The Federal Reserve this week announced a half a percentage point cut in interest rates, the first reduction in four years. Markets have been anticipating the move for months, and sectors with large upfront costs, like renewable energy, will get a boost from the rate cut.

The lift from lower rates was first evident for renewable energy after the Fed lowered interest rates down to near zero percent during the COVID-19 pandemic. One result was a boom in climate tech investment. But as inflation began rise in the beginning in 2022, interest rates began to increase to combat rising inflation.

The clean energy sector already had some protections from rising rates because of the Inflation Reduction Act (IRA), passed in August of 2022. The IRA has buffered much of the risk associated with investing in clean energy projects even as interest rates remained high, with over $391 trillion in funds. 

“The heavy upfront costs and low operating costs of clean energy technologies are particularly sensitive to interest rates and to the cost of capital,” said Ilmi Granoff, a member of the U.S. Dept. of Treasury’s Climate-Related Financial Risk Advisory Committee.

In the lead-up to the Fed’s announcement, the share price for NRG Energy, one of the largest providers of clean energy solutions to U.S. businesses, rose by over 40 percent compared to this time last year, in line with much of Wall Street in anticipation for the cut. 

Shares of developer First Solar are up more than 20 percent in recent weeks, after touching a high of just over $300 in June. Private developers such as Invenergy and EDF Renewables have announced financing for major projects in recent weeks. 

While these developments are not necessarily directly tied to interest rate moves, they are promising signs for the clean energy industry moving forward. Capital intensive projects like wind, solar and nuclear plants are financially risky for investors. The World Economic Forum estimates that with every two percent increase in interest rates, there is a 15-20 percent increase in overall cost for clean energy projects. 

Rising interest rates, in conjunction with the decline in financing costs that the clean energy market has seen in the last few years — especially within the solar and wind sectors — created headwinds for clean energy investments, added Granoff.

“When we have a rate reduction like we saw [on Sept. 18], this is a clear indication of the Fed’s comfort level with the direction that the country is taking with respect to the economy, with respect to unemployment, and with the respect of corporate gains and so forth,” said Tom Soto, founder of investing firm Latimer Partners.

The drop in interest rate, according to Soto, won’t only impact the private sector, but also federal funds, like the Inflation Reduction Act (IRA). The IRA has buffered much of the risk associated with investing in clean energy projects even as interest rates remained high, with over $391 trillion in funds. 

Federal funds get a boost

The Fed’s decision to reduce interest rates also sends a signal to offices like the Department of Energy’s Loan Program Office (LPO), which distributes IRA funds to clean technology startups. 

The Fed’s interest cut “gives [LPO] greater headroom to identify projects that might have, maybe perhaps a little bit more risk,” said Soto, and if LPO is backing these riskier projects, “then other debt sources will get behind them, because now they have lower rates, and the operators, the founders, the entrepreneurs, can now afford that.”

Moving forward, it’s likely the Fed will continue to cut rates, with Soto going so far as to predict the cut of interest rates down to 3 percent by 2026. 

And with permitting reform now on the horizon and the cost of financing headed downward, it’s safe to expect more big deals from renewable energy developers in the coming months.