Adverse effects of rising interest rates on sustainable energy transitions

Article metrics


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.

Access options

Rent or Buy article

Get time limited or full article access on ReadCube.


All prices are NET prices.

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.


  1. 1.

    Giang, A. & Selin, N. E. Benefits of mercury controls for the United States. Proc. Natl Acad. Sci. USA 113, 286–291 (2016).

  2. 2.

    Peng, W. et al. Managing China’s coal power plants to address multiple environmental objectives. Nat. Sustain. 1, 693–701 (2018).

  3. 3.

    IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation (eds Edenhofer, O. et al.) (Cambridge Univ. Press, 2011).

  4. 4.

    Fuso Nerini, F. et al. Mapping synergies and trade-offs between energy and the sustainable development goals. Nat. Energy 3, 10–15 (2018).

  5. 5.

    Fuso Nerini, F. et al. Connecting climate action with other Sustainable Development Goals. Nat. Sustain. 2, 674–680 (2019).

  6. 6.

    Rogelj, J. et al. in Global Warming of 1.5°C (eds Masson-Delmotte, V. et al.) 93–174 (IPCC, 2018).

  7. 7.

    Luderer, G. et al. Residual fossil CO2 emissions in 1.5–2 °C pathways. Nat. Clim. Change 8, 626–633 (2018).

  8. 8.

    Ralon, P., Taylor, M., Ilas, A., Diaz-Bone, H. & Kairies, K.-P. Electricity Storage and Renewables: Costs and Market to 2030 (IRENA, 2017).

  9. 9.

    Trancik, J., Brown, P., Jean, J., Kavlak, G. & Klemun, M. Technology Improvement and Emissions Reductions as Mutually Reinforcing Efforts (MIT, 2015).

  10. 10.

    Schmidt, T. S. & Sewerin, S. Technology as a driver of climate and energy politics. Nat. Energy 2, 17084 (2017).

  11. 11.

    Kost, C., Shammugam, S., Jülich, V., Nguyen, H.-T. & Schlegel, T. Levelized Cost of Electricity Renewable Energy Technologies (Fraunhofer Institute for Solar Energy Systems, 2018).

  12. 12.

    Wronski, M. Renewables 2.0: the Subsidy-free Revolution (Aurora Energy Research, 2018).

  13. 13.

    BayWa: First Subsidy-Free Solar Park Under Construction in Germany (Marketscreener, accessed 8 July 2019);

  14. 14.

    EnBW Developing 175MW Subsidy-free Solar Project in Germany (PVtech, accessed 8 July 2019);

  15. 15.

    Obama, B. The irreversible momentum of clean energy. Science 355, 126–129 (2017).

  16. 16.

    Clark, P. The big green bang: how renewable energy became unstoppable. Financial Times (18 May 2017).

  17. 17.

    Bassi, S., Carvalho, M., Doda, B. & Fankhauser, S. Credible, Effective and Publicly Acceptable Policies to Decarbonise the European Union (LSE/Grantham Research Institute, 2017).

  18. 18.

    Pfeifer, S. Subsidy-free renewable projects on ‘cusp of breakthrough’. Financial Times (28 March 2018).

  19. 19.

    Managing Merchant Risk in Renewables (Aurora Energy Research, 2018).

  20. 20.

    Green Finance: Mobilising Investment in Clean Energy and Sustainable Development (UK Parliament, 2018).

  21. 21.

    Koalitionsvertrag: Ein neuer Aufbruch für Europa Eine neue Dynamik für Deutschland Ein neuer Zusammenhalt für unser Land (CDU/CSU/SPD, 2018).

  22. 22.

    Egli, F., Steffen, B. & Schmidt, T. S. A dynamic analysis of financing conditions for renewable energy technologies. Nat. Energy 3, 1084–1092 (2018).

  23. 23.

    Steffen, B. The importance of project finance for renewable energy projects. Energy Econ. 69, 280–294 (2018).

  24. 24.

    Schmidt, T. S. Low-carbon investment risks and de-risking. Nat. Clim. Change 4, 237–239 (2014).

  25. 25.

    Hirth, L. & Steckel, J. C. The role of capital costs in decarbonizing the electricity sector. Environ. Res. Lett. 11, 114010 (2016).

  26. 26.

    Global Economic Outlook (Swiss Re Institute, 2018).

  27. 27.

    Kallabis, T., Pape, C. & Weber, C. The plunge in German electricity futures prices—analysis using a parsimonious fundamental model. Energy Policy 95, 280–290 (2016).

  28. 28.

    Frankel, J. A. & Hardouvelis, G. A. Commodity prices, money surprises and Fed credibility. J. Money, Credit Bank 17, 425–438 (1985).

  29. 29.

    Frankel, J. A. Expectations and commodity price dynamics: the overshooting model: reply. Am. J. Agric. Econ. 69, 856–856 (1986).

  30. 30.

    Frankel, J. A. Effects of speculation and interest rates in a ‘carry trade’ model of commodity prices. J. Int. Money Finance 42, 88–112 (2014).

  31. 31.

    Barsky, R. B. & Kilian, L. in NBER/Macroeconomics Annual (eds Bernanke, B. S. & Rogoff, K.) 137–183 (MIT Press, 2002).

  32. 32.

    Kilian, L. & Zhou, X. Oil Prices, Exchange Rates and Interest Rates CEPR Discussion Paper No. DP13478 (SSRN, 2019).

  33. 33.

    Anzuini, A., Lombardi, M. & Pagano, P. The Impact of Monetary Policy Shocks on Commodity Prices Bank of Italy Temi di Discussione Working Paper No. 851 (SSRN, 2012).

  34. 34.

    Arango, L. E., Arias, F. & Flórez, A. Determinants of commodity prices. Appl. Econ. 44, 135–145 (2012).

  35. 35.

    Chiou–Wei, S. Z., Chen, S. H. & Zhu, Z. Energy and agricultural commodity markets interaction: an analysis of crude oil, natural gas, corn, soybean, and ethanol prices. Energy J. 40, 265–296 (2019).

  36. 36.

    Hammoudeh, S., Nguyen, D. K. & Sousa, R. M. US monetary policy and sectoral commodity prices. J. Int. Money Finance 57, 61–85 (2015).

  37. 37.

    Huang, W., Mollick, A. V. & Nguyen, K. H. Dynamic responses and tail-dependence among commodities, the US real interest rate and the dollar. Empir. Econ. 53, 959–997 (2017).

  38. 38.

    Ratti, R. A. & Vespignani, J. L. Oil prices and global factor macroeconomic variables. Energy Econ. 59, 198–212 (2016).

  39. 39.

    Bodenstein, M., Erceg, C. J. & Guerrieri, L. Oil shocks and external adjustment. J. Int. Econ. 83, 168–184 (2011).

  40. 40.

    Bodenstein, M., Guerrieri, L. & Kilian, L. Monetary policy responses to oil price fluctuations. IMF Econ. Rev. 60, 470–504 (2012).

  41. 41.

    Bernanke, B. S., Gertler, M. & Watson, M. Systematic monetary policy and the effects of oil price shocks. Brook. Pap. Econ. Act. 1, 91–142 (1997).

  42. 42.

    Kilian, L. & Lewis, L. T. Does the Fed respond to oil price shocks? Econ. J. 121, 1047–1072 (2011).

  43. 43.

    Fuss, S. et al. A framework for assessing the performance of cap-and-trade systems: insights from the European Union emissions trading system. Rev. Environ. Econ. Policy 12, 220–241 (2018).

  44. 44.

    Vogt-Schilb, A., Meunier, G. & Hallegatte, S. When starting with the most expensive option makes sense: optimal timing, cost and sectoral allocation of abatement investment. J. Environ. Econ. Manag. 88, 210–233 (2018).

  45. 45.

    Cashore, B. & Howlett, M. Punctuating which equilibrium? Understanding thermostatic policy dynamics in Pacific Northwest forestry. Am. J. Pol. Sci. 51, 532–551 (2007).

  46. 46.

    Edenhofer, O. Klima, Kohle, Kapital. Ökonomische Hebel in der internationalen Klimapolitik. Aus Politik und Zeitgeschichte (18 May 2018);

  47. 47.

    Geddes, A., Schmidt, T. S. & Steffen, B. The multiple roles of state investment banks in low-carbon energy finance: an analysis of Australia, the UK and Germany. Energy Policy 115, 158–170 (2018).

  48. 48.

    Steffen, B. & Schmidt, T. S. A quantitative analysis of 10 multilateral development banks’ investment in conventional and renewable power generation technologies from 2006 to 2015. Nat. Energy 4, 75–82 (2019).

  49. 49.

    May, N., Neuhoff, K. & Richstein, J. C. Affordable electricity supply via contracts for difference for renewable energy. DIW Weekly Report 8, 251–259 (2018).

  50. 50.

    Pahle, M. et al. Sequencing to ratchet up climate policy stringency. Nat. Clim. Change 8, 861–867 (2018).

  51. 51.

    Meckling, J., Kelsey, N., Biber, E. & Zysman, J. Winning coalitions for climate policy. Science 349, 1170–1171 (2015).

  52. 52.

    Edenhofer, O. & Pahle, M. The German coal phase out: buying out polluters, not (yet) buying into carbon pricing. EAERE Mag. 5, 11–14 (2019).

  53. 53.

    Main Economic Indicators (OECD, 2016);

  54. 54.

    Gorton, G. & Metrick, A. Getting up to speed on the financial crisis: a one-weekend-reader’s guide. J. Econ. Lit. 50, 128–150 (2012).

  55. 55.

    Macro Research Economic Forecasts (Deka, 2018).

  56. 56.

    Commerzbank Forecasts (Commerzbank, 2018).

  57. 57.

    Donovan, C. & Nuñez, L. Figuring what’s fair: the cost of equity capital for renewable energy in emerging markets. Energy Policy 40, 49–58 (2012).

  58. 58.

    Comello, S., Reichelstein, S. & Sahoo, A. The road ahead for solar PV power. Renew. Sustain. Energy Rev. 92, 744–756 (2018).

  59. 59.

    Renewable Capacity Statistics 2017 (IRENA, 2017).

  60. 60.

    Renewables 2018 Market Analysis and Forecast from 2018 to 2023 (IEA, 2018).

  61. 61.

    Stromgestehungskosten Erneuerbare Energien (Fraunhofer ISE, 2018).

  62. 62.

    Rubin, E. S., Azevedo, I. M. L., Jaramillo, P. & Yeh, S. A review of learning rates for electricity supply technologies. Energy Policy 86, 198–218 (2015).

  63. 63.

    Keles, D., Bublitz, A., Zimmermann, F., Genoese, M. & Fichtner, W. Analysis of design options for the electricity market: the German case. Appl. Energy 183, 884–901 (2016).

  64. 64.

    Definition und Monitoring der Versorgungssicherheit an den Europäischen Strommärkten Projekt No. 047/16 (Fraunhofer ISI, TEP, Consentec & r2b, 2019);

  65. 65.

    Bublitz, A., Keles, D., Zimmermann, F., Fraunholz, C. & Fichtner, W. A survey on electricity market design: insights from theory and real-world implementations of capacity remuneration mechanisms. Energy Econ. 80, 1059–1078 (2019).

Download references


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.

Author information

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.

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

Ethics declarations

Competing interests

The authors declare no competing interests.

Additional information

Publisher’s note: Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary information

Supplementary Information

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

Supplementary Dataset

Data used and the model calculations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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) doi:10.1038/s41893-019-0375-2

Download citation

Further reading