Analysts warn that the renewable energy sector faces significant challenges due to soaring interest rates, posing a threat to the worldwide transition to sustainable energy.
With interest rates in the US reaching multi-decadal highs since 2023, borrowing costs have surged, particularly impacting capital-intensive renewable projects heavily reliant on subsidies. Vegard Wiik Vollset, head of renewables and power (EMEA) at Rystad Energy, emphasizes the vulnerability of new renewable projects to high-interest rates, while existing projects with secured debt remain relatively unaffected.
Data from the US Energy Information Administration reveals that over 80% of planned new energy installations in 2023 in the U.S. were from renewable sources like battery, solar, and wind. The recent uptick in the US 10-year treasury yield, fueled by stronger-than-expected inflation data, heightens concerns, with markets predicting the first interest rate hike in September.
Even marginal interest rate fluctuations can substantially inflate the total cost of renewable projects, as highlighted by Wood Mackenzie, which estimates a two-percentage-point increase could inflate the levelized cost of electricity (LCOE) for renewables by up to 20%.
Given that renewable energy plays a pivotal role in achieving the climate goals outlined in the 2015 UN Climate Change Conference in Paris, any setbacks in the sector could jeopardize these ambitious targets. Wood Mackenzie’s report underscores that in a high-interest-rate environment, the journey towards achieving net zero emissions becomes significantly more arduous and costly.
