Luxembourg, 13 May 2024 – While inflation rates are decreasing, central banks are maintaining historically high key interest rates. Consequently, government bonds are once again becoming attractive due to their high yields, outperforming many green investments. “The combination of persistent inflation and high interest rates poses a greater threat to the energy transition than any political opposition”, states Stephan Blohm, Board member at securities.lu. “It is now up to politicians to offset the increased risk differential.”
“When risk-free investments yield as much as riskier ones, the decision becomes straightforward, particularly for institutional investors”, explains Blohm. Government bonds are deemed risk-free, and as central banks increase interest rates to combat inflation, the appeal of these bonds grows. “There’s a noticeable decline in market demand for renewable energy projects”, Blohm notes. “While this may seem inconsequential from an investment standpoint, it is counterproductive from a socio-political angle.“
“Investors seek strong returns relative to risk, with higher risks demanding higher yields”, says Blohm. Government bonds from major nations like Germany and the USA set the benchmark with yields now exceeding four per cent. “These rates are becoming competitive, even outpacing some wind or solar projects”, Blohm adds.
Green energy projects also involve higher expenses due to development, construction, and operational challenges. “These projects require significant capital and expertise to navigate bureaucratic processes”, Blohm points out. Despite these costs, once operational, green energy becomes a cheaper option, but consumers are generally reluctant to pay a proportionate share of the initial higher investment costs.
“A four percent risk-free return on government bonds starkly contrasts with the complexities and increased risks of investing in renewable energy projects. “Institutional and semi-professional investors consider the risk-return profile when deciding, and currently, government bonds appear more favourable”, says Blohm. “Consequently, there is a decrease in commitment towards developing new green energies.” In other words: “Effectively, government bonds are undermining the much-needed investments in combating climate change.“
To enhance the likelihood of a swift and effective transition to sustainable energy, necessary changes can be made: “To foster a rapid and secure energy transition, we must establish security through means such as government guarantees and sureties to make investments less risky”, suggests Blohm. “Simplifying bureaucratic processes alone could make a significant number of projects financially viable.“