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Mercom Capital Group says total corporate solar financing, global venture capital financing, public market financing and PV M&A fell year-on-year in the first quarter of 2024. The sector continues to grapple with high interest rates , which, according to Wood Mackenzie, is disproportionately affecting renewable energy projects.
The global solar sector is “experiencing a spike in uncertainty and a challenging investment climate,” Mercom Capital Group CEO Raj Prabhu said in the consultancy’s new report on financing and mergers and acquisitions (M&A). in English) in the first quarter of 2024.
According to Mercom, total corporate financing in the solar sector amounted to $8.1 billion in the first three months of the year. The figure includes 41 operations, which represents a year-on-year decrease of 4%. However, the figure represents a quarter-on-quarter increase of 47% compared to the $5.5 billion collected in the fourth quarter of 2023.
On the other hand, global venture capital financing in the solar sector in the first quarter of 2024 reached $406 million in 13 operations, which represents a year-on-year decrease of 81%. Public market financing reached $1.4 billion in six operations during the first three months of 2024, 39% less than in the same period of the previous year. Debt financing increased 59% year-on-year in 22 operations, according to Mercom.
“The solar sector is experiencing a spike in uncertainty and a challenging investment climate,” Prabhu said. “The sector is grappling with multiple headwinds, including the likelihood of prolonged high interest rates, rising labor and construction costs due to inflation, and supply chain issues, along with trade disputes. and tariffs.”
Mercom recorded a total of 21 solar M&A transactions in the first quarter, unchanged from the fourth quarter of 2023, but down from the 27 solar M&A transactions recorded in the first quarter of 2023.
“Although the collapse in Chinese module prices has stimulated demand, it has made investments in manufacturing projects unattractive, even with incentives. Venture capital investments have declined and M&A activity remains subdued,” Prabhu added. “Given current market conditions, it would not be surprising if the recovery is further delayed along with rate cuts.”
For his part, Wood Mackenzie stated in another report that if high interest rates persist, the transition to a net zero global economy will be “even more difficult and costly.”
In the consultancy firms latest report, “ Conflicts of interest: the cost of investing in the energy transition in an era of high interest rates ,” it stated that the higher cost of loans negatively affects renewable energies and emerging technologies in compared to the oil and gas and metals and mining sectors, putting future renewable energy projects at risk.
“Interest rates, which have risen sharply over the past two years, may not fall as much or as quickly as markets expect,” says Peter Martin, head of economics at Wood Mackenzie. “This rising cost of capital has profound implications for the energy and natural resources industries, particularly the cost and pace of the transition to low-carbon technologies.”
According to WoodMac, in the United States, a 2% increase in the risk-free rate could raise the levelized cost of electricity (LCOE) by up to 20% for renewables. The comparative LCOE increase of a combined cycle gas turbine plant is 11%.
The research company says solar and wind have an economic advantage over hydrocarbon generation sources, but higher interest rates are eroding it.
“Although electric and renewable energy companies have higher leverage, they compare favorably with other similar groups in terms of cost of debt. But this is precisely what makes them more sensitive to interest rates,” Martin said. “Price and contracting risk reduction mechanisms allow power and renewable energy companies to obtain debt at a cheaper price than the relatively risky oil and gas and metals and mining sectors. Therefore, the recent rise in interest rates has a greater proportional impact on its cost of borrowing.”
According to WoodMac, policymakers should focus on strengthening carbon markets, maximizing the efficiency of subsidies and mobilizing green finance to offset headwinds.
“The good news is that policymakers can take steps now to help offset or at least mitigate the burden of higher interest rates,” Martin explained. “Policymakers must remove obstacles such as slow permitting and project approvals, as well as provide clear, consistent and sustained incentives, to support the adoption of low-carbon energy and emerging green technologies.” |
