Close Menu
Fund Focus News
    Facebook X (Twitter) Instagram
    Trending
    • Mutual funds were USD bulls going into April’s tariff chaos
    • Which is Better for You?
    • Mutual Fund Expense Ratios Remain at Historic Lows for Retirement Savers
    • Mutual Fund Direct Vs Regular Plan: What’s Better And How To Choose | Business News
    • GTT Strategic Ventures investit dans le leader de l’énergie houlomotrice CorPower Ocean
    • SIP vs Lump Sum vs STP Investment: Which route should investors take for mutual fund investment? Know from experts
    • CM Mohan Yadav Invites Inditex To MP With Open Arms For Investments And Business Partnerships
    • Dubai real estate: PRYPCO Mint tokenises $2.5m of property in first month
    Facebook X (Twitter) Instagram
    Fund Focus News
    • Home
    • Bonds
    • ETFs
    • Funds
    • Investments
    • Mutual Funds
    • Property Investments
    • SIP
    Fund Focus News
    Home»Investments»Risk-on cycle in the global economy can fire clean energy investments
    Investments

    Risk-on cycle in the global economy can fire clean energy investments

    October 29, 2024


    With global inflation moderating, major global central banks like the European Central Bank (ECB), Bank of England (BoE), and now, the United States Federal Reserve (Fed) have queued up to cut interest rates. After the ECB entered the rate cut cycle in June, the BoE in August and the Fed in September slashed interest rates by 50 basis points.

    Unsurprisingly, central Banks in Brazil, Indonesia, and South Africa have already begun to follow suit. Others will likely take cues from these developments to provide a breathing space for economic growth. For critical sectors like clean energy, there is fresh hope that falling interest rates would facilitate liquidity flows at a reduced rate.

    The Fed’s rate cut cycle typically triggers a risk-on atmosphere in the global economy as investors seek riskier assets with higher yields. This weighs on the US dollar, boosts emerging market currencies and makes it easier for developing countries to repay debt denominated in foreign currencies.

    Moreover, foreign investors can now look at investment opportunities in clean energy assets in the developing world, where yield will look more attractive. A low-interest rate regime also translates into the low probability of default of assets owing to decreased interest expenses. It can also lessen the pressure on exchange rate stability and accelerate capital flows into emerging markets.

    Correlation between interest rates and clean energy in emerging economies

    Deploying clean energy technologies requires significant upfront capital investments compared to fossil fuels. Higher interest rates adversely affect the former. Capital-intensive industries, like clean energy, typically have elevated gearing ratios or more debt than equity in the capital structure. Hence, high interest rates discourage debt financers from investing in these industries.

    Most emerging market economies have foreign debt, often denominated in the major global reserve currencies, as one of the most significant components of their international capital flows. The International Monetary Fund (IMF) suggests that such loans can account for more than 50% of the external liabilities of these economies. Thus, high interest rates in developed economies hurt the prospects of rapid energy transition for developing countries.

    Trickling down of monetary policy

    Like a waterfall, commercial and public-sector banks and project financing institutions will likely respond to the low interest rates and pass on the benefits to debt-seeking companies to expand their businesses. Theoretically, lower interest rates should reduce the hurdle rate for new loans and make debt servicing easy for existing borrowers. Both these conditions lead to an increase in loans available for clean energy assets. Besides, lower interest rates lead to fewer loan losses, encouraging lenders to provide more funds for projects.

    However, banks do not immediately pass on the benefit of lower interest rates to the real economy. As the lower interest rate cuts their interest income, banks usually focus on non-fund-based businesses to boost their income. They also test how loan demand reacts to a low-interest-rate environment. Banks also gauge if there is a scope to reduce interest rates on deposits. Competition among banks and with other lenders also determines the cost of debt in markets. Yet, if lower interest rates persist for a long time, banks will be forced to pass on the benefits to corporations.

    Time for clean energy companies to increase capital spending

    Decreased interest rates could address project developers’ extreme sensitivity to the cost of capital. A more than anticipated decrease in the interest rate, often a major component of the cost of capital, will unlock money and mind space for investments in low-carbon industries. Moreover, the appetite for low-cost, long-term debt capital will likely increase, thus contributing to a higher proportion of debt in the capital structure. Such developments are considered favourable for expediting the deployment of large-scale clean energy assets.

    As corporates are likely to borrow more favourably, their investment in capital-intensive low-carbon businesses should grow. On the retail side, rate cuts will allow consumers to borrow for electric mobility, energy-efficient appliances, and eco-homes.

    However, there is a time lag in the transmission of low interest rates in the real economy. Developers need to plan and design project timelines accordingly. They can also utilise this time to lock in long-term off-take agreements before they start new projects. Moreover, legacy projects shelved due to high capital costs will also be an option for quick repowering with a mix of new technologies and the latest project management techniques.

    As global climate change can be directly held responsible for abrupt natural calamities that cause huge losses to people’s lives and property, banks can devise additional carve-outs to boost the clean energy sector in light of the rate cuts. This will relieve clean energy players, big, small, and startups, from the prospects of high-cost debt financing, which stalls new project development and impacts their growth.

    With global inflation moderating, major global central banks like the European Central Bank (ECB), Bank of England (BoE), and now, the United States Federal Reserve (Fed) have queued up to cut interest rates. After the ECB entered the rate cut cycle in June, the BoE in August and the Fed in September slashed interest rates by 50 basis points.

    Unsurprisingly, central Banks in Brazil, Indonesia, and South Africa have already begun to follow suit. Others will likely take cues from these developments to provide a breathing space for economic growth. For critical sectors like clean energy, there is fresh hope that falling interest rates would facilitate liquidity flows at a reduced rate.

    The Fed’s rate cut cycle typically triggers a risk-on atmosphere in the global economy as investors seek riskier assets with higher yields. This weighs on the US dollar, boosts emerging market currencies and makes it easier for developing countries to repay debt denominated in foreign currencies.

    Moreover, foreign investors can now look at investment opportunities in clean energy assets in the developing world, where yield will look more attractive. A low-interest rate regime also translates into the low probability of default of assets owing to decreased interest expenses. It can also lessen the pressure on exchange rate stability and accelerate capital flows into emerging markets.

    Correlation between interest rates and clean energy in emerging economies

    Deploying clean energy technologies requires significant upfront capital investments compared to fossil fuels. Higher interest rates adversely affect the former. Capital-intensive industries, like clean energy, typically have elevated gearing ratios or more debt than equity in the capital structure. Hence, high interest rates discourage debt financers from investing in these industries.

    Most emerging market economies have foreign debt, often denominated in the major global reserve currencies, as one of the most significant components of their international capital flows. The International Monetary Fund (IMF) suggests that such loans can account for more than 50% of the external liabilities of these economies. Thus, high interest rates in developed economies hurt the prospects of rapid energy transition for developing countries.

    Trickling down of monetary policy

    Like a waterfall, commercial and public-sector banks and project financing institutions will likely respond to the low interest rates and pass on the benefits to debt-seeking companies to expand their businesses. Theoretically, lower interest rates should reduce the hurdle rate for new loans and make debt servicing easy for existing borrowers. Both these conditions lead to an increase in loans available for clean energy assets. Besides, lower interest rates lead to fewer loan losses, encouraging lenders to provide more funds for projects.

    However, banks do not immediately pass on the benefit of lower interest rates to the real economy. As the lower interest rate cuts their interest income, banks usually focus on non-fund-based businesses to boost their income. They also test how loan demand reacts to a low-interest-rate environment. Banks also gauge if there is a scope to reduce interest rates on deposits. Competition among banks and with other lenders also determines the cost of debt in markets. Yet, if lower interest rates persist for a long time, banks will be forced to pass on the benefits to corporations.

    Time for clean energy companies to increase capital spending

    Decreased interest rates could address project developers’ extreme sensitivity to the cost of capital. A more than anticipated decrease in the interest rate, often a major component of the cost of capital, will unlock money and mind space for investments in low-carbon industries. Moreover, the appetite for low-cost, long-term debt capital will likely increase, thus contributing to a higher proportion of debt in the capital structure. Such developments are considered favourable for expediting the deployment of large-scale clean energy assets.

    As corporates are likely to borrow more favourably, their investment in capital-intensive low-carbon businesses should grow. On the retail side, rate cuts will allow consumers to borrow for electric mobility, energy-efficient appliances, and eco-homes.

    However, there is a time lag in the transmission of low interest rates in the real economy. Developers need to plan and design project timelines accordingly. They can also utilise this time to lock in long-term off-take agreements before they start new projects. Moreover, legacy projects shelved due to high capital costs will also be an option for quick repowering with a mix of new technologies and the latest project management techniques.

    As global climate change can be directly held responsible for abrupt natural calamities that cause huge losses to people’s lives and property, banks can devise additional carve-outs to boost the clean energy sector in light of the rate cuts. This will relieve clean energy players, big, small, and startups, from the prospects of high-cost debt financing, which stalls new project development and impacts their growth.

    This article was first published in Outlook Business. 



    Source link

    Share. Facebook Twitter Pinterest LinkedIn Tumblr Telegram Email

    Related Posts

    GTT Strategic Ventures investit dans le leader de l’énergie houlomotrice CorPower Ocean

    July 17, 2025

    CM Mohan Yadav Invites Inditex To MP With Open Arms For Investments And Business Partnerships

    July 17, 2025

    Investments in Alternative Proteins Total $443 Million in First Half of 2025 – vegconomist

    July 17, 2025
    Leave A Reply Cancel Reply

    Top Posts

    Mutual funds were USD bulls going into April’s tariff chaos

    July 17, 2025

    Qu’est-ce qu’un green bond ?

    December 7, 2017

    les cat’ bonds deviennent incontournables

    September 5, 2018

    ETF : définition et intérêt des trackers

    May 15, 2019
    Don't Miss
    Mutual Funds

    Mutual funds were USD bulls going into April’s tariff chaos

    July 17, 2025

    Mutual funds were USD bulls going into April’s tariff chaos – Risk.net Skip to main…

    Which is Better for You?

    July 17, 2025

    Mutual Fund Expense Ratios Remain at Historic Lows for Retirement Savers

    July 17, 2025

    Mutual Fund Direct Vs Regular Plan: What’s Better And How To Choose | Business News

    July 17, 2025
    Stay In Touch
    • Facebook
    • Twitter
    • Pinterest
    • Instagram
    • YouTube
    • Vimeo
    EDITOR'S PICK

    The 16 best places to invest in property in Britain: Estate agents say prices will soar in these towns – here’s what you can get NOW for as little as £218,261

    July 17, 2024

    Pacer unveils ‘Cash Cows’ ETF on Nasdaq 100 | ETF Strategy

    August 25, 2024

    Spain Golden Visa 2024 Updated: Residency by Investment

    July 22, 2024
    Our Picks

    Mutual funds were USD bulls going into April’s tariff chaos

    July 17, 2025

    Which is Better for You?

    July 17, 2025

    Mutual Fund Expense Ratios Remain at Historic Lows for Retirement Savers

    July 17, 2025
    Most Popular

    ₹10,000 monthly SIP in this debt mutual fund has grown to over ₹70 lakh in 23 years

    June 13, 2025

    ₹1 lakh investment in these 2 ELSS mutual funds at launch would have grown to over ₹5 lakh. Check details

    April 25, 2025

    ZIG, BUZZ, NANC, and KRUZ

    October 11, 2024
    © 2025 Fund Focus News
    • Get In Touch
    • Privacy Policy
    • Terms and Conditions

    Type above and press Enter to search. Press Esc to cancel.