Europe: Mapping the cost of capital for renewable energy investments in the EU

These are the findings of the ‘DiaCore project’, funded by the Executive Agency for Small and Medium Enterprises (EASME). The research was led by Ecofys, Fraunhofer ISI, eclareon, EPU-NTUA, TU Wien and LEI. The project team is the first to estimate the costs of capital for onshore wind energy projects across the 28 EU Member States.

The European Union has set itself a binding target of “at least” 20 percent renewable energy in final energy consumption by 2020. To meet this target, 60 to 70 billion euros annual investments are needed[1]. Renewable energy technologies are capital-intensive, hence the cost of capital plays an important role in investment decisions and costs of target achievement.

The cost of capital is determined by the cost of debt and the cost of equity. In 2014, the cost of equity for onshore wind projects ranged between 6 percent (in Germany) and more than 15 percent in Estonia, Greece, Latvia, Lithuania, Romania and Slovenia. The cost of debt varied between 1.8 percent in Germany and 12.6 percent in Greece. This results in weighted average cost of capital (WACC) ranging from 3.5 to 12 percent.

“There is a growing gap among EU Member States on the financing of renewable energy projects. From the very start of a project, project developers in the EU do not face the same financing conditions. Why does the cost of capital vary so much? Because of the risks for investors: if an investment is risky, the cost of capital increases”, explains Ecofys Principal Consultant David de Jager.

Based on interviews with more than 110 banks and project developers in the EU, the consortium finds that next to the generic country risk, the main risk for investors in renewable energy is the policy-induced risk, hence the design and the reliability of renewable energy support. Unstable policies, such as sudden retroactive changes, automatically increase the cost of reaching renewable energy targets.

Calculations based on the Green X Model show that if all countries would have the same renewable energy policy risk profile as the best in class, the EU Member States could reduce the policy costs for wind onshore by more than 15%. A reduced country risk could lead to greater savings.

The report can be downloaded at DiaCore webpage.

[1]Financing Renewable energy in the European Energy market, Ecofys, Ernst & Young, Fraunhofer ISI, TU Vienna, 2010