Despite the crucial role of renewable energy projects in building a cleaner future, financing them is a challenge. From solar farms to wind turbines, these projects require significant upfront investment. And here’s the catch: the cost of capital (CoC) can make or break their financial feasibility.

The varying success of renewable energy projects across regions often comes down to the cost of financing these initiatives. Let’s dive into what CoC means for renewable energy, why it’s so important, and how we can reduce it to accelerate the global energy transition.

What is the Cost of Capital (CoC)?

Simply put, Cost of Capital (CoC) is the total expense a renewable energy developer pays to finance their projects. This includes everything from interest rates on loans to fees paid to lawyers and financial advisors. Considering that renewable energy projects typically require funding ranging between $10M–$100M, understanding CoC becomes crucial.

It encompasses:

• Debt Costs: Interest rates charged by lenders.

• Equity Costs: Returns expected by investors.

• Weighted Average Cost of Capital (WACC): A blend of debt and equity costs, reflecting overall financing expenses.

Why Cost of Capital Matters in Renewable Energy

For renewable energy projects, CoC is critical because these projects are capital-intensive, requiring significant upfront investment but minimal operational costs. For instance, utility-scale solar and wind projects may see financing costs account for up to 50% of their total levelized cost of electricity (LCOE) in emerging markets.

High CoC is a major barrier to scaling renewable energy globally. In emerging markets, borrowing costs can be up to seven times higher than in developed economies due to underdeveloped financial systems and higher risks. Lowering CoC makes renewable energy projects more attractive to institutional investors and private capital, enabling broader adoption.

Image: Change in macro indicators for the cost of capital (Source: IEA)

What Makes Up the Cost of Capital?

Let’s unpack the different elements that make up the cost of debt capital in renewable energy:

1. Time Cost

Time isn’t just money - it’s often the most expensive part of the equation. In renewable energy, delays in financing can create a domino effect of extra costs.

What causes these delays?

• Lengthy approval processes: In countries like Germany, permitting for wind and solar projects can take up to 2 years, according to the German Wind Energy Association.

• Mismatched timelines: Developers may need working capital in 3 months, but banks could take 6 months or more to approve loans.

• Emerging markets: In the global south, regulatory bottlenecks and paperwork can stretch timelines even further.

2. Debt Interest

Ever noticed how some projects get loans at 5% while others pay 10% or more - what drives this spread? Here’s what’s happening behind the scenes:

Key factors influencing interest rates:

• Risk perception: Projects in politically unstable regions or with uncertain policies are seen as riskier. For example, renewable projects in Sub-Saharan Africa often face interest rates above 10%.

• Project stage: Development-stage assets, where offtake and revenue agreements are not yet secured – carry higher risks than operational assets with established cash flows.

• Bank relationships: Banks offer better rates to developers with a proven track record. A first-time developer might pay 2-3% more than an established player.

For example, projects in Sub-Saharan Africa or Southeast Asia often face higher interest rates due to political, regulatory, or FX risks, while projects in developed countries with stable policies and strong financial institutions can secure lower rates.

3. Resource Costs

When financing a renewable energy project, it’s not just interest rates you need to watch - resource costs can quietly take a big bite out of your budget.

What’s included here?

• Legal fees for contracts and compliance

• Financial advisory costs for structuring deals

• Credit rating agency fees

• Due diligence expenses (site visits, technical audits, etc.)

For a typical utility-scale project, resource costs can reach $500,000 or more. Even smaller projects feel the pinch, as these fixed costs make up a larger share of their total budget.

How Can We Reduce Cost of Capital for Renewables?

Now that we know what’s driving up costs, let’s look at practical steps to bring them down. Think about which of these solutions could work for your next project.

1. Reducing Time Cost

• Automation: Digital platforms can cut permitting and compliance time by up to 50%. Imagine uploading all your documents once, and having them automatically routed for approvals.

• Faster funding models: Online investment marketplaces can match developers with investors in weeks, not months.

• Policy reforms: Streamlining regulatory and permitting processes, as seen in some advanced economies, can reduce bureaucratic delays and accelerate project timelines.

2. Lowering Interest Cost

• Alternative capital pools: Tapping into green bonds, impact funds, or development finance institutions (DFIs) can lower borrowing rates by 1–3%.

• ESG-compliant assets: Projects that meet environmental, social, and governance standards attract more investors, driving rates down.

• Risk mitigation: Insurance, guarantees, and blended finance structures (including public money) can reduce lender risk and unlock better terms.

3. Cutting Resource Cost

• Operational efficiencies: Automating due diligence and legal reviews can reduce costs by up to 30%.

• Standardized documentation: Using templates for contracts and processes means less time (and money) spent on lawyers.

• Digital platforms: Tokenized investment platforms can lower transaction fees and increase transparency.

Summary Table: Cost Types and Reduction Strategies

The Impact of Lowering CoC

Reducing CoC isn’t just about numbers - it’s about real-world impact:

• A mere 1% drop in WACC could save emerging markets up to $150 billion annually in clean energy financing costs!

• This would unlock affordable electricity for millions while accelerating global decarbonization efforts.

What Can You Do?

The renewable energy transition needs innovative solutions and forward-thinking smart capital. If you’re curious to explore automation of complex debt structuring or how tokenization can help lower the cost of your working capital, visit us at Penomo.com.

Explore how you can be part of the movement to make renewable energy more accessible and affordable for everyone.