High energy sector investment hindered by increased US borrowing expenses
The U.S. clean energy industry is facing significant challenges due to the rising interest rates and the phasing out of federal tax incentives. According to a forecast by BloombergNEF (BNEF), clean energy installations in the U.S. could plunge by 41% after 2027, with wind and solar tax credits expiring.
The rising interest rates increase the cost of debt financing, a substantial portion of capital for renewable projects. This rise in financing costs can reduce investment returns and delay project development, especially without robust federal tax credits to offset costs.
Despite these headwinds, clean energy expansion continues. Solar and wind generation hit new records in 2024, and overall corporate clean energy procurement grew steadily through mid-2025, indicating strong private sector support amid shifting government policy.
Demand for electricity in the U.S. is expected to grow by 2.3% this year, more than double the average annual growth rate over the last decade. Data centers are the main driver of this growth. However, the increasing interest rates are likely to slow down the growth of the clean energy industry, particularly after 2027.
The Inflation Reduction Act (IRA) previously boosted incentives, but new legislation like the One Big Beautiful Bill cuts back these supports, adding uncertainty. Thomas Byrne, CEO of CleanCapital, stated that a high-interest rate environment and antagonistic policy from DC pose challenges to the industry.
Despite the challenges, the underlying economics and corporate demand remain favorable. Renewables are expected to outpace coal in the global power generation mix by either the end of this year or early next, according to the IEA. The industry's resilience is evident as renewable-energy tax credits remain on the chopping block.
Izzet Bensusan, CEO of Captona, warned that sudden, deep cuts in interest rates could drive project costs up and cut into returns. On the other hand, a 10% likelihood of 75 basis points of reductions in interest rates by year-end could provide a brief reprieve.
The U.S. Federal Reserve has decided to hold interest rates steady, but the future remains uncertain. The industry will need robust policy support to maintain its growth trajectory beyond 2027.
- The increase in interest rates, a major source of debt financing for renewable projects in the clean energy industry, can lead to higher financing costs, which may decrease investment returns and delay project development.
- Despite the federal tax incentives phasing out and rising interest rates posing challenges, the clean energy industry continues to show growth, with solar and wind generation hitting record highs in 2024 and overall corporate clean energy procurement growing steadily through mid-2025, indicative of strong private sector support.
