Conflicts of interest: the cost of investing in the energy transition in a high interest-rate era – Wood Mackenzie

The ‘zero era’ for interest rates has come to an end. In the past two years, rates have risen sharply as central banks have scrambled to fight inflationary pressures. Governments, companies and households face markedly higher market rates and bond yields, which could yet rise further. The increase in the cost of capital has profound implications for the energy and natural resources industries, particularly the cost and pace of the transition to low-carbon technologies.

The monetary environment over the next couple of decades is likely to remain much tighter than it was in the period from 2009 to 2022. In major economies, nominal and real interest rates could be as much as two percentage points higher, on average, than in the ‘zero era’. Companies, investors and policymakers should brace themselves: tougher financial conditions could persist for some time to come.

The higher cost of borrowing affects the energy and natural resources sectors unevenly. Highly capital intensive and often reliant on subsidies, low-carbon energy and nascent green technologies are most exposed. Debt accounts for a higher share of the capital structure for low-carbon energy sectors, too. The impact of higher interest rates grows as the capital expenditure (capex) share of total expenditure increases.

In contrast, the oil and gas industry, while also highly capital intensive, has far less exposure to the cost of debt, so is less affected by higher rates. The large metals and mining companies, with strong balance sheets, are also well positioned.

Transitioning to a net zero global economy is a monumental investment challenge. Meeting the challenge, already an outside bet, will have to happen against a less favourable monetary backdrop than the world has been used to since 2009.