Sign In or Create an Account.

By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy

Economy

A Sigh of Interest Rate Relief for Renewables

The Fed chair signaled cuts on the horizon, much to the joy of clean energy investors.

•
A Sigh of Interest Rate Relief for Renewables

Are clean energy developers finally free from high interest rates? Not yet, but this might be the beginning of the end. At the Federal Reserve’s annual conference in Jackson Hole, Fed chair Jerome Powell told attendees, “The time has come for policy to adjust.”

Analysts and market participants immediately appeared to interpret this as locking in a series of interest rate cuts starting at the next Federal Open Market Committee meeting next month. Stocks immediately rose and yields on U.S. government debt fell. Market prognosticators expect the federal funds rate to fall a quarter of a percentage point at the September meeting, but there’s a reasonable chance the cut would be larger.

The renewable energy industry — or at least its share prices — got in on the party. Shares of NextEra, which has a massive renewables business, rose following the speech. The stock price of Iberdrola, the Spanish utility with a large wind business, rose after text of the speech was released. The iShares Global Clean Energy ETF, which tracks a range of clean energy companies, is up more than 2.5% today. (No such luck for GE Vernova, which manufactures wind turbines — its shares fell today after another turbine blade failure at the Dogger Bank wind farm off the coast of England, coming barely a month after a blade manufacturing defect led to the Vineyard Wind disaster.)

Renewables investors are particularly giddy at the moment because for years now, the industry has disproportionately suffered the effects of high interest rates compared to fossil fuels. Unlike a natural gas- or coal-fired power plant, a wind turbine or a solar panel does not have to pay for its fuel. In the long term that’s a win, because there is no such thing as a wind pipeline rupture or the discovery of new reserves of sun, and therefore nothing that can send prices reeling. But in the short term, that means the lifetime cost of a solar or wind farm is heavily weighted towards building it.

And to build, you need to borrow money.

“Wind and solar have taken a beating from high interest rates because they’re very capital intensive projects,” Lori Bird, director of the World Resources Institute’s U.S. Energy Program, told me. “Because they’re capital intensive, a 2 percentage point increase in interest rates yields a 20% increase in the cost of electricity, compared to 11% from fossil,” Bird said, citing estimates from Wood Mackenzie.

Developers take out construction loans to build their projects and then pay those back with a term loan that covers the life of the project, explained Advait Arun, senior associate of energy finance at the Center for Public Enterprise (and also a Heatmap contributor).

“If you’re a developer who’s going through the construction process right now, your construction loan is probably floating-rate, so the amount of of interest you’re paying on your construction loan will fall,” Arun said. After you're done building, you get another loan to pay off the construction loan, and that loan can be smaller if your construction loan gets cheaper thanks to lower rates.

These longer-term loans are paid back from the project’s revenues over the life span of the project, which means that the developer or investor will not have to earn as much from selling the electricity to cover the cost of their debt.

Alongside the supply chain issues and inflation that developers — especially offshore wind developers — had to deal with over the last few years, high interest rates have led to higher costs for the power that renewables developers sell. The price of power purchase agreements for wind and solar rose in 2023, thanks, in part, to high rates, and only stabilized early this year as investors became convinced that cuts were finally close.

But whether these lower financing costs turn into higher profits or lower prices for electricity consumers is, unfortunately, not a sure thing — which is one reason why the industry's shareholders may have responded positively to Powell's speech.

“I think profit expectations will rise,” Arun said. “If there’s less money you need to pay in debt service, it doesn’t mean developers will pass on price savings.”

Green

You’re out of free articles.

Use code: CWNYC30 to save 30%.
Subscribe to access Heatmap’s exclusive polling and expert analysis of energy, climate change, and sustainability, now just $99/year $69.30/year.
To continue reading
Create a free account or sign in to unlock more free articles.
or
Please enter an email address
By continuing, you agree to the Terms of Service and acknowledge our Privacy Policy
Daily Briefing

How AI Split Climate Tech in Two

Plus more venture capital musings on Day 4 of New York Climate Week.

Gabriel Kra, Katie Rae, Dawn Lippert
Heatmap Illustration/Luke Liu

It’s another hectic and productive Climate Week in New York City, full of discussions on topics ranging from electrification, to permitting reform (the latest: it’s going to wait until after the midterms), to energy security amid soaring oil and gas prices, to, inevitably, the ways the data center buildout is both helping and hurting climate tech companies and emissions targets alike.

As usual, cadres of venture capitalists descended on Midtown Manhattan, bringing with them the particular brand of optimism that venture inherently requires. They touted the potential synergies between cleantech and the artificial intelligence boom, bemoaned the persistent “missing middle” funding gap, and debated ways to talk about climate without actually saying the word climate. Through it all, a few core themes emerged.

Keep reading...Show less
Blue
Energy

House Science Leaders Introduce a $10 Billion Fusion Bill

The bipartisan proposal from the House Science Committee comes with the backing of the Fusion Industry Association.

The capitol and a tokamok.
Heatmap Illustration/Getty Images

The nuclear fusion industry has been asking for a $10 billion investment from the U.S. government. Now, there’s a bipartisan coalition in Congress ready to give it to them.

On Thursday, Californians Zoe Lofgren, ranking member of the House Science Committee, and Jay Obernolte, chair of the body’s Subcommittee on Research and Technology, introduced the American Leadership in Fusion Act, which would pump some $10 billion into the industry to commercialize the frontier nuclear energy technology.

Keep reading...Show less
Ideas

The Energy Trust Gap Is Crashing Our Grid

Third Way’s head of climate and energy argues that both sides have lost voters’ trust, with serious consequences for our infrastructure.

Fingers crossed.
Heatmap Illustration/Getty Images

In September 2024, then-presidential candidate Donald Trump told a crowd in Wilmington: “We will cut your energy prices in half … Mark it down, and you can get very angry at me if we don't do it.” He gave himself one year from when he’d take office.

Two years later, rates are up. And we’re angry.

Keep reading...Show less
Blue