The energy consultancy in its Conflicts of interest: the cost of investing in the energy transition in a high interest-rate era report warned the higher cost of borrowing negatively impacts renewables and nascent technologies more than established oil and gas, and metals and mining sectors.

In particular, Wood Mackenzie warned the lack of economic incentives to capture carbon and the lack of a hydrogen market are the “most significant obstacles to investment,” but said for the projects that do progress, higher rates of interest “hurt the economics.”

Global interest rates have risen sharply in recent years, with the peak seemingly passed, but many economists have warned their descent could be slow.

The Hydrogen Council’s Hydrogen Insights December 2023 update said despite over 12GW of electrolyser projects having past final investment decision (FID), higher CAPEX, higher capital costs, EPC costs and renewable power costs had increased renewable hydrogen costs by 30-65% to $4.5-6.5/kg.

Read more: Hydrogen project pipeline grows to $570bn – just 7% have passed FID

Peter Martin, Wood Mackenzie’s Head of Economics, said higher interest rates affect both smaller firms that “struggle to access debt” as well as “large, credit-worthy emitters that rely on low-interest leverage to render projects attractive for shareholders.”

Martin said the increased cost of capital had “profound implications” for the energy and natural resources, “particularly the cost and pace of the transition to low-carbon technologies.”

It isn’t just emerging technologies. The consultancy said high rates disproportionately affect renewables and nuclear power, noting their “high capital intensity and low returns” mean future projects will be at risk.

Wood Mackenzie said its analysis showed in the US a two-percentage-point increase in risk-free interest pushed up the levelised cost of electricity (LCOE) by up to 20% for renewables, while the comparative increase in LCEO of a combined-cycle gas turbine plant was just 11%.

“Onshore wind can generate electricity at an LCOE of $40/MWh, 50% of the cost of gas-fired generation,” the report noted. “However, higher interest rates are eroding that advantage.”

In the report, Wood Mackenzie identified subsidy efficiency, bolstering carbon markets and mobilising climate finance as three policy priorities for policymakers in supporting clean projects.

“Policymakers need to remove obstacles such as a slow permitting and project approval as well as offering clear, consistent and sustained incentives to support the uptake of low-carbon energy and nascent green technologies,” Martin stressed.