High interest rates are a climate problem

Contributed by Jessica Fishman

High interest rates (currently topping 7%) are slowing down the energy transition. They’re steering developing countries away from building a renewable energy-based infrastructure, preventing families from installing rooftop solar in developed nations, and likely slowing down the rate of investment into climate tech startups. It’s becoming clear that high interest rates are a climate problem.

Although accelerating the transition to clean energy should be one of the world’s top priorities, it seems like the opposite is occurring. High interest rates are decelerating the transition and making clean energy less accessible. Despite oil prices traditionally experiencing price decreases during times of inflation, the opposite occurs with clean energy – causing its LCOE to potentially rise above grid parity. As borrowing costs increase, clean energy projects, which require heavy CAPEX investments, become more expensive compared to fossil fuel projects that have a cost structure based more on OPEX. And since people and businesses alike are not accustomed to buying their energy upfront, higher interest rates further deter this behavioral change. 

Let’s do the math

Take a residential 10 kW solar system, costing around $29,000 as an example. Putting $9,000 down on a 15-year loan at a 3% interest rate, the total loan payment would be $24,860 according to Nerd Wallet’s solar loan calculator. Using NREL’s LCOE calculator, we can calculate the system LCOE at $0.14/kWh, which is still lower than the utility electric prices. However, if all loan variables remain the same except the interest rate, which we will raise to 7%. the total loan amount increases to $34,403 and the system’s LCOE is now $0.19/kWh. That’s higher than most, if not all utility electric prices in the U.S.

Unfortunately, this means people stay dependent on oil and gas for longer. Financial decisions lead to new construction being based on classic infrastructure – further locking the world into fossil fuel dependency and creating a situation for oil and gas companies to maintain their monopoly status on energy and continue to raise prices, as they did during the summer of 2022 when prices hit an all-time high of $5.01 per gallon.

And while the solar industry, innovative as always, has tried to combat the rising interest rates with solar leasing and power purchase agreements (PPAs), which are on the rise, the energy transition is still not moving at the pace necessary to address the climate emergency. More so, third-party ownership is not a magic bullet for solar financing as it pushes the interest rate challenges onto the financer, potentially leading to negative balance sheets and bankruptcies, as we saw with Sunlight Financial.

It’s not all doom and gloom, though. We recently passed a massive piece of legislation passed was intended to combat inflation and rising interest rates, while spurring the energy transition, aptly named the Inflation Reduction Act (IRA). Seeing the long-term impact of the IRA is like seeing the light at the end of the tunnel. When the current solar market in the U.S. is struggling in some regions, there is also massive investment in building local manufacturing plants.

While at times it can feel like a strange juxtaposition to the current market, it is also a testament to the future growth and potential of the industry. Without the IRA, the interest rates could be doing even greater damage to the current solar market and the recovery time could be even longer. At the same time, for the IRA to have continued success, and for demand to meet the upcoming supply, interest rates need to be addressed for solar investments.

While a too-hot economy can be problematic, a too-hot planet is an existential threat. If investing in clean energy infrastructure came at a much lower interest rate than other types of investments, then this could be a way to combat both. The government could create lower interest rate loans with other favorable terms for individuals to invest in solar for their homes, just like it does for education, housing, farming, or building a small business. This could have additional positive impacts, such as helping applicants with a lower FICO score gain access to the solar market and benefit from lower energy rates.

As the climate crisis intensifies, outside-the-box solutions will be essential to meeting our goals.

About the author

Jessica Fishman is a strategic marketing professional with nearly 20 years of experience, including seven years as head of global public and media relations at inverter maker SolarEdge. Passionate about addressing climate change by accelerating the clean energy transition, she has worked at leading renewables companies, building marketing and communications departments.