Central banks emerge as threat to debt-funded green energy boom
08 March 2018 | Markets
Central banks are emerging as a bigger threat to the green-energy revolution than Donald Trump.
While the U.S. president is tinkering with rules to give coal a leg up over wind and solar, it’s higher interest rates that threaten to scale back the flow of cheap financing that helped funnel $2.9 trillion into renewables in the past decade.
The U.S. Federal Reserve, European Central Bank and Bank of England all are shifting towards tighter monetary policies, and investors in renewables are starting to think about how higher borrowing rates will hurt the economics of their projects. Most vulnerable are developers that rely on non-recourse bank loans for most of their project costs, including some U.S. rooftop-solar installers.
Higher rates would be a significant headwind for policymakers attempting to make good on commitments made more than two years ago in the Paris Agreement on climate change. Investment flowing into clean energy may need to triple by 2030 to $900 billion a year in order to meet the treaty’s goals.
For more on where rates are expected to rise first, click here
Tighter monetary conditions will reshape how renewables get funding. Here’s what’s happening:
1. Bank debt is about to become more costly
Financing costs for renewables are near record lows. For wind farms in Europe, debt costs have fallen 43 percent since 2013, according to Bloomberg New Energy Finance. Rock-bottom interest rates combined with years of quantitative easing have fanned competition among banks to put their cash to work, slashing the price of loans and loosening borrowing conditions, or covenants.
As that unfolds, fewer green projects are apt to get new loans, said Angus McCrone, senior analyst at Bloomberg New Energy Finance.
“Banks could start to regret the low margins they charged on project loans in recent years,” McCrone said. “Some developers would find that some of their projects were no longer economic to build."
2. The cost of clean power may have fallen too much
Revenue from wind and solar projects may not be sufficient to cover the debt on all projects once capital costs increase because sponsors have narrowed their margins so much there’s no cushion left for harder times.
3. Renewables are becoming more risky
Once safe as the subsidized rates they were paid for power, renewables increasingly are having to compete against lower-cost natural gas and coal as governments scale back support.
Last year, Germany and the Netherlands lured bids to build offshore wind farms without any subsidy. A number of solar projects were also being built aid-free in Portugal, Spain and even the U.K. Those leave the developer dependent on market power prices.
Banks and institutional investors are likely to find renewables less appealing as an asset class, given the risks they’re taking on.