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Tags: interest rates | green energy

High Interest Rates Bad News for Energy

a finger touching the words interest rates

Paul F. deLespinasse By Friday, 05 April 2024 01:25 PM EDT Current | Bio | Archive

Recent increases in interest rates have hit green energy projects in a major way, with some planned ocean-based wind turbines even cancelled.

This has been widely celebrated by interests hostile to green energy, but it is only going to be a temporary setback because interest rates will go down again in due course.

Depending largely on decisions by the Federal Reserve Bank, prevailing interest rates may fall or rise. Lately they have risen in an attempt to get inflation under control.

While the higher interest rates apply equally to all energy projects, conventional as well as green, they have a greater impact on green projects.

The interest corporations pay to those who have purchased their bonds are an unavoidable cost of doing business for both types of power.

Costs for companies employing the older technologies are divided into two main parts. The first part is the cost of building generating facilities. The second, much larger, part is the cost of purchasing the coal, gas, or oil needed to run the facilities.

Most of the cost of producing electricity with the older technologies is therefore spread out over the decades after the facilities have been built.

Higher interest rates will affect the construction costs. But the fuel to operate these facilities will be bought after they begin producing electricity.

Rather than borrowing to pay for this fuel, some of the income from sale of the electricity can be used to pay for the fuel. This makes the cost of borrowing money irrelevant.

The total cost of the electricity produced by the dirty plants will therefore be not be increased much by a temporary increase in interest rates.

The case with green energy is quite different. Pretty much all of the cost of producing green energy is the cost of building the wind turbines or building and installing the PV panels in the first place.

These facilities require no fuel. They do require maintenance, and they wear out over time, but so does the equipment that produces dirtier energy.

If prevailing interest rates go up, this acts as a headwind for installation of green energy facilities, since the higher rates affect nearly the total cost of producing the green energy.

There is an analogy here with the energy profile of internal combustion vehicles compared with that of electric cars. Electric cars so far may cost more to buy, but their operating expenses are lower because they require less maintenance and because electricity — in general — is cheaper than the equivalent amount of gasoline.

If one is borrowing to buy a car, higher interest rates will put green cars at a disadvantage, since a higher percentage of their total operating costs must be paid up front. This is true even though the long-run cost of owning and driving an electric car is lower.

Not everyone can afford the luxury of thinking about the long run.

During the last two decades investment in solar and wind energy has increased dramatically, and the amount of green electricity produced has also greatly increased. The headwinds produced by today's high interest rates may slow this growth, but they won't stop it completely.

And the fact that the current high interest rates will begin coming down bodes well for the future of green energy. If high interest rates are a headwind, the coming return of lower rates will become tailwinds accelerating investment in wind and solar.

Since wind and solar are already cheaper than electricity produced by burning hydrocarbons, normal economic motives combined with governmental inducements should accelerate production of green energy even more.

Once a sufficient grid can be built to allow all green producers to move their electricity to where and when it is needed, developments are going to become exciting!

Paul F. deLespinasse is Professor Emeritus of Political Science and Computer Science at Adrian College. He received his Ph.D. from Johns Hopkins University in 1966 and has been a National Merit Scholar, an NDEA Fellow, a Woodrow Wilson Fellow and a Fellow in Law and Political Science at the Harvard Law School. His college textbook, "Thinking About Politics: American Government in Associational Perspective," was published in 1981. His most recent book is "The Case of the Racist Choir Conductor: Struggling With America's Original Sin." His columns have appeared in newspapers in Michigan, Oregon and other states. Read more of his reports — Click Here Now.

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If prevailing interest rates go up, this acts as a headwind for installation of green energy facilities, since the higher rates affect nearly the total cost of producing the green energy.
interest rates, green energy
Friday, 05 April 2024 01:25 PM
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