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Clouds Begin to Clear on Renewable Supply Kinks

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High commodity prices and supply-chain issues have caused renewable investment costs to increase by at least 10% and sometimes 30% in the past two years, according to developers Energy Intelligence has spoken to. Many projects have also been delayed or postponed. But investors and energy consumers remain hungry for renewable projects and industry players are seeing price and supply tensions starting to ease. While most developers had to renegotiate supply contracts and many are still struggling to get fixed prices for components or equipment, some of the largest ones have passed the peak and started to sign contracts for equipment delivery in 2023-24 at prices lower than today.

Meanwhile power prices, which are driven by gas prices in many parts of the world, have increased much faster than renewable investment costs, particularly in Europe. This is coming on top of multiple bottlenecks on equipment supply but also permitting and grids, thus creating a seller's market with improved return expectations, a developer tells Energy Intelligence. "We have more bargaining power than we used to, and that's translating in our PPA [power purchase agreement] prices." Renewables also remain "massively" more competitive than fossil fuels, he says.

Question Is How Long

The supply-demand balance for critical materials and, more generally, the renewable supply chain should be restored by the end of 2022 as substantial new capacity is coming on line, another developer tells Energy Intelligence. This is why he believes prices will start to decrease in 2023. "The question now is how long it will take to go back to normal." The key medium-term issue is general inflation and its impact on labor and construction costs, which are likely to go through a "slightly longer plateau" than raw materials and manufacturing costs.

Financing costs, which are related to inflation, are also likely to increase in the near future but will be reflected in PPA prices. They should not significantly change the competitiveness of renewables as every form of energy is capital intensive. "The real issue is going to be about the affordability of energy for the public."

Catch-Up

There is little doubt, however, that renewable costs will catch up with previous trends because renewables have more scope for efficiency gains, the developer insists. Wind and solar are less mature than conventional technologies such as steam, gas and hydro turbines, which means they have more potential for better energy conversion, increased economies of scale and improved manufacturing and construction processes. "As costs are going up, more people will sharpen their pencils to further improve the technologies." Past cost forecasts have mostly failed to predict the speed of renewable technological and manufacturing improvement, the same person notes.

Geopolitics

One major obstacle in the journey toward lower costs is geopolitics. And rather than the Ukraine-Russia crisis, the US-China relationship may prove more critical for the future of renewables. This is already evident in the US Department of Commerce's investigation on the alleged violation of anti-dumping rules by some solar photovoltaic (PV) panel manufacturers in Southeast Asia. Those rules have already caused project costs to increase by more than 30% in the US and, with the current investigation, many final investment decisions are being delayed. Last year, the US also banned solar imports from several polysilicon manufacturers located in the Xinjiang province, based on forced labor concerns.

Those issues, together with the Ukraine-Russia situation, could fuel moves to relocate part of the solar supply chain in Europe and North America, some experts believe. Manufacturing costs in OECD countries would be only slightly higher than in China as PV manufacturing is more capital than labor intensive. “Manufacturing costs may be a bit higher but Europe could play on efficiency and quality, and with more efficient panels get cheaper LCOEs [levelized cost of energy] than with Chinese panels,” one expert tells Energy Intelligence.

Topics:
Renewable Electricity , Policy and Regulation, Resource Access, Low-Carbon Policy
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