Attempts to remove coal usage in South Africa and Indonesia have faced obstacles. The development of offshore wind farms in New Jersey and British coastlines, as well as a green hydrogen project in an Italian port city, have also encountered difficulties.
Climate initiatives across the globe are failing due to expensive loans influenced by interest rates – jeopardizing a critical aspect of the global endeavor to mitigate the severe consequences of rising temperatures.
Several countries, including the US, have come together at the COP28 climate conference in Dubai with the aim of increasing global renewable energy capacity threefold by the end of the 2020s. This commitment may be one of the significant steps towards addressing climate change that will be discussed at the summit, which is currently facing a dispute over whether nations should agree to gradually eliminate the use of fossil fuels.
However, these goals are now in jeopardy due to increasing interest rates.
Higher borrowing costs were cited by developers as a contributing factor in the cancellation of several significant offshore wind ventures in recent months. These included two projects near New Jersey by Danish firm Ørsted and a project in the North Sea by a Swedish company. In September, an offshore wind energy auction in the U.K. had no bidders, which was also attributed to the impact of increased interest rates.
“It is often overlooked how significantly interest rates are affecting our global efforts to combat climate change,” stated Sumant Sinha, the CEO of ReNew, a renewable energy company based in India. “Interest rates are often an overlooked factor in managing the economy and controlling inflation, and many people fail to recognize this.”
In essence, consistent increases in rates have disrupted the economic foundations of significant, resource-intensive ventures with extended repayment timelines – precisely the kind of initiatives necessary to achieve the global target of drastically reducing carbon emissions by the middle of the century.
The current economic conditions are posing challenges in transitioning away from the use of fossil fuels. According to Joseph Curtin, the managing director of power and climate at the Rockefeller Foundation, the increasing interest rates have made it difficult to refinance debt for shutting down coal-fired power plants. This has resulted in wealthy nations being unable to provide billions of dollars in financial aid to countries like South Africa, Indonesia, and Vietnam to encourage them to move away from coal.
The negative impact of renewable energy is
Central banks such as the Federal Reserve and the European Central Bank have been raising interest rates in order to decrease inflation, attempting to regulate it following the pandemic and conflict in Ukraine involving Russia.
However, these actions have inevitably had consequences. Specifically for those monitoring climate change, they have redirected investment away from developing countries that are expected to produce a significant amount of greenhouse gases in the future.
According to Chris Seiple, vice chair of the power and renewables group at consulting firm Wood Mackenzie, investments in renewable energy have significantly decreased in the Middle East, leading to a forecast of fewer new installations compared to previous expectations.
Mike Taylor, a senior analyst at the Abu Dhabi-based International Renewable Energy Association (IRENA), stated that the use of coal and imported oil and gas in Asia has hindered the progress of onshore wind projects in the region. This has resulted in a similar impact as seen in other parts of the world.
At the same time, the increased rates have hindered the financing of expensive renewable projects, even in wealthy nations.
According to Seiple, while hydrogen has been viewed as a promising solution for reducing the environmental impact of heavy industries, it is not currently financially viable. Only 7% of hydrogen projects in Europe have secured funding for construction, as reported by Bloomberg New Energy Finance. Enel, an Italian energy company, recently gave up on its government-funded green hydrogen project in La Spezia.
The unstable funding for renewable energy is causing a delay in the urgent deployment of clean energy that scientists say is crucial in fighting climate change. The rates play a significant role in this newfound instability.
This is due to the fact that clean energy projects usually receive the majority of their funding upfront, and then pay off their debt over time using the revenue generated from electricity customers. The prices that developers are able to charge are often determined before the financing is completed, making it difficult to withstand changes in rates.
Ramon Mendez, former energy secretary of Uruguay, stated during a press conference on Wednesday that the renewable energy industry differs greatly from the traditional energy sector. He went on to say that renewable energy is primarily driven by financial considerations.
Widening the gap
The issue of economic equality is also in jeopardy.
Developing countries were already struggling to cope with higher borrowing conditions before the increase in interest rates began. Furthermore, fluctuations in interest rates can have a greater impact on halting projects in these countries, where there is a higher perceived risk due to political or economic instability.
IRENA’s Taylor stated that there is no time remaining to tolerate such disruptions. He explained that the increased rates have caused delays in projects in low- and middle-income countries due to reluctance.
Avinash Persaud, climate envoy for Barbados Prime Minister Mia Mottley, stated that the impact is felt worldwide and has initiated a strategy to modify global financial systems in order to direct more capital towards smaller countries.
According to Persaud, higher interest rates in countries like the U.S. and EU attract investors to more secure investment options like U.S. Treasury bonds. This diminishes the availability of funds that could have been directed towards developing economies, forcing them to raise their own interest rates in order to attract investors. As a result, heavily indebted nations face even higher costs for managing their debt.
In an interview, Persaud stated that there has been a decrease in international capital flows, which is making it more challenging for developing countries to undergo a green transformation.
Although the majority of investments in renewable energy are made in China, the United States and the European Union, the International Energy Agency reports that developing countries will be responsible for most of the world’s future warming. This decrease in investment in these markets makes it difficult to achieve the goal of tripling renewable energy and puts nations further behind in reducing greenhouse gas emissions quickly enough to prevent catastrophic consequences.
Mike Hayes, the head of renewables at KPMG, stated that the challenge before us is incredibly difficult.
Struggling with unfavorable loan conditions becomes a hurdle as the worldwide government debt rose to 92% of the gross domestic product in the previous year, compared to 84% in 2019, according to the International Monetary Fund. As a result, countries have limited funds to allocate towards sustainable energy, as stated in a November report by KPMG.
What needs to be done?
Leaders acknowledge the gap between the demands of the global climate and the reluctance of the private industry to provide funding. In a recent proposal, French President Emmanuel Macron recommended that initiatives for renewable energy should have lower interest rates compared to those for coal-powered plants, which are currently being constructed at a rate that contradicts climate predictions.
Some individuals have been tasked with developing innovative approaches. On December 3rd, U.S. special climate envoy John Kerry officially announced an initiative aimed at addressing this issue.
Utilize credits to transition developing nations towards more sustainable energy sources.
Rockefeller is collaborating with the Monetary Authority of Singapore and ACEN Corp., a company based in the Philippines, to provide a loan that rewards the act of decommissioning the South Luzon Thermal Energy Corp. coal plant in the Philippines and transitioning to renewable energy sources.
On December 1st, the World Bank made a commitment to allocate 45% of its funding for the upcoming fiscal year towards investments related to climate, totaling $40 billion.
Higher rates are also drawing public institutions like the U.S. International Development Finance Corp. even deeper into emerging economies to unstick investment logjams through financial instruments like loan guarantees and underwriting insurance for projects, said Jake Levine, the agency’s chief climate officer.
He informed journalists that the increasing interest rates have posed difficulties in various sectors, including the United States. However, in our markets, they have worsened a pre-existing challenge that is one of the main hindrances to sufficient capital flow.
This report was contributed to by Sara Schonhardt.