All the turbulences of renewable energy. Economist Report
Supply chain disruptions, rising interest rates and protectionism are complicating renewable energy plans. The in-depth analysis of the weekly The Economist
A few years ago, renewable energies were experiencing their moment of glory. Lower interest rates have lowered the cost of clean energy, which is expensive to implement but runs on free sun and wind. The price of solar panels and wind turbines had fallen as technologies matured and manufacturers increased the scale. These developments have led to the levelized cost of electricity (lcoe) – which takes into account capital and operating expenses per unit of energy – for solar, onshore wind and offshore wind to fall by 87% respectively, by 64% and 55% between 2010 and 2020. Clean energy has become competitive with dirty alternatives and has been purchased by large energy users directly from developers.
Infrastructure investors like Brookfield and Macquarie have made big bets on renewables. Some fossil fuel companies, such as BP, have done the same. Utilities, such as EDP and Iberdrola in Europe and AES and NextEra in America, have invested in the projects. The average return on capital invested by developers rose from 3% in 2015 to 6% in 2019, a level similar to that of oil and gas extraction, but with less volatility. The industry's prospects looked so rosy that in October 2020 NextEra's market value briefly eclipsed that of ExxonMobil, America's largest oil giant, to become America's most valuable energy company.
THE DIFFICULTIES OF RENEWABLE ENERGY
Today these prospects appear significantly reduced. Over the past two years, the renewable energy economy has been hit by rising interest rates, supply chain snags, permitting delays and, increasingly, the protectionist instincts of Western governments. The “green premium” of bonds has turned into a “green discount”. The S&P Global Clean Energy Index, which tracks the sector's performance, has fallen 32% over the past 12 months, even as global stock markets have risen 11%. AES has lost more than a third of its value. NextEra is worth about a third of ExxonMobil, which has been buoyed by rising oil prices. Wind turbine manufacturers have gone from a near-profit situation to a loss-making one.
This is a problem, and not just for renewable energy companies and their shareholders. On December 2, at the annual UN climate summit in Dubai, 118 countries committed to increasing their combined renewable energy capacity to 11,000 gigawatts (gw) by 2030, up from 3,400 gw last year. year, as part of their decarbonization efforts. This will require adding about 1,000 gw per year, triple what the world managed last year. For this to happen, renewable energy must become a bet on again.
THE INCREASE IN COSTS
The industry's recent problems are the result of a confluence of factors. One problem is rising costs along the supply chain. The price of polysilicon, a key material for solar panels, rose from $10 per kilogram in 2020 to $35 in 2022, thanks to supply chain problems in China due to the pandemic. The price of solar modules has skyrocketed.
Wind turbine costs have also increased. Russia's invasion of Ukraine has raised the prices of steel, an important input of which both countries are large producers. Furthermore, to create longer and more powerful blades, manufacturers have pushed towards new frontiers of technology, even experimenting with materials such as carbon fiber composites instead of glass fibre. To capture stronger winds at greater heights, today the average tower is nearly 100 meters tall. In 2018, GE unveiled a 260-meter offshore wind turbine, not much shorter than the Eiffel Tower. Suppliers of the approximately 8,000 wind turbine parts have struggled to keep up. Ships and trucks have difficulty transporting pieces the size of football fields.
All this has led to delays and failures in the production of wind turbines. In October, a turbine made by the Danish company Vestas caught fire in Iowa. Around the same time, blades on a GE turbine in Germany broke off and fell into a field. Warranty clauses in sales contracts ensure that manufacturers bear the costs of these incidents. Over the past 12 months, such guarantees have cost Vestas 1 billion euros ($1.1 billion), equivalent to about 6% of revenue. Quality problems at Siemens Gamesa, including wrinkling in blades, have pushed annual operating losses at its parent company, Siemens Energy, to 4.6 billion euros. On November 14, a loan guarantee was granted by the German government to avoid a crisis.
To stem the bleeding, equipment manufacturers raised their prices. According to data provider S&P Global, Western manufacturers are now charging prices a fifth higher than at the end of 2020. These price increases have combined with rising interest rates to push up the ICOE of offshore wind projects Americans by 50% in the last two years, calculates the research firm Bloombergnef, even after including the subsidies provided by the Inflation Reduction Act (ira), President Joe Biden's mammoth climate law.
Developers who set electricity prices with customers before setting costs ended up with unprofitable projects. In America they have canceled or tried to renegotiate contracts for half of the offshore wind capacity under construction in the country, according to Bloombergnef. In October Orsted, a Danish company that is the world's largest offshore wind developer, took a $4 billion writedown when it canceled two large projects off the coast of New Jersey. In Britain, a government auction in September to supply offshore wind power to the grid at a guaranteed maximum price of 44 pounds ($56) per megawatt hour (mwh) received no bids.
BUREAUCRATIC DELAYS
Renewables managers also complain about bureaucratic delays. In America it takes on average four years to get permission for a solar farm and six for an onshore wind farm. An EU rule that permitting times for renewable projects in the bloc should not exceed two years is mostly poorly enforced. Because solar and wind farms typically produce less energy than conventional power plants, and because easily connected sites have already been occupied and are built in increasingly remote locations, they often require new transmission lines. These also need to be approved. In America the interconnection queue for renewable energy is 2,000 gw long and growing.
All this is exacerbated by growing green protectionism. America has effectively blocked Chinese solar manufacturers with heavy anti-dumping duties and the Uyghur Forced Labor Prevention Act of 2021, which bars American developers from importing polysilicon-containing modules from the Xinjiang region, the source of half of global supply. Due to these policies, solar modules in the country cost more than twice as much as elsewhere, according to consultancy Wood Mackenzie.
Costs could rise further. The Commerce Department found in August that some Southeast Asian suppliers were simply repackaging products from China and would therefore be hit with the same anti-dumping duties starting in the middle of next year. The Biden administration is leveraging the IRA's domestic content requirements to lure manufacturing home. First Solar, America's largest module maker, is expanding its domestic manufacturing capacity from 6GW this year to 14GW by 2026. However, that's a fraction of what America will need to reach its targets. decarbonization objectives. Furthermore, it will not serve to reduce prices in the sector as a whole.
TRADE RESTRICTIONS
Europe is sending mixed signals. The EU has abandoned previous anti-dumping duties on Chinese solar panels. But on November 22 the European Parliament approved the Net Zero Industry Act, which will introduce minimum national content levels for public renewable energy contracts. The European Commission is also considering investigating subsidies given by China to its turbine manufacturers, which sell their equipment at home at prices 70% lower than those charged by Western rivals in the rest of the world. Chinese companies are already gaining traction outside their home market. They are now more regularly bidding for projects around the world, notes Miguel Stilwell d'Andrade, EDP's chief executive.
Trade restrictions won't just keep out cheap Chinese solar panels and wind turbines. They will also affect the availability of components. Siemens Gamesa plans to outsource more of its supply chain to reduce costs. Western turbine makers already buy nacelles, towers and other components from China, which dominates production. America will need to import the majority of components for offshore wind projects to meet its 2030 goals, according to the Department of Energy. Supply shortages are likely as the world races to increase supply. 'renewable energy. Local content fees and regulations could make the problem worse.
There are not many signs of an easing of protectionism. But the industry is at least starting to address some more immediate challenges. Polysilicon prices have fallen and production capacity is increasing throughout the solar supply chain. Western turbine manufacturers may also have made a breakthrough, thanks to falling raw material prices and greater technological and financial discipline. The industry is realizing that “bigger turbines are not always better,” says Henrik Andersen, CEO of Vestas. On November 8, the Danish company announced that it had returned to profitability in the third quarter.
Developers, for their part, are managing to raise prices without hurting demand. Over the past two years, prices for solar and wind energy received by American developers under power purchase agreements have increased nearly 60%, according to data from LevelTen Energy, an energy marketplace. Andres Gluski, head of aes, says his company is on track to bring more than double the renewable energy capacity into service this year compared to 2022. Yields are stable, he adds. In next year's offshore wind auction, Britain will raise the maximum price from £44 per mWh to £73. Germany also increased maximum prices for solar and wind auctions.
“No one likes to see prices go up, but they are accepting it,” says Macquarie's Mark Dooley. If permitting rules are not relaxed and protectionism remains unchecked, much more will have to be accepted.
(Extract from the eprcomunicazione press review)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/turbolenze-energie-rinnovabili-economist/ on Sun, 10 Dec 2023 07:19:44 +0000.