The Fed is not doing renewables any favors

It’s no coincidence that the renewable energy explosion has occurred almost simultaneously with the Federal Reserve cutting interest rates to historic lows. But those of us who have been around for a while knew that the era of “free” money couldn’t last forever. It’s time for solar and wind to prove they can maintain their momentum in a more typical financial environment.

Having achieved (or nearly) price parity with fossil fuels, renewable energy must adapt to higher costs that will put pressure on its parity position. And it’s not just wind and sun that will have an impact. New technologies like hydrogen will also feel financial pain.

Higher interest rates have hit renewables harder than fossil fuels, according to research firm Wood Mackenzie. The company estimates that a two percentage point increase in interest rates increases the levelized cost of electricity from renewable sources by as much as 20%. They believe utility-scale solar will suffer the most.

By comparison, Wood Mac estimates that the combined cycle natural gas plant’s impact is just 11%. The reason is simple: fossil fuel projects were already paying 5% or more on loans before interest rates started rising.

Like fossil fuel generation, large-scale use of solar energy and hydrogen is capital intensive. If developers have to use debt more than equity, costs will increase. The good news for hydrogen is that Wood McKenzie believes it will only drop by 10%, making it more similar to natural gas. Of course, hydrogen presents other challenges and is far from commercial viability.

Higher interest rates will also make it harder to meet the Biden administration’s goal of creating domestic manufacturing. It is encouraging that the interest rate environment will remain at historically low levels for an extended period of time. The Federal Reserve is expected to cut interest rates over the next six to 12 months. Nevertheless, the financial landscape will not be as favorable as it has been since 2008. It will be interesting to see how clean technologies adapt.

#cleantech #greentech #solarsystems #interestrates #woodmckenzie #renewableenergy #fossilfuels