Research in the no man’s land
Reaching the targets of the Paris climate agreement requires to shift trillions of investments from high-to low-carbon energy assets. Given this situation, there is surprisingly little empirical research on energy finance. Here I reflect on the reasons and difficulties and argue why it is still worth getting oneself into the no man’s land between the energy and the finance research field.
This blog is a welcome occasion to reflect about one own’s research and how it evolved. In the sometimes hectic everyday life of an academic scholar, one hardly has (or takes) the time think about how papers came about.
So what was the reason to analyse financing conditions of renewable energy projects over time, as we did in our paper? A key motivation for my co-authors Florian and Bjarne and me was that there is simply very little empirical literature on this topic, despite its relevance. I can only speculate about the reasons, but I assume it is because on one hand, energy finance (and even climate finance) is not really that interesting for finance researchers (see also ). On the other hand, the energy modelling and policy research community focuses primarily on other issues and lacks access to the finance community. Consequently, many models still assume a generic cost of capital across countries and technologies (typically 5% or 10%). In other words, it seems the topic of financing conditions somehow got lost between research fields. With our paper we try to fill this gap. We believe the topic will gain in relevance for (at least) two reasons:
First, while financing conditions are not very important for fossil fuel-based electricity generation projects, whose generation costs are dominated by fuel costs, financing conditions are very important are for renewable energy projects, due to their high upfront investment costs (seeor ). Second, power plants in high-income countries have thus far primarily been financed via the balance sheets of big utilities. So the conditions for the individual project did not matter that much. Yet, this has changed over the last decade. Nowadays many RE projects are financed on a project-by-project basis (for data and an explanation see ).
Performing research at the interface of two fields can sometimes feel like being in now man’s land. For instance, when presenting at conferences, one has to completely change the presentation style depending on the audience. At energy policy or modelling conferences one often has to explain basics of finance first, before presenting the actual analysis. At one instance, I already got so many questions on the first part of my presentation that I could hardly show my results. In contrast, at (climate) finance conferences, one has to explain the relevance of energy infrastructure finance first. While this admittedly takes less time than explaining basics of finance, one remains an outlier at these conferences, because the topic is so specific (“So you really look at individual assets?”).
Despite the extra work required to report findings from the no man's land, we believe that working at the interface of these fields is particularly interesting and rewarding. The likelihood to discover something truly new (such as the financing experience curves we identified) is much higher. In addition, one learns to summarize entire complicated research fields on just a few power point slides.