The new macroeconomic environment presents further challenges that policy makers need to address
In 2023, new renewable energy capacity financed in advanced economies was exposed to higher base interest rates than in China and the global average for the first time. Since 2022, central bank base interest rates have increased from below 1% to almost 5%. In emerging and developing economies, renewables developers have been exposed to higher interest rates since 2021, resulting in higher costs hampering faster expansion of renewables.
The implications of this new macroeconomic environment are manifold for both governments and industry. First, inflation has increased equipment costs for onshore and offshore wind and partly for solar PV (excluding module costs). Second, higher interest rates are increasing the financing costs of capital-intensive variable renewable technologies. Third, policy has been relatively slow to adjust to the new macroeconomic environment due in part to expectations that cost reductions would continue together with permitting challenges. This has left several auctions in advanced economies undersubscribed, particularly in Europe. Additionally, some developers whose power purchase contracts were signed prior to these macroeconomic changes have had to cancel their projects. Efforts to improve auction design and contract indexation methodologies are needed to resolve these challenges and unlock additional wind and solar PV deployment.
The renewable energy industry, particularly wind, is grappling with macroeconomic challenges affecting its financial health – despite a history of financial resilience. The wind industry has experienced a significant decline in market value as European and North American wind turbine manufacturers have seen negative net margins for seven consecutive quarters due to volatile demand, limited raw material access, economic challenges, and rising interest rates. To address these issues, the European Union launched a Wind Power Action Plan in October 2023, aiming to enhance competitiveness, improve auction design, boost clean technology investment, streamline permitting, and ensure fair competition. Chinese wind turbine manufacturers, benefiting from strong domestic demand and vertical integration, remain relatively stable amid global challenges.
