Rising interest rates and what they mean for clean energy
By Ted Leonard, VP Market Operations - March 03, 2022
Rising interest rates play a big role in higher electricity costs. Businesses that act quickly can minimize the cost of waiting.
Higher interest rates put pressure on energy users since financing costs make up a large portion of electricity prices.
Cleantech is particularly sensitive to rate hikes and has relied on low rates to bankroll the green transition.
Businesses that don’t put cleantech projects on hold save far more in the long run.
Record inflation is pressuring central banks to raise interest rates. At the same time, surging energy demand is fueling a cleantech boom. Unfortunately, cleantech is especially vulnerable to rate increases.
The global renewable energy market is expected to nearly double to $2 trillion by 2030, which is a massive opportunity for businesses. That said, this market expansion is not a given. Higher interest rates could slow down and stall many cleantech projects.
For companies that aren’t proactive, the cost of waiting will only keep rising. Has your business considered the impact of higher interest rates?
Rising interest rates pose a threat to cleantech projects
Since the 2008 financial crisis, low interest rates have been cleantech’s friend. Despite the pandemic, low rates helped 260 gigawatts (GW) of new renewables capacity come online in 2020 — almost 50 percent more than in 2019.
Low funding costs for renewable projects act as “big leverage” to counter increases in underlying costs. For many companies, rising interest rates could put the brakes on their energy plans. Longer waits lead to increased costs from rising electricity prices and lost savings.
Upgrading grids and power facilities, and building new capacity is expensive. Many utility-scale installations are highly-leveraged (up to 80 percent or more) which makes them vulnerable to interest rate hikes.
Julien Dumoulin-Smith, an analyst at Bank of America, highlighted this in a January 2022 interview:
“One of the single most important inputs that go into these highly leveraged projects are [interest] rates.”
Given that interest rates play such a large role in cleantech costs, it isn’t surprising that rate hikes have serious fallout.
Don’t wait until interest rate hikes hit cleantech
Renewables are more competitive than fossil fuels in a low-interest environment. On the other hand, they are particularly vulnerable to interest rate increases.
Specifically, interest rate increases are a threat to green energy technologies’ levelized cost of electricity (LCOE). Put simply, LCOE is the price that a generator needs to sell electricity at to break even. The higher the interest rate, the higher the electricity price needs to be for generators to stay in the black.
According to Pierre Monnin, Senior Fellow at the Council of Economic Policies, “green energy [...] LCOEs react more significantly to a change in interest rates” than fossil fuel LCOEs do.
Supporting this, one study found that raising interest rates to pre-financial crisis levels (5.28 percent) in Germany by 2024 would increase costs compared to current rates (-0.12 percent). In this case, higher rates would cause the LCOE of utility-scale solar and onshore wind to jump by 11 percent, with offshore wind increasing by 25 percent.
It is important to remember that the cost of capital (e.g. interest rates and premiums reflecting credit risk) generally accounts for about one third of LCOEs for most renewable projects, but can be up to 50 percent for some utility-scale solar projects.
Waiting will only cost your business more
Waiting for funding leads to lost savings — including from higher LCOEs due to rate hikes. And doing nothing will hurt your business’ financial stability.
As Isabel Schnabel, executive board member of the European Central Bank (ECB) explains, “there is a positive relationship between the greenhouse gas emissions resulting from a firm’s operations and credit risk estimates, as measured by credit ratings and market-implied distance to default.”
Put simply, stalling your cleantech projects because of interest rates means lost savings, greater financial risk, and higher borrowing costs.
How your business can reduce interest rate worries
Interest rate increases lead to higher electricity prices, especially from renewables. This is important since many businesses are transitioning their electricity hardware and supply. This means the cost of waiting increases.
Instead of hoping for a better financing deal in the future, businesses can start saving today with EnPowered Payments.
Payments is an on-bill payments platform that helps clean technology and energy solution providers provide more value to customers.
With Payments, you will close more deals by helping your clients start their clean energy transition now, using a portion of their electricity savings. And that’s a benefit your competitors can’t provide.
With Payments you can unlock stalled projects and help your customers save more.
Contact us today to learn how EnPowered Payments can help you minimize the impact of interest rates on electricity prices and achieve your energy goals.