Adverse effects of rising interest rates on sustainable energy transitions

Abstract

Increasing the use of renewable energy (RE) is a key enabler of sustainable energy transitions. While the cost of RE have substantially declined in the past, here we show that rising interest rates can reverse the trend of decreasing RE costs, particularly in Europe with its historically low interest rates. In Germany, interest rates recovering to pre-financial crisis levels within 5 years could add 11% and 25% to the levelized cost (LCOE) of solar PV and wind onshore, respectively, with financing costs accounting for roughly one-third of total LCOE. As fossil fuel-based electricity costs are much less and potentially even negatively affected by rising IRs, the viability of RE investments would be markedly deteriorated. Based on these findings, we argue that rising interest rates could jeopardize the sustainable energy transition and propose a self-adjusting thermostatic policy strategy to safeguard against rising interest rates. The Energy Politics Group (EPG) within the Department of Humanities, Social, and Political Sciences of ETH Zurich investigates questions related to the governance of technological change in the energy sector.

Low‐carbon transition risks for finance

“…5 5 Discussions of green bubbles have to date taken place mainly outside academia, for example, in central banking circles (Regelink, Reinders, Vleeschhouwer, & van de Wiel, 2017). If anything, academic research has considered the reverse direction of causation, how the recent financial crisis has either slowed the progress of the green transition (Falcone, Morone, & Sica, 2018; Geels, 2013) or accelerated it through subsequently low interest rates that lowered the costs of capital intensive low‐carbon power generation (Schmidt et al, 2019). …”

Renewable Energy Deployment and COVID-19 Measures for Sustainable Development

“…Regarding the possible impact on the general population in China, a survey of 1210 people revealed that out of the 53.8% who rated the psychological impact of the situation, 16.5% reported depressive symptoms, 28.8% reported moderate to severe anxiety symptoms and 8.1% reported stress levels between moderate and severe [8][9][10][11][12][13][14][15][16][17][18]. It is also indicated that the framing effect includes numerous effects on sustainability, and various perceptual and cognitive processes can be used [9][10][11].…”

“…The various restrictive policies are expected to reduce the sustainable demand for renewable energy and led to a drop in economic growth, slowing the growth of COVID-19 infections in 2020 [14,15]. This article also assesses to what extent the observed slowdown in the spread from March 2020 to September 2020 is due to the impact of politics and the extent to which the peculiarities of the interaction of the virus itself and the external environment.…”

“…Most empirical studies are on the relationship between energy dynamics and economic growth. For example, Kanas found a significant positive effect of the stock market on exchange rate changes in all countries except Germany [14]. It described the effect of the flow of volatility between the renewable energy market's economic growth in the COVID-19 pandemic period [9].…”

Spurring low-carbon electrosynthesis through energy and innovation policy

“…Figure 2 B demonstrates how increased financing costs result in much higher levelized costs of electricity for photovoltaic projects (the same is true for wind). A policy recommendation is therefore to design policies that enable low-cost financing by allowing independent power producers, by adopting (or continuing) renewable energy auctions, and by avoiding policy volatility/reversal, which increases financial risk ( Egli, 2020 ; Schmidt et al., 2019 ).

Figure 2 A comparison of the cost of different power generation technologies (A) The composition of the levelized cost of electricity of renewable and fossil fuel-based technologies.

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