High interest rates threaten green initiatives
Report says renewable energy industry more vulnerable than oil and gas sector
Renewable energy companies in Canada are feeling the pinch of higher interest rates, which a new report says could make the net-zero transition more costly and difficult.
Published Thursday by global consultancy Wood Mackenzie, the report says renewable energy and emerging technologies such as carbon capture and storage are vulnerable to high interest rates — especially when compared to more traditional sectors such as oil and gas.
“The higher cost of borrowing affects the energy and natural resources sectors unevenly,” the report states. “Highly capital intensive and often reliant on subsidies, low-carbon energy and nascent green technologies are most exposed.”
The report's findings come as no surprise to those involved in Canada's renewable energy sector.
“The renewable energy and energy storage industries across Canada are well aware that the new interest rate environment is an additional headwind to getting projects built,” Vittoria Bellissimo, president of the Canadian Renewable Energy Association, said in an interview.
“The topic of what changes (for us) in a high interest rate environment has been discussed in all of our boardrooms.”
Renewable energy has been booming in Canada in recent years, in part because its production costs have come down to the point where most wind and solar generation is actually cheaper than traditional fossil-fired generation.
But the upfront capital expense to build a solar farm or wind turbines is significant, and in most cases requires project financing secured by long-term power purchase agreements.
“Renewables are cap-ex intensive because it's like buying all of your fuel for the next 20 to 30 years in year one,” said Richard Legault, CEO of Eocycle Technologies, a Montreal-based manufacturer of small-scale wind turbines meant to be deployed on farms and commercial facilities.
“We're also not as well-financed as the oil and gas sector. We all know the oil and gas sector makes tons of money, so their balance sheet is much, much stronger.”
Interest rates have risen sharply in the past few years as central banks aim to rein in rampant inflation. These higher borrowing costs are coming at a time when countries around the world are facing pressure to live up to their climate commitments and transition to greener forms of energy.
Wood Mackenzie itself has estimated that US$75 trillion in investment will be required if the world is to reach net-zero greenhouse gas emissions by 2050.
The problem, the consultancy says, is that the economics of many large-scale clean-energy projects are negatively affected by a high cost of borrowing, especially when compared to traditional fossil fuel production.
“The oil and gas sector has less to fear in a tighter interest-rate environment,” the report says. “The oil and gas industry ... has far less exposure to the cost of debt.”
In the U.S., the Wood Mackenzie analysis showed that a two-percentage-point increase in the riskfree interest rate pushes up the cost of electricity by as much as 20 per cent for renewables. The comparative increase for a combined-cycle natural gas-fired power plant is only 11 per cent, the report states.
“I've been in renewables for 30 years and if this interest rate hiking happened 10 or 20 years ago, I would have said the industry would be completely dead,” Legault said.
“In our case, we see a 33 per cent increase in the cost of producing electricity with our turbine today compared to a few years ago, because of the interest rate increase.”
But Legault added that the renewables sector has momentum in its favour. In Canada, the wind, solar and energy storage sector grew by more than 11 per cent in 2023, according to statistics from the Canadian Renewable Energy Association.
“What's playing in our favour now compared to 10 years ago is that people and corporations, our customers, are more serious about reducing their greenhouse gas footprint than they were. Especially in Europe — it's mandatory, it's in the regulation, they have to do it,” he said.
“So the interest rate hike will have an impact but, because we have so much momentum, it won't kill the renewables industry. But it will definitely slow it down.”
The Wood Mackenzie report says governments need to offset the burden of high interest rates by offering clear, consistent and sustained incentives to support the uptake of low-carbon energy and green technologies.
“Transitioning to a net-zero global economy is a monumental investment challenge. Meeting the challenge, already an outside bet, will have to happen against a less favourable monetary backdrop than the world has been used to since 2009,” the report says.
Bellissimo said that means the clean technology investment tax credit promised by the federal government in its budget last year and expected to be enshrined in legislation this spring is critical to ensure the effect of higher interest rates doesn't get passed on to consumers on their power bills.
“The demand for electricity is growing and we will need more renewable energy and energy storage. And wind and solar are the most affordable sources of electricity in the world today, even with higher interest rates,” she said.
“So even with higher project costs, we will still be building renewables. What we need to do is have the (investor tax credit) pass so that the cost to customers is not as high.”