The US central bank has lowered interest rates for the first time in more than four years. (Photo: Fed)
The Federal Reserve slashed interest rates by 50 basis points and suggested further reductions to come. The news immediately reverberated in the U.S. stock market, significantly boosting solar energy stocks and highlighting market expectations for the renewable energy sector. However, some analysts believe that the current rate cut is not enough to reverse the situation.
Lower interest rates to reduce costs of renewable energy
Compared to fossil fuels, renewable energy projects are more sensitive to interest rates. A report from global energy consultancy Wood Mackenzie in April indicated that in the U.S., a two-percentage-point increase in interest rates would raise the cost of renewable energy generation by 20%, while traditional natural gas plants would see an 11% increase.
Investment bank Lazard conducted a similar analysis in June, noting that when the weighted average cost of capital (WACC) drops from 7.7% to 5.4%, the average cost of offshore wind power generation can decrease from $118 per megawatt-hour (MWh) to $97. Solar power projects could see costs decline from $76 to $54.
The costs of renewable energy projects, such as wind farms, are heavily concentrated during the construction phase, so a reduction in interest rates could alleviate cost pressures. With strong expected demand, developers may be more willing to invest, which could also benefit new technologies like carbon capture and green hydrogen.
Sean O'Sullivan, founder of venture capital firm SOSV, believes the nature of the climate tech industry is shifting. Investors are no longer solely seeking industry giants but are instead focusing on smaller companies that specialize in specific fields and are essential to the sector. He predicts that if the Federal Reserve cuts rates by one percentage point, the market could see tens to hundreds of millions of dollars available for clean energy projects.
Nellis Air Force Base solar panels in the United States. (Photo: Wikimedia Common)
Renewable energy development faces many challenges
However, experts warn that the current rate cut's impact on the renewable energy sector is limited. Peter Martin, chief economist at Wood Mackenzie, stated that it is not enough to rescue renewable energy projects from deep debt, providing at most a psychological boost. He anticipates that there won't be any aggressive rate hikes, but many emerging energy solutions still require additional government subsidies.
The effects of the rate cuts will take time to materialize, and other challenges, such as permitting processes and transmission system connections, are currently hindering renewable energy development. Alex Dewar, head of carbon capture and removal at the Boston Consulting Group, pointed out that the presidential election is also a significant uncertainty that could fundamentally alter the overall investment environment.
Source: HuffPost, E & E News, Heatmap
