High gas and coal prices keep renewable-energy rollout on track
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2 min read . Updated: 04 Dec 2021, 01:00 PM IST - Build-out of wind and solar farms is accelerating as rising power prices help offset input cost inflation
Premium 2 min read . Updated: 04 Dec 2021, 01:00 PM IST Higher energy prices are a worry for consumers and central bankers this winter, but they have the odd benefit. Case in point: fueling the renewable-energy revolution.
This will be another record year for building wind and solar farms, according to a report published Wednesday by the International Energy Agency. About 290 gigawatts of generating capacity is expected to be installed, up 3% on an exceptionally strong 2020. The trend should continue with an average of 305 GW forecast annually through 2026.
The investment comes despite much higher costs. In the past two years, freight rates have risen nearly sixfold, the cost of polysilicon used in solar panels has more than quadrupled, and prices of steel, copper and aluminum—big inputs for panels, turbines and electrical connections—are up by half or more.
The case for building more renewable-energy production still adds up because of higher power prices. Wholesale electricity prices have risen across the world—by more than double in the U.K., Spain and Germany—driven partly by a global bidding war for gas, coal and other fuels used in heating and power. These price changes have little impact on the economics of existing wind or solar farms, which often sell their first 10 to 25 years of power at contracted rates, but it has improved the terms agreed for new projects.
Renewable projects will also get a boost from the increasingly ambitious climate policies of governments and companies. States have promised $480 billion for clean energy, with the majority expected to be spent before 2024. Renewable power will become the largest source of electricity globally by 2026, making up half the mix in Europe, 40% in China and 30% in the U.S. and India, according to the IEA estimates.
This year’s supply-chain bottlenecks have reversed the sector’s long-term trend of dramatic cost reductions. Over the last 12 years, the cost of solar panels and wind turbines has dropped about 90% and 70%, respectively, but in most places recent cost inflation has made them about 10% to 25% more expensive than the average of the last two years.
This has been a headache for turbine and panel makers. They have increased prices for new contracts, but some existing contracts margins were hit despite commodity hedges and an effort to rein in freight costs with more local sourcing. Turbine manufacturer Siemens Gamesa issued two profit warnings this year.
Cost inflation may also lead to a bout of indigestion for renewable developers. While new projects add up, the IEA says there are about 100 GW of projects in progress which may have assumed costs would continue to fall. These could be delayed or struggle to generate returns.
As long as commodity and freight prices normalize in the next year or two, though, the IEA doesn’t expect cost inflation to throw the renewables rollout off course. In the longer run, perhaps the biggest risk comes from higher interest rates, as financing is a significant portion of project costs. On the flip side, project economics would be improved by policy changes to speed things up, such as quicker permitting, more grid connections or increased auction capacity.
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Government efforts to up the pace seem likely in the wake of the COP26 climate conference. Even the rapid expansion of renewable generation forecast by the IEA wouldn’t be enough to cut carbon emissions to net zero by 2050—an increasingly common target. Renewables remain the dominant growth story in global energy, and this year’s twists don’t really change the likely ending.
This story has been published from a wire agency feed without modifications to the text
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