Macro Trends

Rising Costs, Supply-Chain Issues Won't Slow Transition

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High commodity prices and supply-chain disruptions are prompting critics to argue that the energy transition will slow down or derail as Germany, for example, rushes to develop new LNG terminals. The truth is Europe wants to end its reliance on Russian gas. This involves replacing some of it with LNG and probably using more coal for a couple of years, but the EU clearly believes energy security and decarbonization will reinforce each other. More generally, power companies are not overly worried about current high metals prices and delays in project development.

  • The recent surge in commodity prices and supply-chain issues are impacting renewable energy deployment, causing bottlenecks and making it difficult for developers to deliver power at the right time and price.

Higher commodity prices are feeding into higher equipment costs. Key commodities and freight costs were making up about 15% of total solar photovoltaic (PV) and 20% of onshore wind investment costs as of this past December according to the International Energy Agency (IEA), and prices have increased since then. Copper and steel contribute the most to the cost of wind projects, as large quantities of steel are used in manufacturing and construction of the tower, nacelle and mechanical equipment, and large quantities of copper in electrical equipment. PV's largest cost component is the manufacturing and shipment of modules, which are directly affected by the price of polysilicon, steel, aluminum and copper. This is especially challenging to developers who won bids in past auctions anticipating continuous declines in the cost of renewable equipment.

  • But fossil fuel prices are even higher, making renewables more competitive than ever and allowing renewable developers to restore margins.

The appetite for renewables remains strong as they are "massively" more competitive than fossil fuels, according to Spanish developer Acciona Energia. Assuming capital costs are 25% or even 50% higher than today for all technologies — because supply-chain issues equally apply to renewable and conventional energy — onshore wind and solar PV would still be the cheapest technologies for new power generation, Energy Intelligence calculations show. In Europe, for example, a 50% increase would translate in onshore wind and solar PV costs at $77 and $97 per megawatt hour instead of, respectively, $57/MWh and $68/MWh. This would easily beat combined-cycle gas turbines, currently at $200/MWh or $210/MWh.

In fact, beyond short-term issues and delays, companies like Acciona do not see higher capital expenditure costs as a problem because power prices, which are driven by natural gas prices, have been increasing even more than project costs. Indeed, renewable power purchase agreement prices in Europe surged 27% year over year, according to consultancy LevelTen Energy. Meanwhile, wind and solar project costs have increased by around 10%-11% between 2020 and early 2022, according to Acciona.

  • Higher prices for energy transition minerals will encourage more investment in mining and equipment, easing geopolitical risks associated with accessing these products.

More generally, supply-chain issues may drive investment to diversify renewable equipment supply. Europe is already a major wind turbine maker but production of PV panels has become mostly Asian. However, European companies, notably German and Swiss firms, continue to be among the leading suppliers of machines and manufacturing equipment to the PV industry. The European Commission recently reiterated its commitment to the industry-led European Solar Initiative aimed at manufacturing 20 gigawatts per year of solar panels by 2025. Italian utility Enel, also a panel manufacturer, will expand production capacity from 0.2 GW/yr to 3 GW/yr by 2024 and could "copy-paste" that larger unit at other locations.

Critics often argue that renewable energy and electric cars use such huge amounts of strategic metals that the energy transition will be delayed by price spikes and supply shortages. But in terms of raw materials, the near-term picture is generally not worrying, according to the IEA. In fact, with a few exceptions, other uses of materials in the global economy far exceed those in the energy sector, a group of Dutch experts from the University of Leiden's Institute of Environmental Sciences emphasized in a 2020 report.

"It is only for copper, lithium, indium and neodymium that demand is raised substantially above the expansion rate of the global economy by the change in electricity generation technology and the massive introduction of electric cars," the report said. New resources would be needed for copper, lithium and indium. But the first two would only require a "modest" annual expansion rate of reserves, comparable to what was achieved in the 1990s and 2000s during a period of declining prices.

Other options can also be considered to reduce exposure to supply shortfalls or undesired sources. Tesla, for example, is working on zero-cobalt cathodes to avoid Congo's socially controversial production. Those cathodes are high in nickel, for which Russia is responsible for about 10% of global output. But top producers also include Indonesia, the Philippines, France's New Caledonia, Australia and Canada. The Philippines recently announced it would open about 12 new mines this year.

  • Longer term, even if the next few months prove difficult for some players, the energy transition will certainly accelerate in Europe — and probably everywhere else.

New capacity for generating electricity from solar, wind and other renewables increased to a record global level in 2021 and will grow further this year, the IEA found in its newly released Renewable Energy Market Update. So far, renewable growth this year has been "much faster than initially expected," driven by strong policy support in China, the EU and Latin America — and in spite of slower-than-anticipated growth in the US, caused by uncertainty over new incentives and trade actions against PV imports from Asia.

Based on today's policy settings, renewable power global growth is "set to lose momentum" next year and renewable capacity addition could plateau in 2023, the IEA warns. But governments' strengthened focus on energy security and affordability — particularly in Europe — is "building new momentum" and should accelerate deployment of renewable energy technologies and energy efficiency solutions. The IEA expects global addition of PV capacity to break new records in 2022-23. In the EU, the agency believes households and companies will accelerate rooftop solar installation as a way of saving money on electricity bills. Anecdotal evidence suggests it is currently difficult to find solar panels in Germany as demand is booming.

Policy and Regulation, Low-Carbon Policy, Renewable Electricity , Gas-Fired Electricity, CO2 Emissions, Macroeconomics
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