The Federal Reserve's 50-basis-point interest rate cut alone will not be enough to turbocharge renewable energy investments and project finance, sector experts told S&P Global Commodity Insights following the Sept. 18 decision.

While interest rates have hampered project development in recent years, particularly for offshore wind and residential solar, other impediments like tariffs, interconnection bottlenecks and permitting reform still need permanent solutions before stock prices can recover and capital flows begin to accelerate, according to analysts and investors.

"It's definitely helpful from a psychological perspective" since it reduces developers' and infrastructure equity investors' "margin for error," Marathon Capital senior managing director Ammad Faisal said in an interview.

Peter Martin, Wood Mackenzie's head of macroeconomics, agreed in an email that "while the impact on project economics is marginal initially, the confirmation that the easing cycle has started can't be overstated."

The rate cut also gives renewables a leg up over other parts of the energy sector when it comes to investor interest, according to Julien Dumoulin-Smith, who heads Jefferies' power, utilities and clean energy research group.

"In a lower rate environment you've got this battle going on between utility ownership and renewable development and independent power producers, and having a lower rate environment historically accrues the benefit in a disproportionate way to these renewable IPPs," Dumoulin-Smith said in an interview.

Project finance

Interest rate expenses for large renewable developers rose 30% year over year in 2023, according to Chris DeLucia, S&P Global Commodity Insights' head of global power and renewables, in a year that forced industry giants like GE Vernova Inc. and Ørsted A/S to record billions of dollars of offshore wind project impairments and cancel projects.

Those write-downs and cancellations have continued into 2024.

"Lower rates will probably have the greatest impact on the offshore wind part of the renewables sector," DeLucia said in an interview.

Residential solar system and equipment suppliers were also among the hardest-hit companies while interest rates were high. Financing costs for Sunnova and Sunrun had nearly tripled since interest rates began rising, Guggenheim managing director Joseph Osha said in an interview.

For Greenbacker Capital Management, on the other hand, interest rates do not "make or break deals" because most of the investment management firm's financing hedges them, managing director Carl Weatherley-White said.

"We leave a little bit unhedged because we do think rates will continue to come down, so we're giving us the opportunity to benefit from that," Weatherley-White added.

Other impediments

The renewable sector would benefit from further rate cuts, reduced inflation and easing interconnection queues, as well as federal tariff and permitting policy certainty, in the view of Weatherley-White and Marathon's Faisal.

"[T]here may be as much as $2 billion in interconnection deposits, being held at [approximately 4%] increased cost of capital, for an extra two years compared to historical norms," renewables marketplace operator LevelTen Energy Inc. wrote in a recent report. Renewable developers inundated the US market with preconstruction projects during the first half of 2024, facilitating a buyers' market as sellers sought to exit "higher volumes of projects earlier" with costs ballooning, the report added.

Legislation to ease US permitting for energy projects cleared the Senate Energy and Natural Resources Committee in July, but it faces the added obstacle of the upcoming post-election lame-duck session of Congress.

Earlier in September, the US announced it will proceed with Section 301 tariffs on several commodity imports from China, including steel, aluminum, lithium-ion batteries, graphite and other critical minerals. The announcement prompted criticism from trade groups representing major clean energy investors, who said the action will "disproportionately" harm the US power industry by driving up prices on clean energy and electric industry goods.

"We've continued to see this declining rate narrative, and we haven't seen as clear-cut of a follow-through on some of the stock price recovery," Jefferies' Dumoulin-Smith said.

The 'bright side'

Power purchase agreements are increasing as electricity demand skyrockets, driven partly by datacenter customers' race to build more facilities.

"Interest rates matter, but the offtake prices that one could observe in the marketplace are as robust as we've seen in years, arguably almost ever, so returns for developers have clearly meaningfully expanded in recent months," Dumoulin-Smith said.

"On the bright side, the power story's never been better," Marathon's Faisal agreed, adding that the renewables tax credit transfer market is "growing quickly."

M&A transactions could also pick up soon, Faisal said.

While platform-level deals have traditionally accounted for the bulk of dealmaking, the sector saw just 10 of those deals in the first six months of 2024, compared to 42 renewable asset transactions, according to LevelTen.

"Platform buyers that may have been sitting on the sidelines, they may be more inclined to jump in, especially if in November elections go a certain way," Faisal said.