Excluding natural gas generation from the EU’s green taxonomy would not increase its cost of capital and thus not create any risk of underinvestment in the fuel, according to a new research note from the EDHEC Infrastructure Institute.

But including gas in the green taxonomy framework could slow investment in renewable energy projects and technologies, the paper’s authors argued.

Last week the European Commission announced its decision to go ahead with its proposal – with tweaks following feedback – to include criteria for natural gas and nuclear energy in its green taxonomy.

The controversial decision was criticised by the Commission’s own advisory body and investors, although some have suggested the proposal, if seen through, could make a limited difference in practice.

In their research note, the EDHECinfra researchers point to the already record low cost of capital of gas power projects and their increasing profitability. They said that after a peak in 2009, gas power projects’ cost of equity declined steadily and have plateaued at around 8% since 2015, even falling below that level in 2021.

The “gas option”, they write, is very valuable in a world without enough renewable energy capacity and predictability.

“As soon as coal is completely out, gas will be the de facto ‘generator of last resort’ to meet European power demand,” they wrote.

“Everything points to gas being already able to secure all the capital it needs”

Frédéric Blanc-Brude, director and CEO of EDHECinfra

According to the EDHECinfra researchers’, “the high value and profitability of gas projects confirms that their cost of capital will remain low, irrespective of their treatment under the EU taxonomy”.

“Thus, from this point of view, it is not useful to create an additional incentive to invest in gas infrastructure by giving it a green label, while it really is not a green source of energy,” they wrote in the paper.

From the perspective of renewable energy investment, meanwhile, such a move could be harmful.

“Everything points to gas being already able to secure all the capital it needs,” said Frédéric Blanc-Brude, director and CEO of EDHECinfra.

“Conversely, by saying that gas is green, you can slow down investment in renewables, especially energy storage, and make gas even more valuable.”

The Commission’s proposal is now with the European Parliament and the EU Council, the Member States body. The chances of MEPs and the Council blocking it have often been said to be slim given the extent of opposition that must be registered but IPE understands that EDHECinfra wanted to publicise its research note to inform the debate and decision-making.

The Commission’s proposal and the debate around it comes as the Platform on Sustainable Finance, its advisory body, is developing an extended taxonomy with an intermediate performance category and an “unsustainable category”.

Asked about covering natural gas in an “amber” category in such an extended taxonomy, Blanc-Brude said this would be better, as it would avoid crowding out capital from genuinely green projects, like storage, and attracting capital at an even lower cost “when the gas power sector does not need access to cheaper capital to keep going for the next decade”.

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