Michel Euler/AP Photo
U.S. economist Larry Summers speaks during a panel at the World Economic Forum in Davos, Switzerland on Jan. 18, 2017.
It is definitely amusing to see Larry Summers flail away at recalibrating his opinions in real time. For years, in full public view, Summers insisted that high public spending was “the least responsible economic policy in 40 years,” and that the only way to keep the economy safe from crushing inflation was to increase unemployment significantly. With last week’s report on the Consumer Price Index, we have essentially returned to Federal Reserve benchmarks on inflation on a trend basis. And this was done without a meaningful rise in unemployment; while the headline rate has skipped up half a percentage point from 3.4 to 3.9 percent, most of that is due to higher labor force participation, and it’s certainly nowhere near what Summers claimed was vital.
As a result, Summers has attempted to erase history. He now says that “transitory factors” like supply bottlenecks were pushing up inflation, and now that they have eased, inflation is coming down. I appreciate Summers’s obvious study of the Prospect’s special issue on supply chains, but this is manifestly not what he was saying as recently as a few months ago. His entire public commentary was set up in opposition to anyone who would raise the possibility of “transitory factors” and supply chain crunches as the source of inflation.
If we could merely focus on Summers’s desperate, gaslighting attempt to get on the right side of the data, we could have a good laugh and move on. But unfortunately, we can’t. The incorrect movement he led pushed the Fed to raise interest rates and tighten the economy. And while people are now falling over themselves to credit the Fed with engineering a “soft landing,” avoiding both stubborn inflation and recession, its rate hikes have had real consequences, particularly on one of the most important economic issues of our time, the effort to eliminate greenhouse gas emissions and transition to a sustainable energy system.
That transition was necessarily going to be front-loaded with investment. Things not currently built must be built: solar arrays, geothermal sites, onshore and offshore wind platforms, transmission grids to send that renewable energy along, manufacturing plants to produce the components for all of this, electrified vehicles at every level of transportation, building retrofits, and more. So the rate of interest to finance that production was critical to the enterprise, as much if not more so than the subsidies that would entice companies to make the investments.
The rise of the federal funds rate since last March has impeded this investment. Because the Inflation Reduction Act and other measures are largely based on the tax code, private entities still have to make the up-front decisions to invest. By the time the IRA passed last August, interest rates were at 2.33 percent. They’re now more than double THAT, at well above 5 percent. And for startup and even established energy companies, that has become too high a price to bear.
Plug Power, the hydrogen company that has been waiting for subsidies for its industry for years as a kind of zombie ever on deck, has now seen them arrive just as the cost of capital grows. Last week, the company said in an earnings statement that it missed revenue and profit expectations significantly, citing “ramp up of costs on new product offerings for high power stationary units and electrolyzers.” All of its hydrogen generation plants have been delayed, and Plug even had to say that it has “substantial doubt about the Company’s ability to continue as a going concern.”
NuScale, a small modular nuclear reactor (SMR) company, just abandoned a project backed by Department of Energy subsidies in Utah, due mostly to higher construction costs and costs of materials like concrete and carbon steel piping. This increased the price estimate for NuScale’s power generation, and the company simply could not sell its electricity at those rates to local municipalities.
Ørsted, the Danish offshore wind provider, has canceled two projects off the New Jersey coast and taken up to $5.6 billion in write-downs, and the chief culprit was that higher interest rates and financing costs have made offshore wind simply unprofitable. “The world has in many ways, from a macroeconomic and industry point of view, turned upside down,” Mads Nipper, Ørsted’s chief executive, told reporters when he announced the cancellation.
This is just one of a series of problems with offshore wind, one of the more capital-intensive clean-energy initiatives. Siemens, which makes a lot of wind generation components, is also seeking financial guarantees due to massive losses in the turbine unit. Many offshore wind deals were agreed to when “the world was just awash in cheap capital,” one analyst told The Wall Street Journal.
We’re seeing this retrenchment of investment and weakening corporate stock prices throughout the energy space. Electric-vehicle manufacturers, while not canceling investments, have rolled them back into future years, hoping for an interest rate turnaround. EV demand, along with demand for heat pumps, has been hindered by higher financing costs for consumers, which are weakening and in some cases canceling out federal incentives. (Heat pump rebates are often not large enough to justify the expense anyway.)
A main impact of the Fed’s inflation-fighting has been to ruin the economics of clean energy.
The common thread here is interest rates. Yes, spiking demand for new materials to service the energy transition has led to higher costs, because production didn’t rise as much as it needed to. For example, there’s a shortage of undersea cables for offshore wind, which are critical for transmitting wind power back onshore to distribute to homes and businesses. At the same time, we’re seeing a slump in copper prices, a key material for electrification, despite a good demand forecast. Just as ramping up cable manufacturing to take advantage of high prices would require new production facilities, offsetting future copper demand would mean increasing investment when prices are low. And both would be incredibly expensive due to interest rates.
So that’s what Larry Summers’s running of the mouth has yielded. The clean-energy transition has been stunted to varying degrees because the much-needed subsidies for green development came at the same time that financing costs soared. The Inflation Reduction Act is effectively being offset by interest costs. The man who said these higher rates were necessary has changed his tune about the reasons why, now saying that bottlenecks reverting to the mean was sufficient for inflation subsiding. That means that a main impact of the Fed’s inflation-fighting has been to ruin the economics of clean energy.
Is there a way out of this? Well, Fed watchers are now expecting large rate reductions in 2024, which certainly wouldn’t hurt. With even Summers calling off the dogs, it might even happen. But every time analysts have predicted rate cuts in this cycle, they have not been correct, economic damage notwithstanding.
The other form of assistance with the transition could come from more government support. Michigan’s recent passage of a 100 percent clean energy standard makes investment not optional, and effectively builds costs into the status quo. New Jersey is continuing to bid out offshore wind transmission. Virginia’s offshore wind farm is moving forward. Where mandates for clean energy can pair with subsidy support and labor standards to create good jobs, the coalition for the transition can overcome the short-term financing crunch.
But it would be a hell of a lot better if, in a fit of pique over not getting a high-level job in the Biden administration, Larry Summers didn’t set the Fed down the path of constricting the clean-energy transition just as it gets going.
