Renewables and New Low-Carbon Tech Most at Risk from Rising Interest Rates; Need for Policy Intervention Stressed

The latest report from Wood Mackenzie, titled ‘Conflicts of interest: the cost of investing in the energy transition in a high interest-rate era,’ highlights the significant challenges facing renewable energy and emerging low-carbon technologies due to persistently high interest rates. According to the analysis, the increased cost of borrowing could significantly impede the global transition to a net-zero economy.

The report, authored by Peter Martin, Head of Economics at Wood Mackenzie, points out that renewables and nuclear energy are particularly vulnerable due to their high capital intensity and relatively low returns. This sensitivity to interest rates contrasts with sectors like oil, gas, and metals mining, which are less affected due to their lower levels of debt financing.

Wood Mackenzie’s findings indicate that a 2-percentage point rise in the risk-free interest rate could increase the levelized cost of electricity (LCOE) for renewables in the U.S. by up to 20%, compared to an 11% increase for gas turbine plants. This shift threatens the cost competitiveness of renewable energy, particularly wind and solar, which have traditionally held a cost advantage even without subsidies.

The report also emphasizes the disproportionate impact of rising interest rates on the debt costs for the power and renewables sector, which already faces higher gearing compared to other industries. This makes renewable projects more sensitive to changes in financing costs, potentially stalling progress on crucial energy transition initiatives.

Furthermore, Martin discusses the strain on nascent technologies such as low-carbon hydrogen, carbon capture, utilization, and storage (CCUS), and direct air capture (DAC). These sectors face significant investment challenges, compounded by the lack of established economic incentives and markets, which are exacerbated by the rising cost of capital.

Wood Mackenzie advises policymakers to address these challenges by enhancing subsidy efficiency, strengthening carbon markets, and mobilizing green finance. This includes finalizing parts of the Paris Agreement’s Article 6, which deals with carbon markets, and using financial tools to boost private sector investment in green technologies.

Overall, the report underscores the urgency for clear, consistent, and robust policy measures to mitigate the financial barriers posed by high interest rates and ensure the successful transition to a sustainable energy future.