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High interest rates pose a threat to the energy transition

It would raise the cost of capital for renewables and nascent technologies.

High interest rates will “disproportionately affect” renewables, nuclear power and new technologies which could put the energy transition at risk, according to Wood Mackenzie.

In a report, WoodMac said that future projects could be burdened if high-interest rates persist due to their high capital intensity and low returns.

On the other hand, companies in the metals and mining and oil and gas sectors will be unaffected due to their low gearing.

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“Interest rates, which have risen sharply in the past two years, may not come down as far or as quickly as markets anticipate. This increased cost of capital has profound implications for the energy and natural resource industries, particularly the cost and pace of the transition to low-carbon technologies,” said Peter Martin, Wood Mackenzie’s Head of Economics and lead author of the report.

For example, the higher interest rates could remove the advantage of the onshore wind sector in the US which could produce electricity at $40 per megawatt-hour, which is 50% higher than the cost of gas-fired generation.

“Whilst power and renewables companies have higher gearing, they do compare favourably with other peer groups on a cost-of-debt basis. But this is precisely what makes them more sensitive to interest rates,” Martin said.

Mechanisms to reduce price and offtake risk enable power and renewables companies to obtain debt more cheaply than the relatively risky oil and gas and metals and mining sectors. The recent rise in interest rates, therefore, has a larger proportional impact on their cost of debt,” he added.

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