If you've been reading the latest reports from the IPCC, you would have been reminded that the global shift to a low-carbon (and climate resilient) economy needs to happen fast, real fast.
In particular it has to happen in the countries that are building vast energy systems, especially China and India. But different financing tactics are needed in different economies.
In the high interest rate-climate of places like India, the cost of capital can add up to two-thirds of the lifetime financing cost of a solar plant. Cut commercial interest rates in half to even developed world higher-risk levels, say 6%, and you can save up to a third the lifetime cost of the asset.
Given that for solar, wind, hydro and other renewable energy 90% of investment required is upfront, this is one helluva of a race handicap when compared to coal and gas fired power plants, with much lower capex costs but higher input costs. Fossil fuel plants end up looking much easier to pull off, even with some risk around future volatility in coal and gas prices.
Dave Nelson and Gireesh Shrimali of the Climate Policy Initiative have recently been exploring just how best to tackle to issue of the cost of capital for renewables in emerging markets, notably India. They've produced a couple of very useful papers that highlights the highly efficient role governments, especially rich countries, can play in lowering interest rates.
In a paper published in March about India they find that a combination of reduced interest cost and longer terms for debt (extended-tenor) is the most cost-effective policy to grow renewables.
Their January paper on "Finance Mechanisms for Lowering the Cost of Renewable Energy in Rapidly Developing Countries" lays out the issues and the solutions.
They propose two solutions:
- Bring in developed world capital to these markets at lower interest rates. While the higher risks and weaker capital markets in many developing world countries present barriers that increase costs, these risks can be managed and lower financing costs provided, by linking a portion of renewable energy feed-in-tariffs or contract prices to foreign currencies. Yes yes yes.
- Subsidize renewable energy project debt to bring interest rates down to the levels of developed world debt. "Incentives needed to make projects attractive to renewable energy project developers in developing world economies could cost 30% less if delivered through subsidized debt rather than through higher tariffs or subsidies on top of wholesale energy prices." Yes yes yes again!
Have a read and you'll understand the incredibly powerful effect that bringing down interest rates can have on making renewable energy viable where it currently isn't. Magic.
