Why the National Debt Matters for the Energy Sector

Rising Deficits Could Make It Harder to Meet Growing Energy Demand and Climate Goals

The U.S. will need an unprecedented amount of new energy infrastructure to meet forecasted energy demand growth and net-zero emissions goals. BPC modeling conducted as part of the Decarb America Research Initiative found that achieving net-zero emissions in the U.S. by 2050 would require a doubling of wind and solar capacity, at least an eightfold increase in carbon capture capacity, and new production capacity of over 1.4 quads of zero-carbon fuels like hydrogen and biofuels (enough energy to power the entire U.S. for nearly 5 days), among other actions. Many of these projects will be large and complex, such as high-capacity electricity generation facilities, interregional transmission lines, and carbon dioxide pipelines. Such projects are capital-intensive and demand long lead times and stable financing. When economic conditions turn for the worse, capital-intensive projects become increasingly difficult to finance as the private sector looks for safer investments. The effect is slower deployment of energy projects that affordably and reliably meet our energy needs.

Inflation

The energy sector has a capital intensity ratio (total assets per dollar of revenue generated) double that of other industries, due to large material and labor demands. Elevated inflation means higher costs for both the materials and labor required to build a project. As a result, project developers often need to raise prices or cancel projects altogether.

This dynamic played out in recent years as inflated material costs spurred by supply chain challenges made planned  offshore wind projects and a breakthrough small modular nuclear reactor project inviable for the developers.

High Interest Rates

Financing the construction of an energy project usually requires complex loan structures that are dependent on a contracted interest rate. The higher that interest rate, the higher the cost of capital and thus the less desirable it is to borrow money and the more pressure on the project to produce a high rate of return. This results in project developers increasing energy prices to meet the returns demanded by lenders. This dynamic particularly disadvantages some clean energy projects already seen by investors as riskier bets (e.g., less predictable risk factors that affect project returns on investment) than traditional and more predictable energy projects.

High interest rates in recent years significantly slowed investment in the clean energy sector. Wood Mackenzie found that a 2-percentage-point increase in interest rates pushed up the levelized cost of energy (LCOE) for a natural gas plant by 11%. For renewable energy projects, a 2-percentage-point increase in interest rates has an even larger impact, pushing up the LCOE by 20%.

Constrained Federal Resources

In 2022, the U.S. continued a long trend of contributing more than any other country to energy R&D. In fact, American businesses invested more than three times as much in R&D compared to the federal government, though the federal government continues to be an important investor in both R&D and projects. The DOE’s Loan Program Office has distributed $35 billion in loans to energy programs.

Federal funding for energy R&D and commercialization helps bring innovations to the market. The Department of Energy drives these efforts, accounting for 60% of all federal R&D funding—over $2 billion annually—in the energy sector. Additionally, tax policy that recognizes the climate benefits of clean energy projects can incentivize greater private-sector investment and accelerate deployment. If an increasing share of the federal budget is spent on servicing the federal debt, it will become more difficult to maintain and increase federal investments in innovation and commercialization programs.

The Path Ahead

To maintain federal capacity to invest in projects vital to meeting our energy affordability, reliability, and climate goals, we must address the core drivers behind our federal budget imbalances and maximize the efficiency of all spending and tax programs. Without tackling these issues, critical funding to drive innovation and reduce emissions will be increasingly difficult to secure.

A high-interest and inflationary environment could hamstring investment in the next generation of energy technologies currently under development that could ensure all Americans have access to abundant, affordable, reliable, and clean energy. These dynamics could deter future private and public investment in the sector as national priorities are realigned to service the ballooning national debt. Improving our fiscal trajectory can avoid long-term economic impacts that create risks for a strong U.S. energy sector.

The Bipartisan Policy Center is a mission-focused organization helping policymakers work across party lines to craft bipartisan solutions. By connecting Republicans and Democrats, delivering data and context, negotiating public policy, and creating space for bipartisan collaboration, BPC helps turn legislators’ best ideas into durable laws that improve lives. Since 2007, the Bipartisan Policy Center has helped shepherd countless bills across the finish line.