25.10.2019 | ETH study on the competitiveness of renewable energies

Profiting from low interest rates

Wind power and solar energy play an important role in energy system restructuring. Renewable energies have become competitive. However, they are more capital-intensive than fossil energy sources. Accordingly their costs would go up if the interest situation were to return to normal. For solar plants, costs would increase by up to 11 per cent, and for wind power plants by up to 25 per cent. The results of a new study.

In recent years, non-subsidised, competitive photovoltaic plants have been built in many European countries, such as Spain, Portugal or Germany. This has also been made possible by Axpo with its focus on Power Purchase Agreements (PPA) (see adjacent article).

Among other things, this expansion can be attributed to technological advancements and lower prices, in particular in the area of solar plants (see box below). According to a study by the ETH Zurich and the Postdam Institute for Climate Impact Research, alternative energy power production costs in many European countries are close to the marginal costs of existing gas-fired or coal-fired power plants. On the other hand what is often overlooked is that low capital costs have also had an impact. Low interest rates have increased the profitability of renewable energies.

What if...

So what would happen if interest rates go up again? Since renewable energies are more capital-intensive than fossil energy sources, costs would go up more strongly in such a scenario. Researchers calculated various different interest scenarios and their impact on the costs for renewables:

  • If interest rates were to return to pre-financial crisis levels, power production costs in Germany would go up by 11 per cent for solar plants, and by 25 per cent for wind farms.
  • A moderate interest rate increase would result in a cost increase of only 9 per cent for wind power plants. For solar plants higher interest costs would be offset by technological advances and learning curves.
Risk strategy

In view of these calculations, researchers warn that instruments for promoting alternative energies must not be eliminated, as is currently being discussed in the European Union. If interest rates go up, this would be counter-productive and CO2 emission reduction would be jeopardised, warns Tobias Schmidt, Professor for Energy Policy at the ETH. He advocates retaining market-based instruments such as auctions for large-scale plants to generate renewable energy.

In addition, it is important to set a minimum price for CO2 certificates in the European emission trading system. Researchers believe: This would speed up the transition from fossil to renewable energies because price drops for climate-damaging CO2 emissions could be eliminated in the future.

Link to the study by the ETH Zurich and the Postdam Institute of Climate Impact Research

Average price of rooftop solar panels for end consumers in Germany. Source: Fraunhofer Institute
Photovoltaic is becoming less expensive

The power production costs of a photovoltaic plant represent the ratio of total costs and electrical energy production in relation to the useful economic life of the plant. The level of production costs is mainly determined by:

  • Acquisition investments (construction and installation)

  • Financing conditions (return on equity, interest rates, duration)

  • Operating costs

  • Solar radiation at the plant site

  • Life-time and yearly degradation of the plant

A new study by the Fraunhofer Institute "Recent facts about photovoltaics in Germany" indicates that primary costs for solar plants, the investment costs since 2006 for rooftop plants with a nominal output of 10 to 100 kWp have on average dropped by 13 per cent per year, in total by 75 per cent, thanks to technological progress, economies-of-scale and learning curves. The annual operating costs at about 1 percent of investment costs are comparatively low – and financing costs were inexpensive owing to the current low interest rate situation.

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