The renewable energy sector is mindful of the threat posed by the end of cheap finance but believes there is enough resiliency among industry players to maintain a healthy market.

Last week, Ignacio Galan, CEO of Iberdrola, warned, “Because money is so cheap, many people who have no talent in the sector have been coming with an extremely high-level of leverage. With the change of the rates, there will be a clean-up of the sector.”

Cheap money, Mr. Galan added, “has been one of the main triggers of price inflation of costs in renewable energy projects. If interest rates go up, non-industrial players will find it more difficult to get projects”. 
Michael Taylor, Senior Analyst, International Renewable Energy Agency (IRENA)
Dr Jonathan Marshall, Energy Analyst, at the Energy & Climate Intelligence Unit (left), told Power Engineering International Galan’s remarks were reasonably founded, but the sector is in good shape to withstand much of the negative impact.

“I think there is some truth in what he says – any raise in interest rates will be felt in capital-intensive businesses, but the overall effect may not be too great.”

“The fall in capital costs that have accompanied the renewables industry’s growth into a mature industry have been one of the major drivers behind lower costs in the sector. With more and more countries backing low-carbon electricity sources, this is set to continue, with the potential to offset either some or all of the effects of higher interest rates.”

Meanwhile Michael Taylor, Senior Analyst, International Renewable Energy Agency (IRENA)  was equally measured in his response to the Iberdrola chief’s read on the situation. He shared Galan’s view on the threat to smaller entrants, but is, on the whole, positive about the sector’s overall durability.

“While solar PV and onshore wind projects have relatively short development timelines, meaning exposure to fluctuations in borrowing costs is more limited than for some technologies, there is a chance that rising interest rates may challenge the profitability of projects that have not included sufficient contingencies for rate increases prior to financial close. Given small developers are likely to have less favourable borrowing terms than large ones, they may be more exposed to this risk than larger developers.”

“A potential increase in the weighted average cost of capital for a solar PV project from 5 per cent to 7.5 per cent may increase the levelised cost of electricity by around one-fifth, assuming no induced cst cutting in other areas. The impact of rising interest rates on renewable energy power generation costs is likely to be higher than fossil fuel plants given the cost of traditional electricity is heavily dependent on fuel costs. Having said this, fossil fuel plants are exposed to fuel price risk over the life of the asset.”

However Taylor said that despite that context, other considerations offered more positive prospects.

He pointed out that there is already a large divergence in the cost of capital today from country to country and indeed between developers in some cases – ranging from 2-3 per cent in parts of Europe, up to as high as 15 per cent in parts of Asia.

“The higher the cost of capital today for projects, the lower the impact of any rate rise may have.”

“Developers – large and small – already have some experience navigating financial uncertainties and contingencies are usually built-in to project costs. For instance, recent exchange rate fluctuations in some countries have challenged project economics for a number of projects, but developers have largely found a way to proceed, albeit in some cases with some delay.”

Taylor says that it should be borne in mind that borrowing is only one component of a project’s cost.

“Renewable power generation projects, notably solar and wind, are experiencing constant innovation that is driving down the overall cost of technology and development. As a result, the cost of capital will need to rise at a rate faster than these gains to exert upward pressure on prices, without taking into account any additional cost savings, such as on equipment, balance of system costs or project development costs, that might be induced by higher capital costs.”

Galan had likened present conditions as similar to what preceded the 2008 global financial crisis, saying,  “I think that what happened with Enron [could happen again]. Enron was highly leveraged . . . and they had no talent as a utility or as traders. And what happened — it disappeared.”

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