Long-shelved capital-intensive green-energy projects could be dusted off for construction to begin—if everything goes right
3 min
If the Federal Reserve cuts interest rates in the coming weeks, a friendlier borrowing environment could make all the difference for some mothballed renewable-energy projects.
The returns generated by such projects once they are up and running are often predictable and modest, but because they require a large upfront expenditure, frequently funded in part by debt, they are sensitive to interest-rate fluctuations.
With recent economic data suggesting the Fed has plenty of room to cut, some investors say now is the time to get moving on renewable plans.
Thomas Byrne, chief executive at solar investor CleanCapital, said a drop in interest rates would affect a “not inconsequential amount” of solar developments under consideration. “We have had projects on hold that simply don’t make economic sense for us anymore because the borrowing cost was too high. So those projects will immediately unlock,” he said.
Byrne estimates some of these projects could begin construction by the end of the year and start generating energy next summer.
Solar and wind energy in particular stand to gain from lower borrowing costs, said Srinivasan Santhakumar, principal research analyst with the research firm Wood Mackenzie. “Higher interest rates have disproportionately affected the economics of wind and solar projects,” he said.
An interest-rate increase of 2 percentage points could result in a 20% jump in the cost of producing energy for utility-scale solar power over the life cycle of a project, according to a Wood Mackenzie analysis released in April. In comparison, the same increase might boost the cost of producing energy from gas by 10% to 12%.
Some developers may wait to see a steeper drop before making moves. “It’s definitely a phenomenon, particularly for the more sophisticated, more longer-standing developers who’ve had a history of surfing the ups and downs of the interest-rate spectrum and are also aware of the consequences for their own balance sheet of a long-term interest rate rise,” said Katherine Mogg, managing director at the New York Green Bank, a state-sponsored investment fund that focuses on filling gaps in energy transition financing. Mogg said she expects to see a modest uptick in requests for proposals in the coming months.
The Federal Reserve has signalled a rate cut at its next meeting in September, and most futures investors expect a quarter-percentage-point reduction, according to CME FedWatch. More than three quarters of investors expect the Fed to lower its benchmark rate, now in a range between 5.25% and 5.5%, by at least a full percentage point by year-end.
While a cut in interest rates is a positive for renewables financing, a durable boost for green projects may require a Goldilocks economic scenario in which a cut to borrowing costs don’t coincide with rising fears of a global recession, which could in turn drive investors away from the U.S., said Ron Erlichman, partner at the law firm Linklaters.
“There are a lot of different factors, like the old cliché of ‘headwinds,’ that affect transactions,” he said, adding that large-scale projects such as offshore wind, hydrogen and carbon capture frequently rely on foreign investment.
Fears of unchecked inflation and rampant increases in the cost of materials have cooled down somewhat in the past year, he said, but the looming U.S. election brings a fresh element of uncertainty . While many see a low probability of a full rollback of the Inflation Reduction Act, the legislation that provides game-changing tax breaks for renewables, an executive branch hostile to green energy could slow project permitting or otherwise “nibble at the fringes” of the landmark legislation, as Byrne put it.
“Having done this awhile and seen the cycles in the market, I still remain incredibly optimistic about renewables and energy transition in the United States,” Erlichman said.
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2 min
Tuesday’s retail sales report could be the scrap of evidence that tips the balance as Federal Reserve officials decide how much to cut interest rates on Wednesday.
It is practically a given that the central bank will reduce rates. Inflation has fallen to its lowest point since February 2021, giving the Fed more flexibility to focus on the second component of its dual mandate—achieving maximum employment. Although the labor market remains resilient, the most recent two jobs reports have been weaker than expected, putting some pressure on the Fed to loosen monetary policy.
The question now is by how much rates will fall—0.5 percentage point, or 0.25 point? The indications from interest-rate futures are split , recently favoring the more aggressive half-percentage-point decrease.
Andrew Hollenhorst, an economist at Citi , leans toward the likelihood the Fed is more cautious on Wednesday, cutting rates by 0.25 percentage points. But he notes that it it is a close call that depends on the dynamics of the bank’s rate-setting committee and the strength or weakness of Tuesday’s retail sales report.
A positive surprise would suggest that both consumers and the labor market remain resilient, paving the way for a more modest cut. If the report comes in well below expectations, however, Fed officials may grow concerned that a weaker labor market is weighing on consumer spending, which could lead to a bigger cut, Hollenhorst added.
Louis Navellier, founder and chief investment officer of the money-management firm Navellier agrees. “In theory, if the August retail sales report is horrible, then a 0.5% Fed key interest rate cut may be forthcoming on Wednesday,” he said.
Economists are expecting retail sales will decline by 0.2% in August from July, according to FactSet. They jumped by a surprising 1% in July .
Lower gasoline prices and car sales will likely drag the headline number lower. Indeed, stripping out car and gas sales, retail sales are projected to increase by about 0.3% month over month.
Yet there is growing concern that even excluding autos and gas sales, the sales figure will be soft. While spending was remarkably strong in July, the Fed’s latest Beige Book flagged that consumer spending ticked down in August, points out Bill Adams, chief economist for Comerica Bank . Many retailers, particularly those catering to lower-income shoppers, have warned that Americans are being cautious and exceedingly choosy about what they are buying and where.
The impact of the retail sales report will likely extend beyond the immediate rate cut. The insights it contains about U.S. consumers will also factor into the Fed’s quarterly update to its Summary of Economic Projections, containing officials’ latest forecasts for the U.S. economy, inflation, and near-term interest rates.
The so-called dot plot , which charts the individual interest-rate projections of the seven members of the Fed’s board of governors and the 12 regional Fed presidents, is always closely watched as investors try to chart the Fed’s future actions.
Hollenhorst believes the median dot showing where rates will be at the end of 2024 should show “at least” 0.75 percentage-point of cuts, factoring in 0.25 point at each meeting through the end of the year. But it is likely that officials will leave the door open for more cuts in case data on the job market or consumer spending sour faster than expected.
