Is the recession good for renewables?

The Bank of England has made a recent cut in its interest levels to reach 1.5%. This is the lowest level it has ever set since it was founded in 1694. One way to think of the interest rate is that it tells you about the cost of capital. If you borrow capital today you would be expected to pay a rate proportional to the interest rate (depending on how you do your borrowing). The idea is to make capital cheap so people would borrow and start spending, and in the process getting the wheels of the economy to turn again.

Renewable energy projects are very capital intensive. You pay a lot of money upfront and then you sit back and reap the rewards as your plant generates electricity with minimum maintenance costs. So if the interest rates are low, and thus the debt service is cheap, wouldn’t this be a good time to start building some renewables?

The average bank is not really passing through the savings and thus it will be difficult for John Smith to remortgage his house (and that is especially difficult now with how the housing market is acting) and take the money and put up some wind turbines. But what happens if you have a major project to finance? Surely there must be a way to access large capital cheaply. With the world today calling for reduction in the carbon footprint, and with some politicians looking at the green industry to overturn the recession, would it be wise for the government to start some program through which the large project developers could take out loads of cash, and start building something? Or maybe even encourage some firms to take out lump sum cash amounts cheaply and then finance microrenewables at a small profit (in percentage terms).

The bottom line is, cash is cheap, renewables need cash, so someone should start building some renewables.

Sustainable Energy

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January 11th, 2009

3 responses

3 responses


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tio cael

How long do you think the interest rate is likely to stay this low? Surely it would only be an additional incentive to invest capital in renewables you could be sure of the interest rate staying low for the duration of the payback period. It’s definitely an incentive to increase short term borrowing, but as for long term projects I am sceptical it would make much difference.

January 12, 2009 9:54 pm

admin

But once you secure your capital, you secure your capital. I am sure that someone out there is willing to lend on a fixed-interest basis. At least the government should do. It’s all down to how you implement it. You could issue bonds with a low interest rate. The UK 10-year government bonds are running at 3.14% yield, and the 30-year bonds at 3.87. Sure a renewable project is more risky then lending the government, after all if the government gets really stuck they will just print out money, but this means that with adding a risk premium you can still get substantially low debt service. The government might also want to underwrite the risk, due to the special circumstances we are in today, and issue bonds at those low rates and use the proceedings to finance the projects.

There is an issue of course with all this intervention, given that the tax-payer will be taking the risks, but special times call for special measures. Failing that I feel that if the government gives adequate policy support, they may entice people to start doing something, and they won’t have to deal with any money themselves.

January 12, 2009 10:03 pm

florida public adjuster

I suspect California municipal governments are in the worst shape of all. The state is beyond broke and is currently confiscating both county and city revenue in an effort to mitigate budget deficits and lessen fiscal cuts.

February 21, 2010 8:23 pm

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