International Finance
Energy Magazine

Green dreams to red realities: Renewable woes

IFM_ Renewable woes
The line for renewable energy connections in America is 2,000 GW long and still growing

Renewables were experiencing their heyday a few years ago. Low interest rates have brought down the cost of clean power, which is costly to install but runs on free energy from the sun and wind. As manufacturers increased their scale and technologies advanced, the cost of wind turbines and solar panels decreased. The levelized cost of electricity (LCOE), which takes into account capital and operating expenses per unit of energy, decreased by 87%, 64%, and 55% for onshore wind, offshore wind, and solar energy, respectively, between 2010 and 2020 as a result of these advancements.

Big corporate power users immediately purchased clean energy from developers as it became competitive with dirty alternatives. Bettors on infrastructure, like Brookfield and Macquarie, placed significant bets on renewable energy. BP and other fossil fuel companies also did. Projects received funding from utilities like NextEra and AES in America and EDP and Iberdrola in Europe. From 3% in 2015 to 6% in 2019, the average returns on capital employed by developers increased, approaching the level of less volatile oil and gas extraction. The outlook for the sector was so promising that NextEra briefly overtook ExxonMobil, the largest oil company in the United States, in terms of market value in October 2020, making it the most valuable energy company in the country.

These prospects appear much less promising today. Over the last two years, growing interest rates, supply-chain bottlenecks, permit delays, and Western governments’ increasingly protectionist inclinations have all hurt the economics of renewable energy. What was once a “green premium” in stocks is now a “green discount.” Over the last 12 months, the global stock markets have increased by 11%, but the industry’s performance is tracked by the SandP Global Clean-Energy index, which has decreased by 32%. More than a third of AES’ value has been lost. The value of NextEra is about one-third that of ExxonMobil, which has benefited from a rise in oil prices. Wind turbine producers went from being roughly profitable to losing money. That is an issue for all parties involved, not just the shareholders of the renewable energy companies.

As part of their decarbonisation efforts, 118 countries committed to increasing their combined renewable-energy capacity to 11,000 gigawatts (gw) by 2030, up from 3,400gw last year, at the annual UN climate summit being held in Dubai on December 2. That will mean adding about 1,000 gw annually, which is three times what was accomplished globally last year. Renewables need to once again appear like a viable business venture for this to occur. The current issues facing the industry are the product of several interrelated factors. Increasing supply chain costs is one issue. Thanks to increased demand, the cost of polysilicon, a crucial component of solar panels, skyrocketed from $10 per kilogramme in 2020 to as much as $35 in 2022.

The price of wind turbines has also skyrocketed. Steel is a crucial input that both countries produce in large quantities, and its price increased as a result of Russia’s invasion of Ukraine. Furthermore, to produce longer and more potent blades, their creators have ventured into a previously uncharted technological territory, testing materials other than fibreglass, such as carbon-fibre composites. The average tower today stands close to 100 metres tall to harness stronger winds at higher altitudes. A 260-metre offshore wind turbine, not much shorter than the Eiffel Tower, was unveiled by Ge in 2018. Vendors of the roughly 8,000 parts that make up a wind turbine have had difficulty keeping up. Football field-sized parts are too big for lorries and ships to handle.

All of this has resulted in production failures and delays for wind turbines. An Iowa wind turbine manufactured by Vestas, a Danish company, caught fire in October. At approximately the same moment, a German geothermal turbine broke and landed in a field. Manufacturers are required to cover the costs of such incidents under warranty provisions in sales contracts. Such warranties cost Vestas €1 billion ($1 point 1 billion) in the last 12 months. Siemens Gamesa’s quality issues, such as creases in its blades, caused its parent company, Siemens Energy, to incur €4.6 billion in operating losses annually. The German government gave the parents a loan guarantee on November 14th to help them avoid a crisis.

Can green stay out of the red?

Equipment manufacturers have been increasing their prices in an attempt to stop the bleeding. Western ones currently charge five per cent more than they did at the end of 2020, per data provider SandP Global. According to research firm Bloombergnef, these price increases along with rising interest rates have caused the LCOE for US offshore wind projects to increase by 50% over the last two years. This is even after accounting for the subsidies included in President Joe Biden’s massive climate law, the Inflation Reduction Act (IRA). Developers stuck with unprofitable projects are those who lock in electricity prices with customers before locking in costs.

According to BloombergNEF, for half of the offshore wind capacity being built in the United States, contracts have either been cancelled or renegotiated. The largest offshore wind developer in the world, Orsted, a Danish company, took a $4 billion writedown in October after scrapping two sizable projects off the coast of New Jersey. There were no bids in Britain’s September government auction for offshore wind power to be supplied to the grid at a maximum guaranteed price of £44 ($56) per megawatt-hour (MWh).

Supervisors of renewables also complain about bureaucratic hold-ups. Approval for a solar farm takes an average of four years in America, while approval for an onshore wind farm takes six. The majority of the violations adhere to an EU regulation that states approval periods for renewable projects within the bloc cannot be longer than two years. New transmission lines are frequently required for solar and wind farms because they often generate less energy than conventional power plants and are being built in more remote locations due to the availability of easy-to-connect sites being taken.

These also require approval. The line for renewable energy connections in America is 2,000 GW long and still growing. Growing green protectionism exacerbates all of this. With high anti-dumping duties and the Uyghur Forced Labour Prevention Act of 2021, which prevents American developers from importing polysilicon-containing modules from the Xinjiang region—the source of half of the world’s supply—America has effectively shut out Chinese solar manufacturers. According to consulting firm Wood Mackenzie, the cost of solar modules is more than twice as high in the US as it is overseas as a result of these regulations. These prices might go up even more.

The Department of Commerce discovered in August that certain Southeast Asian suppliers were only repackaging Chinese goods; as a result, they would likewise be subject to the same anti-dumping duties starting in the middle of the following year. The domestic content requirements of the IRA are being used by the Biden administration to entice production domestically. The largest module manufacturer in the United States, First Solar, plans to increase domestic production capacity from 6 GW this year to 14 GW by 2026. However, that is minuscule compared to what America will require to achieve its decarbonisation objectives. Furthermore, it won’t significantly reduce industry-wide prices.

Europe’s signals are conflicting. Previous anti-dumping duties imposed by the EU on Chinese solar panels have been lifted. However, the Net Zero Industry Act, which will impose minimum domestic content requirements for contracts involving public renewable energy, was passed by the European Parliament on November 22. The European Commission is also considering looking into China’s subsidies for its turbine producers, who sell their equipment domestically for 70% less than their international competitors. Chinese companies are beginning to make headway outside of their own country. The chief executive of EDP, Miguel Stilwell d’Andrade, has observed that they are now bidding on projects more frequently all over the world.

Trade restrictions will do more than just keep out low-cost wind and solar energy systems from China. They will have an impact on parts availability as well. To save expenses, Siemens Gamesa intends to outsource a larger portion of its supply chain. Since China produces the majority of turbines, Western manufacturers already buy nacelles, towers, and other parts from them. According to the Department of Energy, America will need to import the majority of components for offshore wind projects to meet its 2030 targets.

As the world rushes to deploy more renewable power, supply shortages are likely to occur. Regulations about local content and tariffs may exacerbate the issue. There’s not much evidence that the protective mindset is changing. However, the sector is at least beginning to address some of the more pressing issues. Polysilicon prices have decreased, and production capacity is growing throughout the solar supply chain. With increased financial and technological discipline, as well as a decline in commodity prices, it looks like Western turbine manufacturers are also making a turnaround. Henrik Andersen, CEO of Vestas, says the industry is beginning to realise that “bigger is not always better” when it comes to turbines. The Danish company announced on November 8th that it turned a profit in the third quarter.

Developers have the ability to increase their prices without causing a decrease in demand. Recent data from energy marketplace LevelTen Energy reveals that prices for solar and wind power that American developers receive through power-purchase agreements have increased by almost 60% within the last two years.

According to AES CEO Andres Gluski, the company is expected to commission over twice as much renewable energy capacity this year as it did in 2022 and the returns are holding steady.

Britain will increase the maximum price per megawatt-hour from £44 to £73 in the offshore wind auction held next year. Germany has also been increasing the maximum prices for auctions of solar and wind power.

During an interaction with The Economist, Mark Dooley of Macquarie said, “No one enjoys seeing prices go up, but they are accepting it. If approval rules are not relaxed and protectionism goes unchecked, a lot more acceptance will be necessary.”

Meanwhile, Amazon recently revealed that over one gigawatt of clean energy capacity has been added to European grids through the addition of 39 new renewable energy projects thus far this year. More than 160 wind and solar projects in 13 European countries have been made possible by Amazon to date. After all projects are up and running, 50.8 gigawatts of clean energy capacity—enough energy to power over 40.7 million households annually in Europe—are anticipated to be produced.

What's New

ROSHN: Shaping Saudi’s Urban Vision


Regulation around AI is needed: iQmetrix Senior VP of Revenue Jason Raymer

IFM Correspondent

The battle against SIM card theft

IFM Correspondent

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.