High Interest Rates Could Slow Down the Energy Transition

Renewable energy projects and emerging low-carbon technologies are more exposed to the current high interest rate environment globally, which could slow the pace of transition to clean energy, Wood Mackenzie said in a new report on Thursday.

The rising interest rates in many major renewables markets in the past two years have significantly raised the cost of capital for new projects, the energy consultancy says.

Global monetary policies are set to remain much higher in the coming decades than the near-zero interest rate period in the two decades from 2009 and 2022, WoodMac added.

“Companies, investors and policymakers should brace themselves: tougher financial conditions could persist for some time to come,” the consultancy’s macroeconomic and offshore wind analysts note.

The higher interest rates and as a result, rising borrowing costs, negatively impact renewable projects more than they do the more established oil and gas industry and its new projects, according to WoodMac.

For example, an analysis by Wood Mackenzie showed that a 2-percentage point increase in the risk-free interest rate in the United States pushes up the levelized cost of electricity (LCOE) for renewables by as much as 20%. The comparative increase in LCOE for a combined-cycle gas turbine plant is only 11%.

“This increased cost of capital has profound implications for the energy and natural resource industries, particularly the cost and pace of the transition to low-carbon technologies,” said Peter Martin, Wood Mackenzie’s Head of Economics and lead author of the report.

High interest rates and surging costs, including the cost of capital, have hit the offshore wind industry especially hard in the past year.

The offshore wind sector was plagued in 2023 by cost increases, rising interest rates, quality issues with turbines, and delays and cancelation of projects. The new year will not fix all these challenges immediately, Orsted, Siemens Energy, and Vestas – the three biggest wind power developers and turbine makers in the world – warned earlier this year.