The United States Federal Reserve’s move to cut interest rates spells good news for clean energy in the country, with impacts that could ripple out to Canada’s energy transition.
“I think we could see a very different environment for investments in 2025, based on the election outcome, based on the Fed and based on inflationary pressures in the supply chains for these projects and technologies,” Alex Dewar, who leads Boston Consulting Group’s work on carbon capture and removal, told E&E News.
On September 18, for the first time in four years, the U.S. Federal Reserve lowered its benchmark interest rate—the rate at which banks lend one another reserve money overnight—by half a percentage point to about 4.9%.
The rate cut’s importance by itself is minimal and won’t immediately have dramatic effects for most businesses’ day-to-day decisions, columnist Paul Krugman wrote in the New York Times. But it is still “momentous” because it indicates more rate cuts to come for longer-term interest rates like mortgages that “really do matter for the economy.”
The Financial Post reports that the impact is not confined to the U.S., as economists speculate that the Bank of Canada might match the move in October.
The Federal Reserve’s rate reduction is the first cut since interest rates were raised in 2020 to address high inflation during the COVID-19 pandemic. The higher rates sustained since that time have made it more expensive to take out loans and get access to credit, with a marked effect on investments across the economy.
That effect has been noticeable for clean energy projects. Many have canceled or scaled back operations as rising costs of construction and supply chain operations affected industries like offshore wind and battery recycling.
Analysts have also suggested that high interest likely weakened the impact of the Inflation Reduction Act (IRA) adopted in 2022. Onshore wind and solar projects have been less affected because of high demand and a more-established financial model, though their growth has also been lower than predicted based on the benefits and incentives offered through the IRA, writes E&E News.
Renewable and nuclear energy projects were particularly sensitive to interest rate changes when compared to other energy sources as they require costly capital and yield lower returns, found energy analytics firm Wood Mackenzie. Increasing interest rates by 2% would raise the overall cost of a renewable project by 15% to 20%, while an average gas plant’s cost would rise by only 11% for the same change in interest.
With lower rates on the horizon, the mood among cleantech companies and investors is “energized,” Lucy Brash, head of JPMorgan Chase & Co.’s North American Energy, Power, and Renewables Equity Capital Markets group, told Bloomberg.
Krugman writes that the rate cut will also be good for Vice President Kamala Harris, Democratic candidate for president, because “it will give consumers some direct relief on interest costs, and it will signal that high inflation is in the rear view mirror.”
Having Federal Reserve Chair Jerome Powell say, as he did in his news conference, that the economy is in good shape “has to be helpful for a candidate who is part of the administration presiding over that economy,” Krugman suggests.
But Powell has said that any influence on the election would be unlikely because the Fed’s actions “really affect economic conditions for the most part with a lag,” and will not be felt by most voters in the short term, reports CNBC.
