Capital Costs: New Battleground for Clean Energy
- Anonymous
- 1 day ago
- 3 min read
Special thanks to Christian Wilison, Gireesh Shrimali, and Ben Caldecott for their paper Financing costs and the competitiveness of renewable power (https://doi.org/10.1016/j.isci.2025.113777).
Capital costs now play a decisive role in determining whether solar and wind can compete with fossil fuels. Rising interest rates have increased borrowing costs for all technologies, but renewables have been hit twice as hard. Lowering the weighted average cost of capital (WACC) can significantly accelerate renewable competitiveness. COP30’s “Baku to Belém Roadmap to 1.3T” offers a critical opportunity to mobilize capital in ways that directly reduce financing risks and make each dollar more impactful.
Why This Matters
If WACC stays high, then LCOE won’t fall—no matter how cheap technology becomes.
If financing stays expensive, then renewables cannot close the cost gap with fossil fuels.
If climate finance ignores capital costs, then the 1.3T goal at COP30 won’t deliver real-world deployment.
Are Renewables Riskier to Finance?
Following the 2008 financial crisis, lenders charged renewable projects around 100 basis points less than fossil fuel plants. This wasn’t charity: solar and wind eliminate fuel price volatility and lock in predictable revenues through long-term power contracts. Banks calculated the risks and found renewables safer bets than gas or coal projects facing carbon policy uncertainty.
From 2021 to 2024, median advanced economy central banks raised base rates from near zero to 5% to fight inflation and economic downturn. This lifted financing costs for everyone: For instance, North American solar and wind borrowing costs surged from under 2% in 2021 to 6.5% in 2024. Both renewables and fossil fuels felt challenges, but the impact was not equal.
What Happened When Interest Rates Increased?
Renewable projects are characterised by relatively high upfront CAPEX requirements, with minimal ongoing expenses. Gas plants, however, cost less to build initially but spend the majority of their costs on fuel over 20-30 years of operation. When U.S. interest rates doubled from 2021 to 2024, this capital structure became a liability: LCOE for solar jumped 18% purely from higher financing costs, while gas plants’ LCOE increased only 9%. Renewables’ dependence on upfront borrowing made them twice as sensitive to interest rate shocks.
However, Inflation Reduction Act tax credits such as the investment tax credits (ITC) and production tax credits (PTC) reduce the sensitivity of renewables to interest-rate changes. By lowering upfront capital needs or offering production-based incentives, these credits shield solar and wind from financing volatility. As a result, projects with tax support experience smaller LCOE increases even when interest rates rise.
Does Cheaper Financing Change the Game Everywhere?
Changes in WACC affect regions very differently. For example, in Europe, renewable energy remains cheaper than fossil fuels under all financing scenarios because high natural gas and carbon prices keep conventional generation expensive. In the US, however, lower WACC can narrow the cost gap between solar photovoltaics and combined-cycle gas turbines, making parity more achievable. China’s already low WACC limits gains for onshore renewables, but offshore wind remains highly sensitive. India sees the largest impact, with lower WACC bringing onshore wind close to coal parity.
Lowering WACC has limited impact in Europe, but in the US, China, and India, it can substantially improve renewable competitiveness. These regions show meaningful convergence between solar photovoltaics, wind power, and lower-cost fossil fuels when financing costs fall.
Baku to Belém Roadmap to 1.3T: How to make each dollar count?
COP29 in Baku failed to agree on a new global climate finance goal, leaving countries without a unified target for supporting mitigation, adaptation, and loss and damage. COP30 aims to finish the job by finalizing the “Baku to Belém Roadmap to 1.3T,” which seeks to mobilize 1.3 trillion dollars per year in climate finance by 2030. Climate finance has become one of the most important priorities under the UNFCCC.
Mobilizing 1.3 trillion dollars annually is an enormous challenge, especially in a world shaped by rising protectionism and fragmented global cooperation. But insights from earlier sections point to a way to maximize the impact of whatever funds are raised: lowering capital costs.
To make each dollar count, COP30 financing should target interventions that reduce financing risks, such as credit guarantees, currency hedging facilities, and long-term contracts that stabilize revenue. Directing funds toward lowering WACC can deliver greater impact than technology subsidies alone, helping renewable energy reach cost parity with fossil fuels in regions where it matters most.
Take Action
Investors: Prioritize projects that lower exposure to interest-rate volatility and use tools such as fixed-rate debt or long-term contracts.
Companies: Assess how financing costs shape renewable procurement strategies and target markets where lower WACC accelerates cost parity.
Development Banks: Channel concessional finance toward regions where high WACC remains the main barrier to renewable deployment.
COP30 Negotiators: Ensure the 1.3T roadmap directs funds toward financing-risk reduction rather than technology subsidies alone
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