Clean Energy Faces Its Last Test: Rising Interest Rates - E&E News

Clean Energy Faces Its Last Test: Rising Interest Rates – E&E News

Clean energy has managed to thrive during a global pandemic, a hostile presidential administration, and fierce competition from fossil fuels. Now, you are facing the prospect of fighting high interest rates and a possible recession.

The rising threat of a market downturn is a test of the economic strength of clean energy. The industry — from renewable energy developers to electric car makers — has sprung up over the past decade, driven by a market where capital was plentiful and debt was cheap.

However, as the Federal Reserve prepares to raise interest rates to tame rising inflation and a growing number of financial analysts warn of a possible recession, clean energy companies face the prospect of rising borrowing costs and growing under-lending.

It simply made a tough job more difficult,” said Julio Friedman, chief scientist at Carbon Direct, a carbon dioxide removal company who worked at the Department of Energy during the Obama administration. It will be more difficult to get debts and it will be a burden on the system. That’s not a reason to slow things down or delay from a policy perspective, but it’s important to be aware of that.”

The economic downturn is a threat to the energy transition because replacing fossil fuels with clean technology takes a lot of money. As a new industry, many clean energy companies need to borrow to fund their growth. The cost structure of wind and solar projects, in particular, is also different from their fossil fuel brethren, in that most investment is required to build a project rather than run it. This means that developers need money up front.

In recent years, clean energy companies have been able to shrug off attacks from the Trump administration and drive the economic turmoil caused by the coronavirus pandemic. In 2021, the International Energy Agency estimated The world will spend $750 billion on clean energy investments. The agency concluded that the amount spent on new renewable energy ($370 billion) exceeded investments in oil and gas exploration ($350 billion).

But this investment is still far below the IEA level Believes The world needs to achieve net zero emissions by mid-century. The agency estimates that global capital spending on clean energy must rise to $5 trillion annually in order to essentially eliminate emissions.

While a recession will make it harder to raise that money, analysts noted that clean energy has weathered recessions before. The Great Recession produced a series of high-profile cleantech failures.

However, they note that the world looks significantly different today than it did at the end of the last decade. Where pneumatic, solar and electric vehicles were once unproven, they are now mature technologies. And unlike the Great Recession, where capital markets stalled, there appears to be no shortage of money flowing through the global economy today.

said Josh Fried, who leads the climate and energy program at Third Way, a think tank known as “the center of the left.”

“There is confidence to invest in and get a return on investment that was not there in 2008-2009,” Farid said.

Indeed, clean energy companies continue to raise money. Li-Cycle Holdings Corp. announced. , a battery recycling company, recently announced a $200 million investment from Glencore PLC. 6K, the manufacturer of battery components, recently raised $102 million, while British carbon capture maker Carbon Clean announced it had raised $150 million.

Investors are increasingly concerned about the market and are subjecting companies’ business plans to greater scrutiny, said Paul Muley, senior vice president of finance at Arcadia, a climate software company. But there is still a strong appetite for climate investment, with more and more sustainability and climate funds dedicated to looking for market opportunities. He said that companies with proven business platforms likely won’t have much trouble raising money, because mature companies are relatively few and far between.

Arcadia collects energy use and pricing data to help businesses and consumers seeking to purchase renewable energy. company recently Raised $200 Million It uses cash injections to finance it Obsession From Urjanet, the utility data provider.

The big question is what happens to early stage companies that haven’t yet perfected their business model. Molly said he expects some climate tech companies to close faster in a recession, but mergers are likely to flow.

“At the end of the day, the market is too big and the opportunity is too big to dissipate completely,” he said.

‘A new form of inequality’

Growing concerns about a possible recession come amid rising fossil fuel prices. West Texas Intermediate, the benchmark for US crude oil, is trading at $110 a barrel, compared to $65 a barrel this time last year. June contracts for US gas standards are $8.75 per million British thermal units (MMBtu) during the first half of 2022. A year ago, gas was just $2.91 per million British thermal units (MMBtu).

Analysts said rising fossil fuel prices are a boost to emerging technologies such as advanced nuclear and geothermal power in the energy sector, or the expanded use of green hydrogen in industry. Some of these technologies will also benefit from the bipartisan infrastructure law passed last year. The bill contains $10 billion for carbon capture, direct air capture and industrial emissions reduction programs; $8 billion for hydrogen centers. and $2.5 billion for advanced nuclear weapons, according to to the Department of Energy.

Carbon Direct’s Friedman said companies looking to tap into this money will need some flexibility if they are to succeed.

“A number of projects died during the Obama administration’s ARRA — not because they were bad projects or out of money, but because the language of allocation was too restrictive. Too restrictive on time,” he said, referring to the US Recovery and Reinvestment Act.

Policy is one of the biggest variables in driving the energy transition during the downturn, said David Victor, a professor who studies energy markets at the University of California, San Diego. In countries where support for climate action is strong, government support can provide confidence for investors to put money behind large capital-intensive and technologically risky endeavors.

That was on display in Europe last week, when Belgium, Denmark, Germany and the Netherlands pledged to install 150 gigawatts of offshore wind by 2050, a tenfold increase from Europe’s current offshore wind capacity. The construction will be based in part on floating turbines, which are more expensive and technologically more difficult to install than those installed on the ocean floor.

However, the combination of high borrowing rates and stagnation can hamper clean technologies in countries that do not support the policies. The impact may be particularly severe in poor countries, which have less access to capital and where investors often perceive political risks to be higher.

“I think what that means are places where government policy is strong and getting stronger and people are able to keep the cost of capital low, and the energy transition will continue to accelerate. In places where you can’t, it will probably stop,” Victor said. “You could see a new form of inequality, in this case inequality in the energy transition, that results from this huge disparity in policy risk and capital risk.”

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