for onshore wind projects, and North America was at the forefront for solar.

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