The world鈥檚 green energy transition, which is essential to achieving net-zero emissions and halting climate change, is under threat, as a financial era of rising interest rates has made some projects, like new offshore wind farms, unaffordable. Estimates suggest that Europe must now find an additional 鈧�163 billion to reach net zero by 2050, with figures likely to be similar elsewhere in the world.
Over the past 15 years, interest rates have been unusually low, making cheap financing accessible for companies to build green energy projects. The transition has been further boosted by the rapidly falling cost of green energy technologies, which has led many governments to withdraw subsidies altogether from some technologies.
But more recently, central banks around the world have been hiking rates in a bid to quell soaring inflation, which is partly driven by the rising cost of fossil fuels following Russia鈥檚 invasion of Ukraine. In the UK, interest rates have risen from 0.1 per cent in December 2021 to 5 per cent last month, while the European Central Bank has raised the rate at which it lends to banks from 0.5 per cent in July 2022 to 4 per cent last month.
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Rate rises aim to choke off spending across the economy, helping to dampen inflation. But the measures are also stymieing investments, with wind, solar and other green energy projects now struggling to get off the ground.
from Dutch consultancy Berenschot, commissioned by the Netherlands Renewable Energy Association (NVDE), suggests rate rises in Europe since 2021 have already upped the costs of the energy transition until 2050 by 鈧�163 billion. Comparable figures for other parts of the world aren鈥檛 available, but the rising cost of capital will have a similar effect everywhere.
Increasing interest rates is a 鈥渂lunt tool鈥�, says at the University of Amsterdam, the Netherlands. 鈥淚t brings down inflation, but then the cost of that in terms of lost investments are serious.鈥�
There are also signs it is a tool that is no longer fit for purpose as we change our energy mix. Low-carbon energy infrastructure, such as wind farms, is costly to build but cheap to run, says at the London School of Economics. In contrast, many fossil fuel energy projects are relatively cheap to build but have higher operating costs. 鈥淭he cost of capital is more important for net zero than the conventional economy,鈥� says Robins. That means rising rates harm green energy more than they harm fossil fuel-based energy schemes.
As such, firms are pulling back from new projects. In a , Mads Nipper, CEO of Danish green energy developer 脴rsted, said the firm is taking 鈥渁ctive choices鈥� to reconfigure projects as a result of rising rates. This includes Baltica 3, an offshore wind farm planned in the Baltic Sea, which 脴rsted has postponed its final investment decision on.
鈥淔or some of these projects, quite honestly, we are going back to our major and most important suppliers, saying: 鈥榊ou need to help us find additional cost savings that can improve these projects鈥�,鈥� Nipper said. 鈥淲e鈥檙e also explicitly saying if we cannot get our projects to sufficient value creation, then therefore not be a responsible user of our investors鈥� money, then we are prepared to walk away from these projects.鈥�
The trend is being felt across the entire green energy sector. NVDE has a membership spanning wind, solar, heat pump and electric car-charging firms, as well as grid operators. In a conducted in April, it found that almost one-third of respondents have already cancelled or postponed green energy projects because of the rate rises. 鈥淩ising interest rates are really damaging the energy transition,鈥� says NVDE chairman Olof van der Gaag.
On 20 July, Swedish energy firm Vattenfall announced it would stop work on an offshore wind farm in the UK鈥檚 North Sea, warning development costs for the Norfolk Boreas scheme had increased by 40 per cent due to rising interest rates and supply chain costs. 鈥淎lthough demand for fossil-free electricity is greater than ever, the market for offshore wind power is challenging,鈥� Vattenfall鈥檚 chief executive Anna Borg said in a statement. The 1.4GW wind farm was set to be one of the biggest offshore wind projects in the UK鈥檚 clean power pipeline, capable of providing enough clean power for around 1.5 million homes.
at trade body SolarPower Europe says rising interest rates are a concern for the 鈥渂ankability鈥� of solar projects. 鈥淚f the cost of debt is higher, the project鈥檚 return on investment will be impacted,鈥� he says. This applies not just to solar power projects, but also to manufacturing projects, such as plans to build solar panel factories. Financing support from governments and central banks is 鈥渆ssential鈥�, he says, to ensure these schemes go ahead even in an environment of high interest rates.
Van der Gaag says one option might be for central banks to implement a preferential 鈥済reen interest rate鈥� for renewable energy projects. Such an approach wouldn鈥檛 be unprecedented. In 2014, 2016 and 2019, the European Central Bank operated a scheme in which banks benefited from lower interest rates if they lent more to households and non-financial corporations. This helped to encourage banks to keep lending to the 鈥渞eal economy鈥� during times of economic uncertainty.
鈥淭he same kind of mechanism could be applied in a more focused way, specifically for investments in the energy transition,鈥� says van der Gaag. This would 鈥渢ackle the problem [of rising inflation] at source鈥�, by reducing reliance on volatile fossil fuel markets, he says.
As with much climate policy, there is a sense of missed opportunities when it comes to interest rates. Governments should have done more to roll out low-carbon energy while financing was cheap, says van 鈥檛 Klooster. 鈥淭hat鈥檚 the big failure of the last decade,鈥� he says. 鈥淚t would have been possible to fund a lot of these investments much more cheaply.鈥�
