Inflation and the Energy Transition

High inflation is showing no signs of receding in the near term.

For my friends and family, that means living with higher prices, cutting energy usage, choosing more efficient appliances, switching to electric boilers and perhaps finally investing in roof-top solar. Suddenly, a lease on an electric car looks more affordable. All of which will soften the impact of higher energy prices.

For my friends in private equity, higher high inflation brings fresh considerations for inputs into their financial models.

Here are some key questions (and answers) from our perspective on how the situation going forward could look like.

1. What high inflation does it mean for raising debt?

The US Fed agrees and will begin the battle to contain US inflation with multiple rate hikes in 2022. But interest rates will remain historically low meaning borrowing will continue to be attractive.

2. What will it do to CAPEX?

Solar panel prices were up 16% last year. But within the project finance model, this rise in costs can be absorbed through other efficiencies — such as lower developer fees or cheaper leases.

3. Where is revenue going to land?

Long-term energy prices have been long-forecast are finally here and will likely remain ahead of both borrowing costs and at least in line with inflation forecasts.

Overall, project IRRs could increase by a hundred basis points or more.

Inflation makes us all more prudent investors. And the erosion of the so-called ‘green premium’ can only be a positive outcome for the energy transition.

Want to learn more? Then check out how our expert advisory solutions can help you navigate this turbulent time.

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