Big lifts in interest rates and consumer prices affect everything - but don’t obsess investors in renewable energy.
The pivotal risks prevail at the local level, in permitting and speed.
So while inflation affects the whole economy, renewable projects depend more closely on local decision-makers.
Watching interest rates climb approximates watching stars: they affect how weil you can see, and how you can navigate a long journey. But you determine whether a deal can move forward by what happens here on Earth.
I lit the fuse for this column by emailing questions about interest rate dynamics to a trustworthy sort who works in asset management. The person knows infrastructure and its economics. “The impediment to infrastructure isn’t financing - it’s permitting.”
This person knows markets, rate shapes, and sundry other forces I've forgotten in my years as a journalist. Yet every time this person and I talk, jargon melts away and we brood over the mouse-clicks and gavel-bangs through which developers can hire crews to start building - or can’t.
The people who show up at meetings and keep referendum votes on their calendars, too often, tend to revile the idea of multi-month construction projects or hectares-wide solar arrays and wind installations where they can see them. Alternatively, the people who face harm from renewable projects' waste and pollution see little alternative to slow-rolling these projets through environmental review. A more collaborative policy process might make renewble energy progress speedier - no matter the interest rate.
While national-scale economic models twinkle in some developers’ eyes, people who clear permits and paperwork for projects determine much about when a renewable installation can start making profits. Or if it can. A project timeline presents many moments at which somebody can say no, and correspondingly fewer moments when parties convene to negotiate. That fragile fate for any project makes it look riskier.
My reality-checkmate friend points out that local folks set projects' pace even in putatively aggressive nations. “I was in Germany last week and had forgotten my European history," the person told me. "They have a very powerful local system - like we do, imposed by us after the war." So to implement the European Union's green deal, municipal officials hold administrative control.
"They have a heat pump mandate that's six months in," my source says. "We talked to a leading residential real estate owner who said, '90 percent of the permits I've put in for heat pumps haven't even been looked at.'"
The impediment to infrastructure isn't financing, it's permitting.
Does this imply an energy transition foundering, or turning in circles? It does not. It implies one that's difficult to steer and that demands cooperation and communication from every navigator.
To switch transportation analogies, you might think of the journey’s vehicle as Agatha Christie’s Orient Express. (If you haven’t read the book or seen any of the movies, skip this paragraph.) On that train, every suspect joined in the murder. On this one, every participant - the planning board, the investors, the developers, the project managers, the mayors - keep a deal alive.
Consider the Thames Tideway, as slide 12 of this deck summarizes. This project, controlling sewer overflow in London's main river, aims at resilience rather than at displacing fossil-fuel energy. Still, the mechanics offer a lesson for investors in big projects.
The local government snuffs out some risk by putting its own capital behind insurance risk and permitting risk. My source says that in that deal, equity shares commanded prices almost equal to that of debt (which had a guaranteed payback). The government made investment more appealing to asset managers.
Of course, asset managers watch interest rates. Homeowners do, small business owners do, and students do. Pensioners sure do. And the interest rate's leap can distract leaders from their targets To sum up how targets work, remember this. Investors pay attention to their allocation targets for types of assets they hold. Corporate leaders consider their net-zero targets. Everyone with status at stake wishes to avoid becoming a boycott or divestment target.
So most participants want viable projects to succeed. Every time I talk to an infrastructure investor, we get within five minutes to questions about local permits, local departments, local news (such as it is). What I’ve read about national interest rates- and national climate inaction - makes every local project frailer and makes every local project more necessary. But the switches still go on and off locally.
Where do we explore paths to success? My source suggests learning from regulated utilities. Their staffers already know how to file rate proposals. You could also look at local small-scale fundraising, such as CBEY friends at the Connecticut have rolled out with Raise Green.
In any model, investors and their observers do well to remember that risk rises with suspicion and can fall with free-flows of information. Whatever price you pay for a mortgage or a melon, you and every other inhabitant of the global economy should be ready to explicate your stake in the risks of letting renewables drag.