Clean Energy Momentum Threatened

After enjoying a prolonged period of free money, for the first time since achieving viable cost structures, the renewable energy industry is going to experience what it’s like to operate in an environment where the cost of capital is closer to historic levels.

To estimate the potential impact higher interest rates will have, I’m going to borrow an example from commentary published by Jessica Fishman.

She provided an example of a 10 kW residential solar system costing about $29,000. The cost number may be a bit high, but it’s in the ballpark. And note that the impact portrayed in this example also applies to wind and larger solar projects. The difference is the impact isn’t likely to be as pronounced as it is with smaller systems.

OK: the example assumes a down payment of $9,000 leaving $20,000 to be financed. We’ll assume interest rates have increased from the previous level of 3% to 7%.

Using Nerd Wallet’s solar loan calculator, total payments for a 15-year loan at 3% amount to $24,860. To translate that into the levelized costs of energy (LCOE) NREL’s LCOE calculator was used. This scenario yields an LCOE of $0.14/kWh.

That same loan at 7% increases the total payment to $34,403 and that puts the LCOE at $0.19 kWh which is an almost 36% increase in the cost of energy.

Beyond the obvious impact from the higher cost, why does that matter? Because at $0.14 kWh the cost of solar energy is below the average utility cost. At $0.19 kWh that is no longer the case. And notwithstanding the small percentage of people who would still install a residential solar system even though it increases their costs, most people wouldn’t – and that’s a major headwind.

The same dynamics will play out for larger projects. Many will no longer “pencil out” or be able to show a profit.

Government subsidies and tax credits will soften the blow, but not eliminate it. Some percentage of both commercial and residential projects will no longer make financial sense and that will translate into slower adoption. Just how much slower is hard to measure. I’m guessing – and this is just my feel – that growth rates will slow somewhere in the range of 10% to 20%.

#interestrates #lcoe #solarprojects #residentialsolar #windpower