Renewable energy could be a casualty in the war against inflation. This is why.

A global campaign to curb inflation is hurting the fight against climate change by steering developing countries away from sustainable energy, raising concerns among officials gathered at the United Nations climate summit in Dubai.

These officials say they support central bankers’ efforts to tamp down rising prices by raising interest rates.

But in interviews in recent days, they worried about the unintended pain these efforts are inflicting on poor countries that are most vulnerable to climate change and that face crucial choices about the types of energy systems in which they will invest.

Rich countries and international agencies must find more creative ways to send money to countries in Africa, Asia and beyond struggling with high interest rates, officials say. Otherwise, the world could miss an opportunity to contain future greenhouse gas emissions as millions of people in those countries rise out of poverty and use more energy.

“It is a very difficult time for many countries,” Kristalina Georgieva, economist and director of the International Monetary Fund, said in an interview on Monday. “That is why international support is absolutely paramount. Helping them stay ahead is in the interest of the countries, but also in our interest, in the interest of everyone. Because where are our emissions growing? These countries.”

Central banks around the world, including the US Federal Reserve, have raised interest rates quickly and sharply in an effort to combat the sharpest peak in price growth worldwide in almost 30 years. Inflation has cooled this year, but interest rates are expected to remain high in the coming years.

When financing costs rise, renewable energy projects are often hit harder than fossil fuel projects. This is partly because most of the cost of a wind or solar farm consists of the initial investments, while a large part of the expenditure in a coal- or gas-fired power plant consists of fuel costs, which are spread over time.

High interest rates also put pressure on government budgets in developing countries in Africa, Asia and beyond, while depressing the value of their currencies.

These challenges come as developing countries must spend hundreds of billions of dollars to adapt to warming temperatures while expanding energy production in an effort to raise living standards.

That combination has alarmed political, economic and nonprofit leaders gathered at the United Nations climate summit, known as COP28, in Dubai, United Arab Emirates.

“The big problem right now is that developing countries are facing crises beyond their control,” said William Asiko, vice president for Africa at the Rockefeller Foundation. The effect of these crises, he said, is that “it is easier to invest in fossil fuels today.”

If interest rates were to rise from 3 to 7 percent, the costs of a new gas-fired power plant would only increase marginally. recent analysis found it. But the costs of a new offshore wind farm or new solar farm would increase by about a third.

Many renewable energy developers also sign long-term contracts to sell electricity at a fixed price before starting construction, making them particularly vulnerable to rising interest rates and inflation.

Higher tariffs have already driven up costs for clean energy projects around the world. the International Energy Agency said recently. That includes offshore wind farms, new nuclear power plants and efforts to upgrade electricity grids. They have also made it more expensive for homeowners to borrow money to buy heat pumps and for electric vehicle buyers to pay for car loans.

The S&P Global Clean Energy Index, which includes shares of many of the world’s largest renewable energy companies, has fallen 28 percent since January. In the United States, higher interest rates are partly to blame a scuttled nuclear project in Idaho and projections of the nation The residential solar market could shrink by 2024the first time this has happened in years.

Orsted, a Danish company, recently canceled plans for two massive offshore wind farms off the coast of New Jersey. The company blamed supply chain delays, but also said high inflation and rising interest rates meant its projects no longer looked as profitable as they did a few years ago.

“The world is turned upside down in many ways, from a macroeconomic and industrial point of view,” Orsted CEO Mads Nipper said in November.

Many officials and analysts say they remain confident that high tariffs will not hold back renewable energy growth in the long term. Even with recent increases in costs, solar and wind power remain competitive with fossil fuels after more than a decade of steep price declines.

Forecasters still expect renewable energy to do just that overtaking coal as the world’s largest source of electricity by the end of the decade. And places like Europe are still eager to move away from Russian gas and other fossil fuels, if only to reduce their vulnerability to sudden price increases.

But higher tariffs hit renewables particularly hard in developing countries, with potentially long-lasting consequences for the climate.

In many parts of sub-Saharan Africa, Latin America and Southeast Asia, capital costs for a typical utility-scale solar project can be two to three times higher than in the United States or China. according to data from the United Nations. Lenders often demand a premium for what they see as riskier investments.

Higher global interest rates exacerbate this risk problem.

“It means that many renewable energy projects are less profitable and have a lower return on investment, and therefore less willingness to invest among investors, because they know that the return on investment is shrinking,” said Jessica Obeid, head of energy transition at SRMG Think Research. and Advisory, a consultancy that published a study during COP28 on Monday detailing the challenges of financing climate spending in the Middle East.

When central banks in rich countries, like the Federal Reserve, raise interest rates, that’s one side effect Investment dollars are taken from developing countries. High interest rates make it more attractive to invest in things with low perceived risk, such as US government bonds. This outward flow of investment means that a poor country’s currency becomes less valuable.

At the Dubai summit, many leaders hope delegates will set a goal of tripling the amount of renewable energy, such as wind and solar, around the world by 2030. But the sharp increase in borrowing costs is making that goal harder to achieve, Sumant Sinha said. , CEO of ReNew Energy, India’s largest renewable energy developer.

“The need for renewable energy is increasing, the targets are increasing, but the ability to achieve them is decreasing,” Mr Sinha said.

Officials from the IMF, other development agencies and some wealthy countries have announced a variety of new efforts in recent days to help accelerate the flow of investment dollars into renewable energy sources in Africa and other countries.

The World Trade Organization has urged business and government leaders to do more to stop unclogging the supply chains that were a major source of pandemic inflation that fueled the rate hike cycle in the first place.

In an interview on Monday, the organization’s director, Ngozi Okonjo-Iweala, said continued progress on supply chains would ease pressure on central banks and ultimately help lower interest rates, easing pressure on renewables in Africa and elsewhere would be enlightened.

“Interest rates are high, but ultimately as an economist I think we have to deal with that for a while before inflation comes down,” she said. “You need central banks to do the initial work. Then you need trade to keep it in a place where it is affordable for everyone and inflation is low. So they go hand in hand.”