High Interest Rates, Mineral Weaponization…The ‘Decarbonization Clock’ Turns Upside Down [BackBook Global]

ORIGINAL LINK : https://www.sedaily.com/NewsView/29X55BATMN

Wind turbines are installed in the waters off the coast of Virginia, U.S./AP Yonhap News

The global turmoil caused by high interest rates and ‘two wars’ is affecting the ‘fossil fuel reduction’ policies of major countries facing the climate crisis. As costs increase, plans to expand renewable energy such as offshore wind and solar power are being halted or disrupted. Due to the weaponization of minerals caused by wars and divisions, the distribution of fossil fuel alternative technologies is delayed, and the ‘decarbonization clock’ of each country is not running at its full speed.

According to foreign media on the 6th, Ørsted, the world’s largest offshore wind company based in Denmark, has decided to withdraw from two energy supply projects it was conducting off the coast of New Jersey in the northeastern United States. Ørsted decided to withdraw after suffering losses of more than 28.4 billion Danish kroner (approximately 5.3 trillion KRW or 4.5 billion USD) in these projects from January to September, far exceeding estimates. BP of the UK and Equinor of Norway, which are jointly conducting offshore wind projects in the United States, reported losses of $540 million (approximately 700 billion KRW or 460 million USD) and $300 million (approximately 400 billion KRW or 254 million USD) respectively from multiple projects. The two companies are currently requesting energy price increases in New York State, but the negotiations are not going smoothly, leaving the future of the projects uncertain. Bloomberg predicted that “the offshore wind power that the U.S. can introduce by 2030 will be limited to 1640 MW, half of the target set by the Biden administration.” Earlier in July, ‘Vattenfall,’ a Swedish company, declared the suspension of a North Sea project in the UK. The situation is similar for solar power generation. In the third quarter of this year, global companies deploying solar power projects in Europe suffered deteriorating profits as solar panel installations were cancelled one after another, leading to a buildup of inventory.

This atmosphere in the renewable energy industry is due to the recent intensification of high interest rate environments and inflation working in combination. According to Bloomberg, major companies participating in U.S. offshore wind projects estimated the cost of electricity generation at 7.7 cents per kWh 2-3 years ago and negotiated sales contracts with local power companies, but the recent cost of electricity generation has surged 48% to 11.4 cents. The costs of power generation equipment, port maintenance, labor, etc., have also skyrocketed, creating a structure where losses are inevitable. In addition, interest rates have risen compared to the time of the contract, increasing the interest burden on companies. For example, when Ørsted signed a project contract with the New York State government in 2019, the interest rate was around 2%, but now it is over 5%, increasing the company’s interest burden. Companies in the offshore wind and other renewable energy sectors typically inflate their size initially based on loans from financial institutions to achieve economies of scale and lower prices. However, a sudden increase in interest rates acted as a variable, increasing losses. Claudio Descalzi, CEO of Italian energy company Eni, said, “The cost of developing new offshore wind projects has doubled recently, making it very difficult to carry out the work.” Companies deploying solar power projects in Europe also suffered a setback after importing large quantities of cheap solar panels from China. As high interest rates have stalled the installation of power generation facilities in homes and businesses, inventory has piled up, and losses have increased as a result. The European Union (EU) has been accelerating the transition to renewable energy, including solar power, with the goal of ‘zero’ greenhouse gas emissions by 2050.

Workers are checking solar panels at a solar power plant in Haltern, western Germany./AP Yonhap News

The escalation of global conflicts, such as the U.S.-China conflict and the Russia-Ukraine war, is another stumbling block to the delay in expanding renewable energy. The International Monetary Fund (IMF) believes that conflicts between countries and the consequent weaponization of key minerals could raise resource prices and reduce global renewable energy investment by 20-30% by 2030. In fact, China is responding to Western sanctions against China by limiting the export of rare minerals needed for fossil fuel alternative energy technologies, including graphite needed for electric vehicle production. As the expansion of decarbonization-related technologies and products, including electric vehicles, is delayed, the achievement of renewable energy goals can only be delayed.

The investment in electric vehicles, which are considered the representative industry of cleantech, is also being postponed and cancelled one after another. The direct reason is mostly the slowdown in the growth of electric vehicle sales, but fundamentally, it is interpreted as the result of weakened consumer purchasing power in inflation. In an environment where the burden of buying a car has increased, the reason for choosing an electric car, which is more expensive than an internal combustion engine car, has decreased. Tesla hinted last month that the construction schedule of the factory in Mexico currently in progress could be delayed when it announced disappointing third-quarter results. Elon Musk, CEO of Tesla, said during last month’s earnings announcement, “Even if you do well in the stormy economic conditions, you can go through difficult times,” and “Many consumers are in debt with credit cards and home equity loans.” General Motors (GM) had planned to produce 400,000 electric vehicles over two years from mid-last year to mid-next year, but recently announced that it would scrap this plan. Ford, which expects a loss of $4.5 billion (approximately 6 trillion KRW or 3.8 billion USD) in the electric vehicle sector this year, also decided to reduce its previously announced $12 billion (approximately 15.6 trillion KRW or 10.2 billion USD) investment in electric vehicles. Earlier, the UK delayed its electric vehicle transition plan from 2030 to 2035, a five-year postponement.