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Why the election won’t decide the fate of clean energy investment
Clean energy policies or monetary easing could provide near-term tailwinds, but we believe the underlying economics will remain the real driver of progress.
The following is an extract from our latest CIO update.
The starkly divided political landscape in the US might suggest continued investment into renewable energy hangs in the balance. We don’t believe that’s the case for one simple reason: economics.
A Democrat win would promise a continuation of the potent legislative support for clean energy investment provided by the 2021 Bipartisan Infrastructure Law, the 2022 CHIPS and Science Act, and the 2022 Inflation Reduction Act. This would benefit the industry, driving capital via federal investment, loans and tax credits. But what if the Republicans win?
Trump has made no secret of his antipathy towards renewables and his support for domestic fossil fuels.[1] Were he to win, we might therefore expect to see a similar reversal of US climate policy to that witnessed under the previous Trump administration, which culminated in the country’s withdrawal from the Paris Agreement in 2017.
Given the rhetoric of Trump’s first term, investors may be surprised to learn that the amount of electricity in the US provided by wind (onshore and offshore) and solar actually rose every year during Trump’s presidency, with what was at the time record levels of generation seen across both (see chart).
Interest rates and financing costs
The cost of building new power-generation facilities is typically undertaken via a mixture of debt and equity. The power produced is then sold through power purchase agreements (PPAs).
While new PPAs incorporate higher funding costs brought about by the rise in interest rates, power producers with existing PPAs suffer lower margins in an environment of rising rates. That’s because the receivables are fixed but payables (i.e. interest payments) can be variable. As a result, a higher cost of capital weighs on the energy sector just as it dampens activity throughout the wider economy.
While some governments have sought to offset the impact of higher rates on the energy transition with subsidies and the development of carbon markets, interest rates will continue to be a factor in the rate of investment in power-generation facilities, including renewables. If rates fall as markets anticipate, this will provide a tailwind for clean energy producers with existing PPAs.
The economics of change
But beyond fluctuations in interest rates, a more fundamental shift in the economics of clean energy is transforming how the world gets its power.
Between 2010 and 2022, solar and wind power passed a crucial tipping point, becoming cost competitive with fossil fuels without the need for subsidies. Over this period, the global weighted average cost of electricity from solar fell 89%, making it almost a third less than the cheapest fossil fuel globally.[2]
The International Renewable Energy Agency estimated in 2022 that the renewable power deployed globally since 2000 saved an estimated US$521 billion in fuel costs in the electricity sector.[3]
Ultimately, we believe economics – not policy – provides the foundation for a clean energy future.
The above is an extract from our latest CIO update.
[2] Source: Renewables Competitiveness Accelerates, Despite Cost Inflation (irena.org)
[3] Source: ibid
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