2023-06-23 10:53:00
The fight that the European Central Bank (ECB) is waging once morest inflation might get in the way of the energy transition. University lecturer Friedemann Polzin of Utrecht University warns once morest this in economist magazine ESB.
To quell the price rises in the eurozone, the ECB has raised its main interest rates by 4 percentage points in a short period of time. It is highly likely that further increases will be added later this year.
Higher interest rates make it more expensive for businesses and consumers to get money, which should cool the economy and thus inflation. Only the higher interest rates do not hit equally hard everywhere. These differences play a role, for example, in the world of energy supply.
Investment costs for green electricity are rising faster than those for gray electricity
More than coal and gas-fired power stations, wind turbines and solar parks are financed with borrowed money. If the ECB raises interest rates, the total investment costs for green electricity will increase much faster than for gray electricity.
The Berenschot consultancy firm recently listed the precise effects: in the Netherlands, green investment costs up to 2030 will be an estimated 17 billion euros higher due to the rise in interest rates. This not only concerns wind turbines and solar parks, but also investments in geothermal heat and heat pumps. For every additional percentage point of interest that the ECB still implements, the total costs will increase by 6 billion euros in the Netherlands in the coming years.
A third of Dutch sustainable energy companies are already noticing this in their financing options, according to a survey by the Dutch Association of Sustainable Energy last week. Another third of the companies are not yet noticing it, but expect it to be more difficult to obtain money soon due to the ECB’s policy.
Purchase in installation
Why are sustainable initiatives hit so hard by interest rates? “With a wind turbine or solar park, almost all the costs are in the purchase,” explains researcher Polzin. Consortia of project developers and banks invest a lot of borrowed money in the purchase and installation, but once the mill is running or the solar panels are installed, the maintenance costs are not too bad.
With a gas or coal-fired power station, the costs are much more spread over the service life, if only because new fuel has to be purchased all the time. The power plant passes these costs on to the customers and does not have to be paid with borrowed money. Per kilowatt hour, gray electricity is therefore much less sensitive to interest rates.
It is ironic that sustainable energy generation in particular is suffering from the fight once morest inflation. It was precisely Europe’s dependence on fossil energy that caused inflation to soar. Gas prices shot to record highs last year when Russian President Vladimir Putin turned off the gas tap, or threatened to do so. The imminent shortage of energy caused energy prices to rise. To ultimately affect the prices of all kinds of other products such as food, drinks and packaging material.
Solutions to protect the energy transition
Polzin thinks it is logical for the ECB to tackle inflation by raising interest rates, as the bank must ensure price stability. But Polzin does provide some solutions to protect the energy transition. “For example, the European Commission might set the price of CO2 emissions higher.”
Another possibility is that member states will once more jointly guarantee new bonds at a low interest rate, just like during the corona crisis. “Those ‘Eurobonds’ might then only be used for green investments,” suggests Polzin.
Rens van Tilburg, director of think tank Sustainable Finance Lab (SFL), argues for a new kind of instrument from the ECB. “Commercial banks would then receive cheap financing from the ECB, but only if they then also lend that money cheaply to companies that do sustainable things with it.”
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