Cost of capital for coal soars as renewables debt costs continue to fall

Oxford University says study on changes in loan spreads shows financial institutions see coal as high risk, while debt costs for gas power have risen to various extents

Debt financing costs for coal power production and generation have risen dramatically in the past decade, while renewable energy financing costs have plummeted in a shorter time period, according to research by Oxford University. 

According to the research, loan spreads for new coal power stations and coal mines have risen by 56% and 65% respectively, comparing averages over the 2000-2010 period and 2011-20. For new coal mines in Europe, loan spreads have skyrocketed by 134%.

In contrast, solar, onshore and offshore wind have seen loan spreads drop significantly across a shorter time period. Compared to the period from 2010 to 2014, loan spreads from 2015 to 2020 fell by one-third for offshore wind, 20% for solar and 15% for onshore wind.

While coal projects have been more expensive to finance across the board, oil and gas have seen wide regional and sectoral variations, including a 41% decrease for offshore oil drilling and a 68% increase for gas-fired power stations comparing the 2000-10 and 2011-20 averages. 

However, when comparing the 2007-10 and 2017-20 averages, loan spreads for gas power have been more stable, increasing only by 7%. 

The report suggests that lenders are “potentially more ambivalent” towards oil and gas, and that the short-term transition risks – loan maturities for oil and gas average at four years – are less material.

“If these observed trends continue and we see the cost of capital for oil and gas go the way of coal, this could have very significant implications for the economics of oil and gas projects around the world,” said Xiaoyan Zhou, Lead for Sustainable Investment Performance at the Oxford Sustainable Finance Programme and lead author on the research. “This could result in stranded assets and introduce substantial refinancing risks”.

This research is the latest indicator that the cost of capital for fossil fuel producers and power generators is increasing relative to greener energy sources.

Research from Carbon Tracker published at the end of March found that that the value of share issuances from fossil fuel producers has reduced by $123bn, and underperformed the MSCI All Country World Index (ACWI) by 52%.

Analysis of initial public offerings and subsequent share sales by fossil fuel producers from 2012 to 2020 showed that shares have consistently fallen short of the ACWI since Q4 2014.

While strong post-IPO performances by a few Asian coal companies drove coal to outperform the rest of the energy sector, renewables and cleantech producers outperformed the ACWI by almost 54%, gaining $77bn in value.

A number of pension funds and insurers have made big moves in the renewables sector in recent weeks. At the start of April, Norges Bank Investment Management announced a €1.4bn deal with Ørsted, taking a 50% stake in a Dutch wind farm. In the same week, Spanish insurer MAPFRE took 80% ownership in a co-investment vehicle created with Iberdrola, incorporating 230MW of its wind and solar projects. The partnership plans to grow this to 1GW. The Canada Pension Plan Investment Board has also announced plans to consolidate its energy and resources, and power and renewables groups into a Sustainable Energy Group, led by Bruce Hogg, its former head of Power and Renewables.