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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.

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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.”

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Q&A

How to Channel Voters’ Anxieties About Data Centers

A conversation with the Guardrails Alliance’s Shaunna Thomas.

The Q&A subject.
Heatmap Illustration

This week’s Q&A is with Shaunna Thomas of the Democrat-allied super PAC Guardrails Alliance, which describes itself as “not anti-technology” but supportive of AI “rules, accountability, and a government that actually represents the public.” Part of that AI accountability they’re calling for is on data centers.

After the midterms, Guardrails Alliance sent a memorandum to all House and Senate Democratic offices arguing for AI and data center accountability to be a key part of their message and plans heading into the new Congress. Described as a “playbook for how to understand and channel anxieties about AI and data centers,” the document laid out “key narratives” that they said voters who care about these issues want to see reflected and echoed by their politics. They said the push against data centers could help Democrats build more lasting political power.

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Plus more of the week’s biggest development fights.

The United States.
Heatmap Illustration/Getty Images

1. New York City — We have a new must-watch offshore wind lawsuit with potential implications for the entire sector — and this time, it’s from lobstermen seeking damages.

  • In late October, a family of lobstermen sued Equinor in federal court claiming the company’s compensatory mitigation program is failing to adequately make up for alleged negative impacts to lobster fishing grounds in the New York Bight. According to the lawsuit, the wind project irreparably hurt fishing in previously trafficked waters. The suit also claims that Empire Wind construction destroyed lobster fishing pots and seeks at least $75,000 in damages as well as punitive damages and attorneys’ fees.
  • The lawsuit is the first I have seen involving someone in aquaculture suing for damages over negative impacts of an already-constructed wind project, and it carries outsized implications as the Trump administration remands without vacatur the construction and operations plans for other offshore wind farms. This case is far from being decided, but that doesn’t matter: It is precisely the kind of complaint that Trump officials are likely to consider as they mull revisions to operational plans.
  • An Equinor spokesman declined to comment on the case, telling me they don’t speak on pending litigation.

2. Hinds County, Mississippi — The largest proposed solar farm in Mississippi is moving forward after an appeals court rejected arguments from aggrieved local residents that it had been improperly approved.

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Spotlight

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Donald Trump and data center protesters.
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This year’s midterm elections called into question the efficacy of a push to pay local residents directly in exchange for building data centers.

Before the elections, I profiled the campaign for politicians to embrace the data center “dividend,” a policy idea modeled off Alaska’s Permanent Fund, which doles out checks to residents from profits off state oil, gas and mineral royalties. The Bitcoin Policy Institute, a tech policy think tank, was one of the first to trumpet the concept, but it was quickly taken up by President Donald Trump, who started raising it in speeches and on social media. “If companies want to make their Data Centers popular, pay the community, and/or individuals within the community, a ‘dividend,’” Trump posted to Truth Social on October 21.

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