The importance of fossil fuel divestment and competitive procurement for financing Europe’s energy transition

Abstract:

For Europe to meet its climate targets, large financial investments in the energy sector are required. Cost reductions for low-carbon power generation are critical to achieve these targets. Particularly pertinent are decreases in financing costs as measured by the WACC. The cost of capital has a bigger impact on the LCOE for renewable energy than for fossil fuel-based power production.

It is therefore essential that policy makers and project developers increase their understanding of what drives the cost of capital, including (perceived) investment risks. We believe two areas deserve special attention: (1) the use of competitive bidding for renewable energy projects, which can put downward pressure on their financing costs, and (2) the divestment from fossil fuel projects, which can drive up their financing costs. Using the integrated assessment model TIAM-ECN we demonstrate that Europe’s future energy system is highly sensitive to the level of financing costs.