There has been a reversal of fortunes with respect to the financing costs of renewable energy firms compared to non-renewable energy (fossil fuel) firms, according to research by Karol Kempa, Ulf Moslener, and Oliver Schenker to be presented at the annual congress of the European Economic Association in August 2020.

Before 2007, the financing costs are 26% higher for firms developing renewable energy technologies compared to firms in non-renewable energy sectors, which corresponds to a mark-up of, on average, 41 basis points (bps). Between 2007 and 2018, however, renewable energy firms paid between 19% - 27% (73 - 92 bps) less for their loans. 

These findings indicate that risks in the renewable energy sector have declined in the last two decades as these technologies and markets have matured and their business risks are better understood. In contrast, firms focusing on fossil fuels and non-renewable energy technologies are perceived as increasingly risky by banks. 

Environmental policies and the development of the financial sector, in particular financial institutions, appear to be important for these identified developments: the more stringent environmental policies and the further developed financial institutions, the lower are the financing costs of renewable energy firms.

Limiting global warming to well below 2°C, as stated in the Paris Agreement, requires a transition to a low-carbon economy almost exclusively using of renewable and clean energy technologies. Substantial investment is required to generate new or improve existing infrastructure in order to increase the availability or reduce the costs of these energy sources.

Recently, scholars stressed the importance of financial markets for this transformation. The major source of external funding to finance firms' operations and investments is debt. Higher risks of low-carbon sectors compared to established carbon-intensive sectors can lead to higher financing costs or even credit rationing. Consequently, higher costs of debt for renewable energy firms compared to fossil fuel firms might impede the low-carbon transition.

The researchers empirically analyse the differences between the costs of debt of firms developing and producing renewable energy technologies and of non-renewable energy firms in OECD countries. The analysis relies on three types of data: (i) bank loan data, (ii) characteristics of borrowing renewable and non-renewable energy firms, and (iii) country level data on environmental policy and financial sector development.

The data on loan spreads (defined as basis points over London Interbank Offered Rate (LIBOR) or equivalent rate the borrower has to pay) across all 1,860 loans in the sample reveals that, before 2007, renewable energy firms face notably higher loan spreads compared to non-renewable energy firms. This gap, however, closes over time and even reverses after 2011, where costs of debt of renewable energy firms are on average below those of non-renewable energy firms. Further statistical analyses explicitly accounting for loan and firm characteristics confirm these observations. 

The findings have important policy implications, e.g., for currently still new and immature clean technologies, such as carbon capture and storage or tidal energy, which might be important to decarbonise the global energy system. Firms developing such low-carbon technologies likely face a mark-up on their financing costs compared to firms producing existing carbon-intensive technologies.

Policy can promote this process through two channels: firstly, both ambitious and credible environmental and climate policies increase banks’ confidence in the sustainability of the clean energy sector. Secondly, policy should increase financial institutions' capacity to assess and manage risks associated with new and immature low-carbon technologies, in particular in emerging and developing countries with less developed financial institutions.



Karol Kempa, Frankfurt School of Finance & Management


Tel.: 0049 (0)69 154008 645

Twitter: @kempa_karol


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