Coal projects face higher investor hurdles as climate risks mount

The growing risks associated with financing new coal projects have driven European and American institutional investors to seek returns up to 4 times greater than those for other sources of energy, according to a survey by the Oxford Institute for Energy Studies.

Why it matters: The cost of capital is a key determinant of whether new coal plants will be built. If costs rise relative to those of competing sources, the construction, expansion and even ongoing operation of coal plants could become prohibitively expensive.

Where it stands: For fossil fuel operators, higher expected rates of investment return are a form of climate-related transition risk — the threat of lower asset values and higher operating costs as societies decarbonize. Growing demand for cleaner energy sources —as much as $10 trillion through 2050 — continues to pull investment dollars away from coal and into less risky projects.

  • Between 2015 and 2018, investors’ minimum rates of return for previously finished coal projects were 16%. These so-called hurdle rates now run as high as 40% for coal, compared to roughly 10% for wind and solar or 15%–20% for oil.

Between the lines: Misjudging the risks of the energy transition can be costly.

  • GE lost shareholders $193 billion on investments in its natural gas turbine and coal business. Although natural gas is a cleaner fuel subject to less transition risk than coal, the demand for both fossil fuels fell short of GE’s lofty expectations, in part because of the rise of wind, solar and other clean energy options.
  • Over 113 globally significant financial institutions are now restricting access to finance for coal — another sign of the emerging consensus that it will continue to lose market share as the global community grapples with the need to address climate change.

Yes, but: The Oxford Institute study only interviewed investors in the U.S. and Europe. Asian investors continue to finance new coal plants and likely have different expected returns, though several Asian financial institutions have recently announced stricter coal policies.

The bottom line: Investors are already pricing in expectations for a transition to a cleaner energy mix, even as politicians have been slow to take corresponding actions.

Justin Guay directs global climate strategy at the Sunrise Project and advises the ClimateWorks Foundation.

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