Higher Interest Rates and Costs Create Challenges for Renewable Energy Investors

Higher interest rates and costs are putting pressure on the renewable energy investment model, with buyers and sellers of renewable power projects recalculation potential returns, hampering fundraising and mergers and acquisitions. The industry, which has attracted big investment for years, is now being squeezed by a decade of low interest rates giving way to constraints, and soaring prices for steel and silicon vital for wind turbines and solar panels. The trend is leading to competition and consolidation in the industry, and may result in companies selling parts of their renewables businesses to fund network upgrades without damaging credit ratings through debt sales.

Investors and corporations have been investing in renewable energy projects in recent years, hoping to profit while doing good for the planet. However, higher interest rates and costs are putting pressure on the renewable energy investment model. These constraints are causing buyers and sellers of renewable power projects to recalculate potential returns, making it more challenging to fundraise and engage in mergers and acquisitions.

The renewable energy industry has seen significant investment for many years, with a boom that echoes investment trends in areas such as organic food, shale oil and gas, and sustainable fishing ventures. Over the past decade, the industry has benefitted from low interest rates and plentiful materials and financing, enabling borrowers to raise cheap debt to build projects and juice returns.

However, the era of low interest rates and plentiful financing has come to an end, with soaring prices for steel and silicon, two vital materials for wind turbines and solar panels, adding to the challenges. The US Federal Reserve is expected to raise headline rates to around 5.5% this year, and European hawks are starting to posit peak rates above 4%, which will further squeeze returns.

Refinitiv data shows that private equity investment in alternative energy, including battery and energy conservation technology, is heading for the slowest quarter since 2020. Refinitiv also predicts that the value of mergers and acquisitions this quarter will total $5.6 billion, down from $17.7 billion last year and almost in line with the depths of the pandemic between April and June 2020.

Utilities in the US and Europe have been selling parts of their renewables businesses to fund network upgrades without offering new equity or damaging credit ratings through debt sales. However, similar moves have struggled to achieve success in the current market reality.

The renewable energy industry is also seeing a trend toward competition and consolidation, with some companies selling parts of their renewables businesses to fund network upgrades without offering new equity or damaging credit ratings through debt sales. As older plants show signs of wear and require costly repairs or upgrades, the pool of operators or investors capable of handling those changes is getting smaller.

The renewable energy industry is facing challenges as the era of low interest rates and plentiful financing comes to an end, causing buyers and sellers of renewable power projects to recalculate potential returns, making it more challenging to fundraise and engage in mergers and acquisitions.