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Economy

The Fed Announcement Is a Sneaky Bust for Renewables Developers

The central bank cut rates again, but that’s not the headline news.

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The Federal Reserve.
Heatmap Illustration/Getty Images

The Federal Reserve cut interest rates at its third straight meeting — but don’t expect as many cuts next year.

The Fed indicated that it expects only two quarter-point reductions in 2025, down from the four it had forecast in September, when it began its rate-cutting cycle. The news will likely overshadow any relief over lower rates for renewables developers, who have been counting on future cuts to ensure the profitability of their projects.

Since renewables like wind and solar have essentially no “fuel” costs compared to fossil fuel projects like gas-fired power plants, a higher portion of their overall costs must come from borrowed money, not from revenues the project itself produces. This makes the projects much more sensitive to borrowing costs.

The Energy Information Administration has projected that solar capacity will grow by 19.5% in 2025 and that wind capacity will increase by 6%. Wind projects, especially offshore wind projects, could be imperiled by higher interest rates and higher borrowing costs. The energy consulting firm Wood Mackenzie has estimated that a 2 percentage point increase in interest rates causes the price of energy produced by renewables to go up 20%.

Further pressure from inflation could also increase the cost of building out renewables. Several major offshore wind projects — such as New Jersey’s Ocean Wind 1 and 2, which were cancelled last year — have had to have their contracts renegotiated or even thrown out due to unexpected cost increases.

And despite the Federal Reserve interest rate cuts in the last quarter of the year, market interest rates have actually been drifting up in the past few months. Trump’s victory supercharged the stock market with promises of deregulation and general euphoria around tech stocks like Nvidia and Tesla (and crypto) and raised the possibility of higher inflation, with a potential combination of tax cuts, some spending increases, and tariffs.

Some analysts thought that even the Fed’s new rate-cutting forecast was too loose considering the economic data that has been arriving in recent months. “We have a hard time squaring them up against the economic forecasts, which show higher near-term growth, higher near-term inflation, and lower near-term unemployment,” Jefferies analyst Thomas Simons wrote in a note to clients Wednesday.

The new rate-cutting forecasts “amount to a message that the FOMC will tolerate above-target inflation for even longer than they previously indicated,” Simons wrote.

But what the market is focused on is that there may be fewer rate cuts than expected, not that there maybe should have been zero.

Over the past three months, the yield on the 10-year Treasury bond, an often-used benchmark for borrowing costs, has risen from around 3.7% to 4.5%, including a substantial jump following the Fed’s Wednesday announcement. Longer-term interest rates have risen “quite a bit since September,” Federal Reserve chair Jerome Powell said in a press conference Wednesday.

The iShares Global Clean Energy ETF, which tracks a basket of clean energy stocks, fell immediately following the Fed’s rate cut announcement; it fell around 3% today and is down 26% on the year, while broader stock market indices also fell, with the S&P 500 declining just under 3% today

Powell said that both the cut and the new, more restrictive forecast indicate that the Fed is “in a new phase in the process,” and that “from this point forward, it’s appropriate to move cautiously and look for progress on inflation.”

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This is Heatmap Daily, a weekday digest written by our executive editor. Subscribe here.

My colleague Emily Pontecorvo has a fascinating story today about Net Power, an energy and power development company whose technology once seemed key to decarbonizing the country’s electricity grid.

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Energy

Net Power Surrendered Its Clean Dreams to Data Center Demand

The zero-emission pioneer is doing the dirty work for the AI boom.

A gas plant and a data center.
Heatmap Illustration/Getty Images

All kinds of companies have refashioned themselves to exploit the AI boom. A bitcoin miner became a data center developer, a shoemaker is building GPUs, and an electric vehicle company is integrating its powertrains into server racks.

Now, a company that once aspired to build one of the lowest-emitting power plants has pivoted to building one of the dirtiest in order to meet data centers’ requirement for speed to power above all. Net Power was founded to pioneer a new form of natural gas power plant with zero emissions, but it has given up on that technology and recently acquired 10 natural gas reciprocating engines that it plans to co-locate with a data center on the site intended for its first commercial plant.

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Politics

The Surprisingly Exciting Race to Be California’s Next Insurance Commissioner

Ben Allen wants to reform the existing market. Jane Kim wants a revolution.

California Insurance Commissioner candidates.
Heatmap Illustration/Getty Images, Ben Allen, Jane Kim

From Crescent City to Coronado, California voters are facing decisions on a down-ballot strewn with over a dozen propositions and a series of statewide Democrat-versus-Republican races with mostly foregone conclusions.

And then there’s the insurance commissioner.

In the race to oversee California’s insurance market, a $452 billion-in-premium-volume monster imperiled by insurer defections and disaster risks, Democratic State Senator Ben Allen, whose district includes Pacific Palisades, is facing off against Jane Kim, a progressive former San Francisco supervisor.

Kim has the support of Vermont Senator Bernie Sanders — it’s the first thing you see about her when you Google her campaign. She previously served as his California political director during the 2020 presidential race, and she appeared earlier this month at an event with the senator in support of the state’s proposed billionaire wealth tax.

Allen, by contrast, won the endorsement of the state’s Democratic Party and its two incumbent senators.

There has been little public polling of the race, but one September survey showed Kim leading Allen 25% to 18%, with more than half the electorate undecided.

“My opponent and I are not even running for the same office,” Kim told me. “He’s running for what this office used to be, and I’m running for what this office could be.”

Allen wasn’t worried about Kim’s characterization in my interview with him, telling me, “I want to fix the market that we have and make it work. My opponent wants to build a new state insurer that nobody has priced.”

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