The Fed isn’t doing renewables any favors

It was no coincidence that the explosion in renewable energy happened almost in lock step with the Federal Reserve cutting interest rates to historically low levels. But those of us who have been around for a while knew that the era of “free” money couldn’t last forever. Now it’s time for solar and wind to prove that they can sustain their momentum in a more typical financial environment.

Having reached (or come close) to achieving price parity with fossil fuels, renewable energy must adjust to higher costs that will pressure their parity position. And it’s not only wind and solar will be impacted. New technologies such as hydrogen will also feel financial pain.

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

In comparison, Wood Mac estimates the impact to a combined-cycle natural gas plant is only 11%. The reason is simple: fossil fuel projects were already paying 5% or greater on loans before interest rates began to rise.

Like fossil fuel generation, large-scale solar and hydrogen are capital intensive. If developers need to leverage debt more than equity, costs will rise. The good news for hydrogen is Wood McKenzie believes it will only take a 10% hit, making it similar to natural gas. Of course, hydrogen has other challenges, and it a long way from market viability.

Higher interest rates will also generate headwinds for the Biden’s administration’s goal of creating domestic manufacturing. The silver lining is that the interest rate environment will remain in historically low territory for quite some time. And it is expected that the Federal Reserve will cut rates within the next six to 12 months. Nonetheless, the financial landscape will not be as favorable as it has been since 2008. It will be interesting to see exactly how clean technologies adjust.

#cleantech #greentech #solarsystems #interestrates #woodmckenzie #renewablepower #fossilfuels