US clean power groups turn to longer deals to finance growth

This week, we investigated how clean power developers are managing stubbornly high interest rates and pushing on with growth plans.

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US clean power groups turn to longer deals to finance growth

A buoyant tax credit market, long-term partnerships and financial hedges are allowing U.S. clean power developers to mitigate the impact of high interest rates.

Clean energy developers are pushing on with deployment plans despite stubbornly high interest rates that are squeezing profits.

Global inflation following the coronavirus pandemic and Russia's invasion of Ukraine prompted the U.S. Federal Reserve to increase its benchmark rate from 0% in March 2022 to 5.5% in July 2023. Inflation has since eased, allowing the Fed to cut its rate to 4.25-4.50% by December 2024, but it predicts just two quarter-percentage-point rate reductions in 2025 and does not expect inflation to reach its 2% target rate until 2027.

Capex costs represent a higher share of costs for clean energy projects than for fossil fuel plants, making them particularly sensitive to high interest rates.

As borrowing becomes more expensive, clean energy developers "are put under greater financial pressure, with profits squeezed and the most leveraged companies at risk of default," the International Energy Agency (IEA) noted in August.

Despite the high cost of finance, global clean energy investment continued to rise in 2024, the IEA said.

?Global investments in clean energy, fossil fuels? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

U.S. President Donald Trump has cast a cloud over the clean energy sector by announcing a flurry of executive orders rolling back Biden's climate agenda, but years of cost reductions in clean power have bolstered the underlying fundamentals.

U.S. deployment of solar, wind and battery storage has remained strong due to “tax credits and favourably-priced [power purchase agreements]” that have allowed for “adequate returns,” Eric Cohen, Head of Green Economy Banking, North America for J.P. Morgan, told Reuters Events.

The Biden administration's 2022 Inflation Reduction Act provides substantial tax credits for clean energy developers, alongside tax credits for manufacturers that have led to a surge in new factories. In addition, solar and onshore wind can offer a lower cost of energy than fossil fuel plants and demand has accelerated on the back of state clean power targets and, more recently, soaring demand from computing groups. Following the inflation act, low carbon investment rose from $37 billion in 2022 to $69 billion in 2023, according to a report in November 2024 from the Oxford Sustainable Finance Group.

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Some developers have adapted to high interest rates by hedging the financing of projects on a multiyear basis, based on their development pipeline and risk profile, Cohen noted.

This strategy helps "protect their cash flows, returns and future pipelines," he said.

Tax boost

Solar and wind projects are typically financed by debt secured against long-term power purchase agreements (PPAs) with offtakers. A 2% rise in interest rates pushes up the levelized cost of energy (LCOE) of a renewables project by 20%, compared with 11% for a gas-fired plant, Wood Mackenzie said in a study published in April 2024. High upfront capital costs for clean energy are offset by much lower operating expenses.

The U.S. offshore wind sector has been hardest hit by higher interest rates due to large material requirements and higher capital costs than onshore wind or solar. Offshore wind developers BP, Equinor and Orsted all cited financing costs as contributing factors when they cancelled U.S. offshore wind projects in 2023-2024?and the sector has been further hit by President Trump's executive order to suspend new federal offshore wind leasing immediately after taking office on January 20.

U.S. capital providers have adopted innovative financial structures, such as hybrid tax equity deals, to address developers’ needs, Brian O’Callaghan, Lead Researcher at the Smith School of Enterprise and the Environment, University of Oxford, told Reuters Events.

O'Callaghan is also Vice President at Acadia Infrastructure Capital, which invested in Matrix Renewables’ 284 MW Stillhouse solar project in Bell County, Texas via tax equity and then agreed to sell tax credits in the project once it is placed in service.

Biden's inflation act created a transferable tax credit market which has attracted more investment into solar, battery storage and other clean energy technologies, from a wider range of investors.

? ? ? ? ? ? ? ? ? ? ? ? ? ? US solar installation forecast by market segment

The total value of U.S. clean energy tax credit transfers was forecast to rise by 50% in 2024 to $25 billion, Crux, a financial services company that facilitates deals, said in its Q3 2024 market update. Solar would represent the largest share, accounting for around 40% of deals, it said. In Q3, solar projects accounted for 21% of transactions, solar plus storage 15% and standalone storage 9%.

Strong partnerships

Many clean energy developers are prioritizing long-term partnerships with key suppliers to mitigate risks and they often look to work with the same financial partners following successful deals. In one example, Pivot Energy secured $450 million of financing in November 2024 from lenders led by long-time partner First Citizens Bank, to develop 96 U.S. projects for a total capacity of 300 MW. Big Tech is also securing long-term deals as demand for new data centers rockets. In January 2024, Microsoft signed a deal for the supply of 12 GW of new solar modules from Qcells’ new factory in Georgia by 2032.

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Key equipment suppliers are demanding larger deposits at an earlier stage, increasing the pressure on developers' finances, O'Callaghan said.

In the current environment, early-stage developers that focus on identifying sites, conducting studies, securing permits and building a project pipeline, can “struggle to secure financing, leading to projects being shelved or mothballed," O'Callaghan said. Few developers manage projects from greenfield through to operation, he noted.

Solar and wind have benefited from years of deployment learnings which have driven down project risks and lowered costs. Developers of more nascent clean energy technology face additional financing challenges, Cohen said.

"Access to capital for first-of-a-kind or pre-revenue companies that are approaching the capital-intensive commercial stage continues to be a challenge," he said.

Tracking Trump?

The pace of growth in U.S. clean energy could depend much on the actions of Trump. Entering office, the President issued a number of executive orders to boost oil and gas production and unwind Biden's climate initiatives.

Trump called for a review of loan programs issued under the inflation act and the 2021 Bipartisan Infrastructure Law, but he is not expected to remove the influential tax credits allocated through the inflation act as dismantling this legislation would require lawmakers, including many in Republican-held states that have benefited from the tax credits to build clean power plants and manufacturing facilities, to vote to repeal it.

However, the solar sector is bracing itself for higher costs following earlier pledges by Trump to hike tariffs as well as new antidumping duties imposed by the U.S. Commerce Department on imports from Southeast Asia, where most U.S. solar developers have sourced their modules.

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Expected falls in interest rates going forward will help to support further investment in clean energy, but the impact will be limited and other market forces and technology evolutions will prove more significant in the long term, experts said.

A drop in interest rates will have a limited impact on the projects and sectors that are already using financial instruments to hedge their exposure, Cohen noted.

“Interest rates are well hedged in advance during the term period in many cases," he said.

Meanwhile, the cost of solar, wind and storage is forecast to decline further on the back of technology improvements and deployment learnings.

Longer term trends in U.S. renewable energy are “shaped by deep market and technological forces that will outlast interest rate swings and policy shifts," O’Callaghan said.

Reporting by Neil Ford

Editing by Robin Sayles