This post originally appeared on the site of CGC’s campaign for a federal Green Bank.
The investment model used by Green Banks around the world provides renewable energy projects with access to low-cost capital. The principle behind this approach is that reducing these projects’ cost of capital will help lower the cost of the energy they produce. Cheaper renewable energy will be competitive in a wider range of market conditions and geographic locations. This ultimately leads to faster adoption of renewable energy in more places.
In other words, to address climate change, the cost of renewable energy must come down to the point where it competes with fossil fuels everywhere. A new paper in Nature Sustainability uses the language of academia to state this very thing:
“To realize the sustainable energy transition in time to meet the Paris targets and SDG 13, key scenarios show that it is necessary that RE are deployed rapidly, displacing FF-based electricity in the mid- to long-term, and eventually stranding FF-assets. For this to happen, investments in subsidy-free new RE capacity (relying on income from the wholesale market) need to remain attractive. To this end, the LCOE of new RE plants need to be lower or equal to the short-run marginal costs of the price-setting plants in wholesale markets.”
The paper goes on to underscore exactly why and how the Green Bank approach works. It examines the opposite question: What would happen if interest rates in Europe were to rise, effectively increasing the cost of capital for these projects? The researchers find that the levelized cost of energy (LCOE) from those projects would increase significantly, up to 11% for solar projects and 25% for wind projects. This could pose a major hinderance to the expansion of renewable energy.
The researchers further discuss the role of capital costs in the rapid decline of renewable energy costs in recent years. This cost decline is commonly attributed to improvements in renewable energy technology, and while this is part of the reason, it’s far from the full story. The researchers write:
“New data for Germany show that the past RE cost reductions not only stem from technological innovation but also, to a substantial extent, arise from improved financing conditions for RE power plants, particularly lowered long-term interest rates (IRs). Lower IRs translate directly into lower cost of debt and equity, which lowers the LCOE of capital-intensive RE investments.”
These findings have important implications for policies designed to increase the growth of renewable energy. Effective climate and energy policies should consider all the factors that can help or hinder a renewable energy project. That can include research and development funding to improve the efficiency of the technology, and carbon pricing to ensure that the environmental harms of competing fossil fuels are priced into the energy they produce. But the policy platform would be incomplete without an institution like a Green Bank that can focus on making low-cost capital available to clean energy projects.
The one area the paper could be developed further is in its assessment of what it refers to as “subsidized loans.” The researchers raise the concern that subsidized loans may “crowd out” private capital; in other words, replace investments that private finance would have made if not for the availability of low-cost public capital. The design of existing Green Banks actually already takes this concern into account. Green Banks’ activities are focused on creating entirely new opportunities for private investment, expanding the market rather than merely replacing private investment. For example, the New York Green Bank specifies in their Business Plan that they consider “additionality” as part of their investment criteria, meaning that Green Bank’s involvement adds value additional to what would otherwise have happened given the state of the private market.
A National Climate Bank built around this model could be a major source of capital to U.S. state and local Green Banks, while also mobilizing investment directly into large and complex clean energy projects. These flows of capital would benefit private investors, by expanding the number of economically viable projects which can yield their desired returns. Most importantly, they would accelerate the clean energy transition to the pace required to meaningfully address climate change. In a world where little will exists to impose higher energy prices on consumers through regulatory means, the low costs made possible by Green Banks will be key to deploying renewable energy.
Update: Free read-only link generously provided by the study authors, here!