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Following the European Commission's decision to include natural gas in the EU Green Taxonomy, an EDHECinfra research note, "The Cost of Capital of Brown Gas," argues that natural gas already has a very attractive cost of capital, and this decision could have unfavourable consequences for investment in renewable energy.
In a new research note, "The Cost of Capital of Brown Gas," EDHECinfra shows that excluding natural gas generation from the EU Green Taxonomy would not increase its cost of capital and thus not create any risk of underinvestment in natural gas, the `transition fuel’ of choice. Conversely, including gas in the Green Taxonomy creates a genuine price distortion and a perverse incentive to limit future investments in renewable energy technologies.
Without coal and with limited and unreliable renewables, natural gas is now the “producer of last resort”: it is a very valuable option, and its cost of capital should be low. In effect, this has already happened: natural gas is doing perfectly well in terms of profits and dividends. The past five years have been bumper years and the cost of capital of these gas producers is already at historical lows. Even as renewables have developed, investments in fossil fuel have been doing very well indeed. Comparing the profitability of coal, gas and renewable projects in Europe over the past five years shows that renewables in Europe are the most profitable but also that gas power projects have enjoyed a significant increase in their profitability, as have coal-fired projects.
Frederic Blanc-Brude, Director and CEO of EDHECinfra, commented, "The costs of capital of gas projects in Europe has been near its record lows in recent years. Hence, there is no reason to argue that gas “needs to be green” so that we have enough investment in “transition fuels”. Everything points to gas being already able to secure all the capital it needs. Conversely, by saying that gas is green, you can slow down investment in renewables, especially energy storage, and make gas even more valuable."
The research note can be accessed here:
The Cost of Capital of Brown Gas, EDHECinfra Publication, January 2022
EDHECinfra will be holding a short (20-minute) webinar on February 17 to discuss this research note. To register, please click on the link below:
WEBINAR: Would excluding natural gas from the green taxonomy prevent the financing of transition fuels? February 17, 2022, 9.30am in London
