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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 costs of RE have substantially declined in the past, here we show that rising interest rates (IRs) can reverse the trend of decreasing RE costs, particularly in Europe with its historically low IRs. In Germany, IRs recovering to pre-financial crisis levels in 5 years could add 11% and 25% to the levelized cost of electricity for solar photovoltaics and onshore wind, respectively, with financing costs accounting for about one-third of total levelized cost of electricity. 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. On the basis of these findings, we argue that rising IRs could jeopardize the sustainable energy transition and we propose a self-adjusting thermostatic policy strategy to safeguard against rising IRs.

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Fig. 1: IR dynamics and their effects on the levelized cost of RE-based electricity generation.
Fig. 2: Projected range of short-run marginal cost of FF-based vis-à-vis LCOE of RE-based electricity generation in 2023.

Data availability

All data and the models used for this paper are provided in the Supplementary Dataset.

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Acknowledgements

This research was conducted as part of the EU Horizon 2020 research and innovation programme project INNOPATHS (grant no. 730403). As such, it was partly supported by the Swiss State Secretariat for Education, Research and Innovation (contract no. 16.0222). The opinions expressed and arguments used herein do not necessarily reflect the official views of the Swiss Government. M.P. was also supported by Stiftung Mercator Foundation under the research project AHEAD. We gratefully acknowledge all funding.

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Contributions

T.S.S., B.S., F.E., M.P., O.T. and O.E. developed the research idea. B.S., F.E. and T.S.S. compiled the data and developed the model. T.S.S., B.S., F.E., M.P., O.T. and O.E. interpreted the results. T.S.S., together with B.S., F.E., M.P., O.T. and O.E., wrote the paper. M.P. and T.S.S. secured project funding.

Corresponding authors

Correspondence to Tobias S. Schmidt or Bjarne Steffen or Florian Egli.

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Supplementary Information

Supplementary Note 1, Tables 1–3 and refs. 1–15.

Supplementary Dataset

Data used and the model calculations.

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Schmidt, T.S., Steffen, B., Egli, F. et al. Adverse effects of rising interest rates on sustainable energy transitions. Nat Sustain 2, 879–885 (2019). https://doi.org/10.1038/s41893-019-0375-2

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