ESG Economist - The impact of a Green LTRO on the energy transition

A green interest rate is an instrument that central banks have globally identified as one of the strongest possible contributions of monetary policy to mitigate climate change (NGFS, 2021). This involves providing funds to commercial banks at an interest lower than the regular monetary policy rate, so that banks use these funds for loans that support the energy transition at a reduced loan rate. Unlike the central banks of Japan and China, the ECB so far has not implemented such a green interest rate, or Green (Targeted) Longer Term Refinancing Operation (GLTRO). Under its new operational framework, the ECB did announce that it will continue to have “structural refinancing operations” that will “aim to incorporate climate change-related considerations” (European Central Bank, 2024).

Following calls from academics, monetary policy economists, and the industry (Lonergan et al., 2022; NVDE, 2023b; Faure et al., 2024), also ECB board members have discussed the possibility of a “green” interest rate (Elderson, 2023; Schnabel, 2023). A green interest rate, whose introduction is expansionary in nature, has become more probable also now that monetary policy is easing, as evidenced by the reduction of the key policy rates in June.

This report aims to increase our understanding of the effects a green interest rate can have on the cost of the energy transition in the Eurozone and wider EU. To that end, it investigates the cost reduction in attaining the 2030 goals for Germany, France, Italy, The Netherlands and Spain. The focus is on three key renewable power technologies, namely: solar PV (fixed axis), onshore, and offshore wind. We run scenarios with the interest rate of the second half of 2023 as a benchmark to green interest rates that are 1%, 1.5%, 2%, and 4% lower than the benchmark. Our results show that a green interest rate is effective in reducing transition costs in these counties, especially when assuming that the costs of equity is also lowered. Countries vary in the extent to which they benefit from lower costs of capital. While green technology investments benefit most from a green rate in Germany, the challenge of getting them profitable remains.

This study starts in section 2 with a discussion of related literature on the sensitivity of investments in renewable energy to interest rate changes. Section 3 describes the methodology to arrive at an estimate of the potential cost reduction through lower interest rates. Section 4 presents the findings. We end with our conclusions.

This publication has been written by Moutaz Altaghlibi, ABN AMRO, Rens van Tilburg, senior advisor, Sustainable Finance Lab and Gaston Bronstering, junior researcher, Sustainabile Finance Lab

• Energy transition investments are relatively more sensitive to interest rate changes

• The current high interest rate environment therefore risks slowing down the energy transition

• The ECB could introduce a Green Longer Term Refinancing Operation (GLTRO), which would counter this effect, as it lowers interest rates on green bank loans

• We model the effect of such a GLTRO for investments in solar PV, onshore and offshore wind energy for the largest EU economies

• At the current high interest rate – so, without a green rate – investments in all these technologies are unprofitable in France and Germany, while in Italy and Spain, investments in solar and onshore wind are profitable

• The impact of introducing a GLTRO differs between countries. It is greatest in Germany and France, in particular for solar, and for France in offshore wind

• Within Germany our impact assessment of a green rate for 16 different technologies shows large variations in profitability of investments, with less mature technologies considerably less profitable

• Compared to the current interest rate, a 200 bps lower green rate would reduce transition costs – associated to existing financial gaps – until 2030, by 23.7% (EUR 3.7 billion), and assuming policy rates are cut to more neutral levels, the GLTRO impact would be even bigger

• If we assume the cost of equity decreases with the costs of debt, transition costs could even decline by 52.7% (EUR 8.2 billion)

• While effective, a GLTRO would on its own still not be a silver bullet as offshore wind investments remain unprofitable in Europe while in Germany none of the technology investments become profitable

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