Think of the people who have done most to impede clean power over the past few years, and a few obvious figures suggest themselves: Vladimir Putin. Mohammed Bin Salman. Donald Trump. Jerome Powell?

That last one may seem out of place. The Federal Reserve governor hasn’t always delighted climate activists, but he’s done his best to stay out of the bitter debates between advocates of fossil fuels and green technology. And yet the actions he’s taken to manage interest rates over the past few years have quietly been one of the most decisive factors slowing the pace of the energy transition.

As the most drastic pace of US monetary tightening since the early 1980s gives way to a more accommodative policy, those macroeconomic headwinds that have hindered the rollout of renewables in recent years could be on the brink of turning into tailwinds. That might accelerate the uptake of clean energy in ways we’re yet to appreciate.

To understand why, it’s worth considering that debt has the same outsized importance to clean energy as fuel has to fossil power. About half of the cost of gas-powered electricity is gas itself. Renewables are fuel-free, but that means almost all of their expenditure is incurred upfront —  financed with debt. (1)

That makes them more dependent on the cost of finance than carbon-intensive alternatives. When Jay Powell lifts interest rates, he makes renewables less competitive. When he cuts, the dynamic goes into reverse.

That’s what happened last year. With interest rates climbing, numerous developers were forced to demand more generous terms. A 3.2 percentage point rise in the cost of capital increases the price of German offshore wind by about 26%. The government and utility counterparts, who had assumed that expenses could only go down, balked. Clean-power auctions failed, billion-dollar projects were cancelled, and turbine-builder Siemens Energy AG ended up seeking a bailout from Berlin. The sector appears to have survived its brush with death, but financial conditions are still the toughest they’ve ever been.

It’s not just about the cost of finance, either — it’s about its availability. During a decade of low interest rates, funds seeking better returns than they could get from government debt sparked an investment boom in infrastructure, a heading which includes clean energy. More than $1 trillion was raised in unlisted infrastructure in the decade through 2022, according to Preqin Ltd., an alternative-assets data provider.

Plenty more went into listed businesses: The US utility sector is such a neat proxy for the cost of borrowing that its performance is often the mirror-image of the yield on 10-year government debt. All that cash pushed down the cost of capital, making clean energy still more competitive.

That juggernaut came shuddering to a halt last year as rising rates dried up funds. Just $21 billion was raised for unlisted infrastructure during the first three quarters of 2023, an 85% decline from the same period a year earlier.

The impact of a sustained reduction in interest rates could be profound. Once a project is established and throwing off stable cashflows, developers seek to sell down their shareholdings to more conservative secondary-market investors such as pension funds, bringing in fresh capital that can be recycled into new investments. Higher rates made deals like that less attractive, further shrinking the availability of funds.

Every player in this chain is largely in the business of interest-rate arbitrage, so we don’t even necessarily need to wait for moves in the fed funds rate to see things shift. “Buy the rumour, sell the fact” means making a long-term bet on lower yields even before they show up. It’s notable that $57 billion was raised in the fourth quarter of last year, just when the prospects of further monetary tightening started to ease. That was nearly three times the sum in the previous nine months.

“We are at a turning point in the interest rate environment,” said Sarah Shaw, chief executive officer of 4D Infrastructure, a Sydney-based asset manager. “Sentiment for infrastructure assets generally, and fundamentals for some existing assets, will improve as interest rates go down.”

The unanswerable question is how much money is still sitting on the sidelines waiting to be unleashed. The past few years have hardly been lean ones for the clean-energy sector, with $1.8 trillion invested in 2023, and capital spending on wind and solar running ahead of upstream oil and gas investment.

It’s possible that the energy transition is ultimately fairly independent of the macroeconomic environment. It may even stall over the coming year, as renewed protectionism and anti-climate policies bite. But if higher rates have really been holding back green power, the momentum as central bankers take their foot off the brake over the coming months may prove unstoppable.


More From Bloomberg Opinion:


  • Yellen Junks 200 Years of Economics to Block China Clean Tech: David Fickling

  • The Fed Is Wrong About How Low Interest Rates Will Go: Bill Dudley

  • An (Almost) Inverted Yield Curve Is Worrying China: Shuli Ren

(1) Power plants also have maintenance costs, but these are small in relation to the spending on fossil fuels. Nuclear plants have to buy fuel, but the expenditure is so small as a share of total costs that they're essentially in the same boat as renewables.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering climate change and energy. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

More stories like this are available on bloomberg.com/opinion

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