On Inflation and Sustainable Energy

Inflation, inflation, inflation. Multiple high profile renewable energy projects have been cancelled recently largely due to high inflation rates. Examples include Ørsted’s 2.25 GW of off-shore wind in Ocean Wind 1 and 2 off the coast of New Jersey [1].

News and journal articles are documenting the effects of rising interest rates on capital intense and operationally light projects, such as renewable and sustainable energy projects [2,3]. The Federal Reserve has increased their interest rates from near-zero in 2020 to upwards of 5% in late 2023 to battle inflation rates that peaked near 8% [4]. All of this is increasing the cost of borrowing capital.

The Levelized Cost of Electricity (LCOE) is essentially the cost of delivering electricity over an energy project’s lifetime. The LCOEs for solar and wind projects have fallen precipitously over the past decade. Despite this, the LCOE for projects completed since 2021 are on average 67% higher for solar and 30% higher for wind than projects in 2021 [5]. In addition to high interest rates, supply chain challenges certainly contribute to these increased costs.

My job in the hydrogen economy involves developing conceptual and pre-feasibility studies of H2 projects for clients. Considering our desire to use wind and solar energy to power H2 production, what directly affects wind and solar, indirectly affects us. Additionally, many hydrogen technologies are also capital intense and operationally light (beyond electricity costs).

How energy costs scale with interest rates

It has been daunting to witness first hand how rising interest rates, and thus a rising cost of capital, are affecting project economics. Imagine a project who’s costs are based 100% on CAPEX (capital expenses); a change in the cost of capital from 5% to 10% nearly doubles the cost of the project, thus doubling the LCOE resulting from the project (figure below).

In contrast, a hypothetical project that has zero CAPEX, where 100% of costs are OPEX (operational expenses), would experience a zero percent increase in the LCOE as the cost of capital increases. This is assuming future operational costs are discounted at the same rate as the value of future electricity.

The below examples show that as the cost of capital increases, the CAPEX contribution to LCOE increases. Whereas, the OPEX contribution to LCOE remains stable. The different panels show the CAPEX and OPEX contributions to LCOE for different hypothetical projects. The values are normalized to projects with a 0% cost of capital.

While these figures are abstract, we can compare different real-world technologies to these curves. Based on NREL’s Annual Technology Baseline[6], the LCOE breakdown for utility-scale solar PV, if the cost of capital was 0%, would be approximately 70% CAPEX, 30% OPEX.

Utility-scale solar projects will approximately follow the scaling associated with the 70% CAPEX curve above (middle panel) that experiences an approximately 45% increases LCOE as the cost of capital increases from 5% to 10%.

In contrast, natural gas power plants have much higher operational costs than solar. If we take NREL’s latest values [7] and a cost of gas of $3/MMBtu, the LCOE breakdown for a combined-cycle natural gas plant, if the cost of capital was 0%, would be 20% CAPEX, 80% OPEX.

Thus, a natural gas plant will approximately follow the scaling associated with the 20% CAPEX curve above (right panel). This curve experiences close to a 15% increases LCOE as the cost of capital increases from 5% to 10%, a much smaller increase than the 45% increase for a solar project.

During these years with high interest rates, the disproportionate effect of high interest rates and cost of capital on capital intensive and operationally light renewable energy projects versus fossil fuel projects is an extra hurdle to overcome in realizing a sustainable energy future. While this is currently a challenge, as interest rates recede, renewable energy projects will disproportionately benefit. A return to the era of near-zero interest rates would be a boon for renewable energy and decarbonizing our energy systems.


The LCOE calculations used here are similar to those used in Schmidt et al. 2019 [8] and use a cash-flow perspective which does not account for depreciation. Values are taken from the NREL ATB when possible [6, 7].

  • Utility-scale PV 2023 Moderate scenario: CAPEX 1,331 $/kW, Fixed O&M $21 $/kW-yr, assume 30 year lifetime
  • Natural Gas Combined Cycle (F-Frame) 2023 Moderate scenario: CAPEX 1,237 $/kW, Fixed O&M $31 $/kW-yr, Variable O&M 1.94 $/MWh, assume 95% capacity factor, $3/MMBtu fuel, 50% efficient (LHV), 25 year lifetime