Switching to coal or renewables? How financial capital affects the transition

Financial capital affects energy transition

A key implication is that financial policy has potential to indirectly impact on energy mix differences across countries.

New research finds that the availability of financial capital is a key driver in differences in energy mix across countries, due to its role in supporting the transition to more capital-intensive sources.   

In higher income countries, financial capital is helping facilitate transition to modern renewables, whereas in lower-income countries, financial capital supports progression from biomass towards fossil fuel energy sources such as coal. 

Research author and PhD student, Rohan Best, emphasises that financial capital is crucial for most energy types, but to varying degrees.     Modern renewable energy types, such as wind and solar energy, are more capital-intensive than fossil fuel energy types.    Ongoing costs are a greater proportion of total costs for fossil fuels, largely due to the ongoing fuel costs that are absent for renewable energy.

“A key implication is that financial policy has potential to indirectly impact on energy mix differences across countries” he said.   “For instance, countries with policies that are favourable to domestic private debt markets are providing indirect support to capital-intensive energy types, such as wind energy, that rely on relatively low-cost capital sources.”

The type of financial capital also matters. Countries with larger amounts of private credit from banks and larger domestic private debt markets have larger wind shares of energy consumption. Other financial segments such as equity markets have been less important.

The research is published in Energy Economics

Updated:  21 September 2017/Responsible Officer:  Director, Energy Change Institute/Page Contact:  Webmaster