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Costlier capital risks future of green technology

Oct 13, 2023

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The green technology industry has thrived for years, fueled by low interest rates and substantial private investment. Despite the massive boost from President Joe Biden’s Inflation Reduction Act (IRA), the industry may struggle to sustain its rapid growth.

Straight Arrow News contributor Peter Zeihan contends that due to the expense of the technology, higher interest rates, and changing demographics, the future of green technology is in jeopardy.

Excerpted from Peter’s Oct. 13 “Zeihan on Geopolitics” newsletter:

The Greentech industry has reaped the benefits of cheap capital for years, but that’s all changing as demographics take a turn and investment patterns start to shift.

Financing Greentech projects requires a boatload of upfront capital, and if the cost of that capital rises, the viability of those projects has the inverse effect. This means the Greentech space will be in hot water even if economic growth holds steady.

Sure, Biden’s Inflation Reduction Act will help the U.S. a bit, but there’s no replacing private investments. This isn’t an isolated issue either; if countries with solid Greentech potential want to see their industries thrive, we will need to see some major breakthroughs.

Hi, everyone, Peter Zion here coming to you from Mexico City. And today we’re going to talk about some of the challenges that are facing the green tech space. If you’ve been following stock tickers in New York in general, you’ll know that there’s been a lot of pushback from the financial world about everything that has to do with wind and solar and interconnections not just in the United States, but on a global basis, with many communities, getting sticker shock and changing some of their plans. Now, this, of course, is going to be a story that’s going to look a little bit different everywhere. But there is a common theme, and that has to do with capital. One of the things that really sets green tech, apart from any other power generation, whether it’s in transport, or the generation itself, is that you have to pay for it all up front, the system is different. So like, if you’re going to build a coal plant, or natural gas burning power plant, most of your cost over the life of the facility is going to be the fuel, actually setting up something that you know, burns, it is not all that complicated from an expense point of view. But with solar and with wind, where the fuel is free, all of the expense is upfront, or at least two thirds of the total versus less than a fifth for most conventional systems. And that means it has to be financed. Now from 2000, from literally from 1997. Until very, very recently, that has not been a problem, because we’ve been living in an environment of absolutely dirt cheap capital. And it’s been a demographic moment. The baby boomers were in the 40s 50s and early 60s. And in that time frame in your life, your expenses have gone down, but your incomes are high, and they’ve been socking away all the money that they’ve got to prepare for retirement. All that capital makes it into various different investment opportunities, whether it’s T bills or the stock market, and makes it very easy for people, for corporations for governments to borrow at scale. Well, as of the fourth quarter of 2022. The majority of the United States is Baby Boomers, the majority of the world’s baby boomers had moved into retirement, and they’ve liquidated their savings. And they’re not generating any more. And they’ve moved their savings into less perspective projects. So a lot more cash a lot more government debt, a lot less things like stocks and bonds. And that means that the cost of capital has already gone up for everyone. And we’ve seen mortgage rates just in the United States doubled in the last 18 months. And for large projects like wind turbines and solar panels, we’ve seen it closer to a tripling, now over say a 10 year payback, which you know, is just kind of a good benchmark. That means that the interest costs have gone up to the point that the overall payback is going to be at least a quarter higher than it was just a year and a half ago. And if you have to finance your green tech project, all of a sudden you’re facing an expense that you weren’t having to deal with before. Now, this to a degree, the sort of overbilled and retrenchment happens with any industry is people kind of grasp the realities of that maybe solar and wind aren’t as great for our community as we thought they were going to be. But the capital that’s going to hit everyone everywhere, it’s gonna slow economic growth on a global basis. And for projects that are very capital forward, like green tech, it’s absolutely going to retard the progress of everything. And the United States, we’ve got this little thing called the inflation Reduction Act that the Biden administration was able to get through Congress, which is basically a green plan, that is going to help a lot with making the finances of green tech a little bit better. But it was never going to replace private capital is just going to supplement. And now since we need 25%, more minimum, probably closer to half again, and more by the time we get to 2026. It’s going to be able to see and some of the edges off, but not fundamentally changed the problem. But if you’re in other countries, I’m thinking of your places that have good green tech potential places like Argentina, or South Africa, or Mongolia, or Greece, or Mexico. That borrowing difference is everything. And unless we have a significant breakthrough in the economics and the physics of solar and wind in the next couple of years, it’s just not going to cut it. So my recommendation remains the same that it’s been for the last three years. We know the texts in their current form won’t get us to where we think we need to go, which means we need better technology. And until we develop that, the rest of this is just kind of spinning in place.

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