Relative to fossil fuel power, renewables are sensitive to changes in the cost of capital (CoC). After decades of low financing costs, interest rates have risen sharply in developed economies post-COVID19.
We investigate the implications of changing CoC on the competitiveness of renewables, with impacts differing by region. In the U.S., higher rates added 18% to the levelised cost of electricity (LCOE) of solar photovoltaics’ compared to 9% for combined cycle gas turbines.
However, with tax credits in the Inflation Reduction Act, solar LCOE increased by only 12%. In the future, falls in CoC will have little impact in Europe, given the high cost of fossil fuel power, but in the U.S., China, and India, differences in LCOE between certain renewable technologies and fossil fuels are minimised.
Consequently, falls in interest rates or targeted policy interventions that reduce the CoC of renewables can facilitate cost parity with fossil fuels.