Renewable energy financing conditions in Europe: survey and impact analysis

This report is framed within the discussions on the costs of capital for renewable energy projects and the implementation of auctions for renewable energy sources in Europe. The sections of the report provide qualitative and quantitative insights intended to contribute to a better understanding of renewable energy financing and energy and climate policy in the European Union.

Several interviews were conducted between September 2019 and April 2020 and the results show that there is still a considerable gap between EU Member States regarding their Weighted Average Cost of Capital (WACC) for wind and PV projects, where some countries as Germany and Denmark present low WACC values and countries as Greece and Latvia have instead higher costs of capital.

However, compared to 2014 levels, most of EU countries reduced their WACC dramatically, which is a positive sign for a further deployment of RE projects. The analyses showed that multiple reasons are behind the observed WACC decreased. Not only lower interest rates, technology improvements and lower country risks explain the downward trend, but other surprising reasons are also part of the picture.

Interviewed experts pointed out to three phenomena. First, capital is not only raised from EU sources, but it is also flowing from international sources, such as North America and Asia markets, which could generate spill overeffects in EU countries where the costs of capital are higher than the costs of international investments.

Second, the non-standard monetary policy of the European Central Bank after the 2008 crisis has resulted in abundant capital which triggered lower loan fees and increased competition for business cases. Third, new market players, such as energy intensive companies, are under policy and regulatory pressure to green their portfolios and are consequently shifting to RE through, for example, corporate Power Purchase Agreements, which could add more competitive pressure on the market.

An econometric analysis complements these findings. A set of variables potentially explaining the rise and fallof the WACC are derived from literature and interviews,and comprised risk aspects as well as market aspects and learning effects. The results confirm findings of the interview: main driver of the WACC is the country risk, but experiences with renewables are also significant: The introduction of auctions did not increase the WACC, rather the opposite, increasing experiences in auctions seem to have a dampening effect on the WACC.

Similarly, experiences of a country with deployment of renewables tend to reduce cost of capital. Finally, even though the variable of remuneration schemes displays no significance, the schemes indirectly reveal an effect through their impact on the significance of auctions, suggesting, that remuneration schemes that reduce the exposure to market risks tend to have a decreasing effect on the WACC.

To estimate the effects of different financing conditions on support costs, we developed a cash flow model that calculates minimum bid levels and debt shares, given several optimisation constraints. Based on this we find that Member States should mainly focus on de-risking debt financing, as this would deliver the largest support costs savings and WACC reduction.

Interest rates have decreased in Europe largely due to the expansionary monetary policy of the ECB. However, instead of additionally/marginally decreasing cost of debt, de-risking policies should also aim at increasing loan maturities and debt size. Such debt de-risking could be best achieved by adopting remuneration schemes that decrease the volatility of the projects cash flows, such as contracts for difference.

Furthermore, we find that de-risking cost of equity –through relaxing pre-qualification requirements, reducing bid bonds, prolonging realisation rates etc. -would not yield very large additional benefits in terms of support cost reduction. Therefore, policymakers should de-risk auction designs in the pre-bidding stage –decrease bid bond levels, relax pre-qualification requirements etc. –only if they have policy goals other than cost-efficiency, such as increasing actor diversity.