Say goodbye to the era of steadily falling clean energy prices
Will Wade, David R Baker and Josh Saul/Bloomberg News (TNS)
The era of increasingly cheap clean energy is over, giving a fresh whiff of uncertainty to global energy markets battered by one supply crisis after another.
Relentless price declines over the past decade have made renewables the cheapest sources of electricity in much of the world. Over the past year, however, solar panel prices have jumped more than 50%. Wind turbines are up 13% and battery prices are rising for the first time.
As pandemic-induced supply delays ensnare everything from cars to salads, green power price hikes may come as no surprise. But shipping backlogs and raw material shortages come at a particularly vulnerable time for wind and solar. After years of rapid advances in technology and manufacturing, fewer opportunities remain to cut costs without sacrificing profits. Instead of falling perpetually, prices will now fluctuate based on the cost of raw materials and other market forces.
For energy markets struggling with blackouts and extreme price volatility in the green transition, clean energy inflation is another wild card. Policymakers, accused of adding wind and solar so quickly that power grids have become unstable, are under pressure to ensure the whole system is more reliable – by pairing solar with batteries, for example, or by maintaining aging nuclear power plants longer.
“From now on, what will make the difference around solar and wind expansion will not be costs – how far can you go? – but value,” said Edurne Zoco, Director cleantech and renewable energy executive at research firm IHS Markit Ltd.
Rising interest rates also threaten to raise the costs of wind and solar projects as central banks weigh in on tighter monetary policy to curb inflation, said Julien Dumoulin-Smith, an analyst at Bank of America Corp. . these high-leverage projects are tariffs,” he said. “Interest rates have only fallen for a decade in a row.”
Climate hawks need not fear renewable energy inflation, however. Even with recent cost increases, wind and solar have evolved from expensive, niche sources of electricity to become competitive with fossil fuels. Renewables remain relatively cheaper than fossil fuels in much of the world, and oil and natural gas prices have surged over the past year. In the long term, wind and solar prices will continue to decline, but at a slower pace. This means that clean energy installations are expected to continue to grow rapidly in the years to come.
Yet the industry is grappling with the immediate effects of supply chain grunts. Burlington, Vermont-based solar developer Encore Renewable Energy LLC is paying about 35 cents a watt for panels, up from 30 cents in mid-2020, according to chief executive Chad Farrell.
Raw materials now make up 70% of the cost of finished modules, leaving virtually no room for suppliers to cut costs, said David Dixon, principal analyst at research firm Rystad Energy. A shortage of polysilicon, one of the key materials in photovoltaic cells that make up solar panels, increased spending last year and shipping costs also rose.
Invenergy, a U.S. developer of wind and solar projects, has been forced to delay some projects because it can’t get panels, said Art Fletcher, the company’s executive vice president of construction. Although shipping spending is beginning to decline after surging last year, the renewable energy industry as a whole is undergoing a transformation, he said.
“I don’t believe we’ll go back to where we were two years ago,” Fletcher said.
The Solar Energy Industries Association and Wood Mackenzie Ltd. forecast last month that US installs would drop 15% in 2022, about 25% less than the trade group’s September forecast.
Supply chain issues may ease this year as China spends billions on new factories to produce polysilicon. This may reduce prices in the short term, but it is less likely to lead to lasting reductions.
“We’re coming to the end of the price cuts,” Dixon said. “Raw material prices will be the sole determinant of module prices.”
The wind industry is going through a similar transition. Prices fell 48% in the decade to 2020, but are now stabilizing and are projected to drop 14% to 2030, according to BloombergNEF.
“It’s a sign of the industry maturing,” said BNEF wind analyst Oliver Metcalfe.
Manufacturers will continue to reduce costs per megawatt with larger installations. However, these massive turbines – almost as tall as the Eiffel Tower – require more materials, especially steel, which has surged in 2021 and is likely to remain expensive for the next few years. Supply chain issues pushed onshore wind prices up 9% in the second half of 2021.
In some areas, developers have already installed wind turbines in the best locations and are now considering less windy areas or smaller sites. This means they can use turbines designed for slower wind speeds or place smaller orders, resulting in higher prices per megawatt.
The world’s largest wind turbine maker, Denmark’s Vestas Wind Systems A/S, had to lower its profit forecast last year due to rising costs of key commodities and continued disruptions to the supply chain. Something will have to change for the industry to be able to supply enough wind power capacity to meet global climate goals, the company said.
“We need to put a warning flag here,” said Morten Dyrholm, senior vice president at Vestas. “We need to focus on profitability across the whole industry.”
Batteries were also affected by inflation. BNEF said late last year that it expected battery prices to rise this year for the first time in data dating back to 2010. The 2.3% increase can be attributed to soaring prices for metals in batteries, booming global demand and tight supply chains. .
But compared to wind and solar, batteries are a much newer part of the clean energy landscape. Suppliers continue to experiment with new chemistries and increase production capacity, which means there is still room for deeper price reductions.
Fluence Energy Inc., a grid-scale storage developer, has experienced delays and increased costs shipping batteries from its contract manufacturing facility in Vietnam, but the company does not expect this goes on.
“This backlog that’s been created is really being worked through,” CFO Dennis Fehr said.
As some of the supply chain issues plaguing renewable energy developers ease, George Bilicic, head of global power, energy and infrastructure for Lazard Ltd., said the industry was undergoing permanent changes. Without new technological breakthroughs or major consolidation, prices stabilize. “The story of the big cost cuts is that the big cost cuts won’t be the story anymore,” Bilicic said.