This report is part of Renewables 2021
Rising commodity prices have increased the cost of producing solar PV modules, wind turbines and biofuels worldwide. This situation has short-term implications for equipment manufacturers, project developers and policy makers. Higher prices for solar PV and wind equipment have reversed the cost reduction trend that the industry has seen for more than a decade and may delay the financing of some projects already in the pipeline. While rising input prices have already resulted in policy change on biofuels in several countries, demand for wind and solar PV remains strong, as reflected in recent auction participation and corporate purchasing, even with rising prices. While uncertainty remains as to how long commodity prices will continue their upswing, the impact of rising material costs on the profitability of the renewable energy industry could have long-term implications for the cost of clean energy transitions.
Wind and solar PV
Prices for many industrial materials, and freight costs, have been on an increasing trajectory since Q1 2021, pushing up wind turbine and solar PV costs. Since the beginning of 2020 the price of PV-grade polysilicon has more than quadrupled, steel has increased by 50%, copper by 60% and aluminium by 80%. In addition, freight fees have increased almost sixfold, resulting in additional costs for the geographically dispersed supply chain of renewables. The reversal of the long-term trend of decreasing costs is already visible in the prices of wind turbines and PV modules, which have increased by 10-25% depending on country and region, erasing two to three years of cost reductions since 2018 from technology improvements. The exception, however, is in People’s Republic of China (hereafter ‘China’) where wind turbine costs have continued to decrease in 2021, as demand declined following the 2020 deployment boom driven by the planned phase-out of subsidies.
Monthly commodity and freight price indexes, 2020-2021
OpenHow do commodity prices affect the investment costs of solar PV and onshore wind?
We estimate that key commodities and freight costs make up about 15% of total utility-scale solar PV and onshore wind investment costs. Solar PV’s largest cost component is the manufacturing and shipment of the module, which is directly affected by the price of polysilicon, steel and aluminium. Inverter and electrical installation costs depend on the price of copper, while all components are impacted by increasing freight rates. Steel contributes the most to the final cost of wind installations, as large quantities are used in manufacturing and construction of the tower, nacelle and mechanical equipment. Freight can make up to 6% of total onshore wind investment costs, as the transport of bulky elements with specialised ships is required.
Upfront capital and associated financing costs are 70-80% of the levelised cost of electricity generation for wind and 80-90% for solar PV. Thus, any increase in initial CAPEX greatly affects the profitability of the investment. We estimate that the overall investment cost of utility-scale PV and onshore wind plants could increase by around 25% due to the commodity and freight price surge, based on a comparison of average commodity prices between 2019 and 2021.
Increases in commodity prices do not immediately affect investment costs, as developers, manufacturers and other parts of the supply chain usually maintain stocks of materials and have contracts based on previous prices. However, the increase in raw material and logistics costs ultimately affects the whole value chain and could result in a higher cost of electricity generated at renewable installations. Different areas of the value chain, such as manufacturers, equipment installers and developers, can absorb cost increases in different ways, with some sectors being more affected than others. Additional hedging mechanisms, the sharing of costs or the strategic distribution of equipment are all options developers can use to minimise the impact of increased costs in the short term.
Implications for manufacturers
Higher costs led to decreased equipment purchases in Q1 2021, as numerous manufacturers reported fewer orders because of higher input prices led them to adjusting the price of their finished products. While purchases increased in Q2 as buyers accepted the new market conditions, growing demand coincided with a sharp increase in polysilicon prices. Higher costs have also resulted in wind equipment manufacturers reporting reduced margins, with some lowering their profit guidance by 50%.
In addition, many European and American wind turbine manufacturers have already announced price increases ranging from 10% to 25% for new orders. While manufacturers are reducing freight costs by sourcing equipment from countries closer to their assembly hubs, increased material costs could be felt downstream as manufacturers use hedging clauses to pass commodity price risk on to the buyer. China has not been insulated from rising commodity costs. Even though China produces around 80% of the world’s modules, higher commodity prices have driven solar PV system costs higher in that market. Chinese wind equipment prices, however, have hit record lows in 2021 due to fierce competition among suppliers left with manufacturing overcapacity after exceptionally high deployment in 2020.
Implications for developers
Recent government-led competitive wind and solar PV auctions have already seen contract price increases partly due to high commodity and freight prices. In Brazil rising equipment prices have contributed to awarded prices being over 70% higher in 2021 auctions compared to those held in 2019. Nevertheless, the awarded prices are substantially below those awarded to natural gas-fuelled generation in Brazil’s emergency reserve auction held in October. In India auction prices for solar PV in Q3 2021 were 16% above the historical lows reached in Q4 2020, which may result in delays in signing PPAs with utility companies. The most recent renewables auction in Spain resulted in prices nearly 30% higher than those awarded in January 2021 due, in part, to increases in the cost of materials. These auction prices are, however, well below current wholesale prices in the country. Nascent renewables markets are also seeing higher prices. In Colombia final contract prices for solar PV at the auction held in November 2021 were almost 45% higher than those awarded in 2019, with these increases partially caused by higher investment costs.
Upward price trends for the equipment needed to build solar PV and wind power plants pose a challenge to developers who won bids in competitive auctions anticipating continuous declines in the cost of modules and turbines. The IEA estimates that around 100 GW of awarded but yet-to-be commissioned wind and solar PV capacity from 2019 and 2021 are at risk of the commodity price shock, potentially leading to commissioning delays. A prolonged increase in commodity and equipment prices could result in developers withholding equipment purchases until prices return to lower levels. Meanwhile, auction organisers, utilities and companies purchasing renewable electricity could also be reluctant to accept higher tariffs, delaying their procurement plans, especially in emerging and developing markets.
Implications for onshore wind and solar PV investment globally
Despite rising costs and contract prices, wind and solar PV generation costs remain lower than fossil fuel alternatives, especially given current high natural gas and coal prices. However, if the prices of polysilicon, steel, aluminium, copper and freight remain at their current elevated levels throughout 2022 and manufacturers continue to increase equipment prices, as currently observed, global investment costs of wind and solar PV could increase further. This situation would erase almost three years of investment cost reductions for solar PV and five years for onshore wind. When compared with previous cost reduction trends, higher commodity and logistics costs could lead to investment costs increasing by USD 70 billion for solar PV and USD 35 billion for onshore wind over the forecast period, affecting the pace of deployment. Without these price increases, developers could build about 95 GW of additional solar PV and 25 GW of further wind capacity over 2021-2026.1
Impact of high commodity price scenario on forecast total investment costs and CAPEX, onshore wind and utility-scale PV, 2015-2026
OpenRising energy prices and trade policies put additional upward price pressure on wind and solar
In addition to increased raw material, commodity and freight prices due to the economic recovery after the Covid-19 crisis, rising energy prices are also putting upward price pressure on renewables as manufacturers of materials critical for renewable energy equipment have curtailed production in Asia and Europe to avoid higher fuel and electricity costs. This situation further exacerbates an already strained material supply chain, leading to additional increases and volatility in prices for commodities such as aluminium, copper and steel.
Reductions in material processing due to high energy prices, commodities used in renewables equipment, selected examples
Material |
Type |
Countries impacted |
Start month, 2021 |
---|---|---|---|
Aluminium |
Shutdown |
China |
September |
Zinc |
Curtailment |
China, Europe |
September |
Polysilicon |
Curtailment |
China, Europe |
September |
Magnesium |
Shutdown |
China |
September |
Steel |
Curtailment |
China, Europe |
September |
In addition, trade measures due to concerns over the origin of equipment bring additional price increases to solar PV modules and wind turbines in key markets such as the United States, India and the European Union. Both supply-side constraints and trade measures have a short- and medium-term impact on markets, increasing costs and affecting project profitability, especially for those projects that won auction bids prior to price increases, and also delaying investment.
Trade measures targeting wind and solar PV equipment
Country/region |
Measure |
Detail |
Start year |
---|---|---|---|
United States |
Tariff |
Import duty on cell/modules manufactured in China |
2012/2018 |
European Union |
Tariff |
Variable tariff on PV-rated glass from China |
2014 |
India |
Import duty |
40% duty on solar modules, 25% duty on cells |
2022 |
United States |
Anti-dumping |
Import duty on wind equipment from India, Malaysia and Spain |
2021 |
European Union |
Anti-dumping |
Steel wind towers from China |
Pending |
United States |
Anti-dumping |
Crystalline silicon PV products from China and Chinese Taipei |
2015 |
Canada |
Anti-dumping |
PV modules and laminates from China |
2015 |
United States |
Anti-dumping |
Utility-scale wind towers from Canada, China, Indonesia, Korea and Viet Nam |
2013/2020 |
Australia |
Anti-dumping |
Wind towers from China |
2019 |
The rapid economic recovery from Covid-19 and higher commodity prices compared to pre-pandemic levels have contributed to rising inflation in many countries (IMF, 2021a). The OECD and the IMF expect inflation rate increases to peak at the end of this year before moderating in 2022; however, both organisations warn that uncertainties associated with the pace of the Covid-19 economic recovery may prolong inflation beyond their current forecasts (IMF, 2021a; OECD, 2021b).
In the event of inflation remaining above target levels, central banks may consider increasing interest rates. Higher rates translate into higher borrowing costs, affecting the total generation costs of renewable energy projects. Although the European Central Bank and the US Federal Reserve currently do not plan to raise their main interest rates in the short term, uncertainty over possible hikes presents a longer-term risk. Coupled with prolonged cost increases for equipment, this could have a material effect on investment in renewables, leading to increased costs for developers and governments and affecting the pace of deployment.
Despite rising equipment prices, wind and solar remain competitive
Rising natural gas and coal prices have led average wholesale electricity prices to increase worldwide. In countries such as Germany, the United Kingdom and Spain, average wholesale electricity prices from January to October 2021 more than doubled compared with values observed in 2019 and 2020. Higher natural gas and coal prices have improved the competitiveness of wind and solar PV, despite historic equipment price increases due to high commodity and energy prices. For corporations, fixed-price renewable energy contracts have served as a hedge against higher spot market prices, increasing the value of such bilateral agreements. For governments, higher electricity prices are not translated into higher subsidies for wind and solar PV, as almost 90% of all wind and PV projects have long-term fixed-price PPAs either through FITs or CfDs.
The long-term implications of price increases
Although it is too early to assess the medium- and long-term implications of commodity price increases on the deployment of wind and solar PV, so far higher prices have had limited impact on demand for new capacity. Governments have made no major changes in their policies or cancelled auctions, both of which are crucial to ensure the continued deployment of renewables. In addition, corporate buying is on pace to break another year-on-year record, demonstrating the cost-competitiveness of renewable resources, even with a slight increase in prices in some markets. Should commodity and freight prices moderate in the near future, the cost reduction trend of wind and solar PV would continue, and the long-term impact on the demand for solar PV and wind may be minimal. However, there is a risk of a prolonged period of high commodity prices, inflation and rising interest rates increasing the cost of clean energy transitions and slowing the pace of wind and solar PV capacity expansion.
Biofuels
Feedstock costs have been driving up biofuel prices, causing an estimated 3% decline in global demand in 2021. A number of factors are causing this price increase, including growth in demand for soybeans and corn in China, weather impacts, climbing shipping costs and, to a lesser extent, biofuel demand itself. In response, governments have lowered blending mandates in Argentina, Colombia, Indonesia and Brazil, reducing biofuel demand. These impacts are likely to be short-lived should prices decline in the coming years. The significant planned expansion of renewable diesel projects, for instance, remains on track and governments seem willing to reinstate mandates if prices come down. However, the prospect of high feedstock and biofuel costs does present a risk to supportive policies under discussion in the United States, Europe, India, China and Indonesia.
- Short-term impacts
In mid-July Argentina passed a law to reduce the biodiesel blend rate from the original 10% to 5% because of high crop costs. The law also authorises the government to reduce the biodiesel blend rate to 3%, and to halve the ethanol volume entering the fuel sector from corn ethanol if necessary.
The Colombian government reduced its ethanol blending mandate from 10% to 4% from April 2021, with the aim of returning blending to 10% in September 2021. However, in August, Colombia extended the 10% blending mandate to January 2022. The reduction was in part because of a sugar cane shortage due to excessive rains, as well as high US ethanol import costs.
Indonesia has continued to delay increasing its biodiesel mandate from 30% to 40% as initially planned. High palm oil and biodiesel costs are part of the reason for the delay.
In response to high costs, Brazil’s mines and energy ministry reduced its biodiesel blending mandate to 10% from 13% for July and August. It then increased the mandate to 12%, but is considering reducing it again to 10%. High costs are also part of the reason for reduced sales of hydrous ethanol in Brazil, as consumers have switched from buying ethanol to gasoline.
Demand decline in response to high prices, selected countries, 2021
OpenIn the United States high feedstock prices are contributing to climbing Renewable Identification Number (RIN) trade prices. The US Environmental Protection Agency (EPA) uses RINs to track the production and use of qualifying renewable fuels under the Renewable Fuel Standard (RFS). RINs are tradeable and fuel providers with a deficit can purchase credits from those with a surplus. RIN prices are at an all-time high, having nearly tripled since 2019 for biodiesel and reaching seven times higher for ethanol as of October 2021, according to IHS Markit data. These increases are primarily a result of higher feedstock prices according to the US Environmental Information Administration. However, uncertainty around renewable fuel obligations, ongoing discussions on waivers for small refineries and lower ethanol production following Covid-19 impacts on fuel demand are also contributing. The impact these prices will have on biofuel production and demand is unclear. If the RIN market acts as intended, then higher RIN prices should create an incentive to produce more biofuels since biofuel producers will receive higher prices for their products. However, since biofuels are blended with gasoline and diesel, higher biofuel prices can also increase consumer fuel prices, which can reduce overall fuel demand. The EPA has also yet to set renewable fuel obligations for 2020/21 and will be starting the process for RFS obligations post 2022 later this year. Fuel costs will no doubt feature prominently in those discussions.
- What is driving price increases?
Weather impacts on biofuel crops, growing corn and soybean demand in China and certain other markets, and higher shipping costs are all contributing to higher biofuel prices. They have increased by between 70% and 150% from the 2019 average, and more than prices for crude oil in most cases, increasing the spread between biofuel and fossil fuel costs.
Chinese demand for soybeans and corn to help rebuild its pig herd after swine fever decimated its pig populations, combined with tight supplies, is one of the main drivers of cost increases for these feedstocks according to the US Department of Agriculture. Biofuel producers use soybeans to make biodiesel and renewable diesel, and corn to produce ethanol. To help keep costs in check, China has increased imports of both soybeans and corn. China’s corn imports more than tripled in 2021 relative to 2020, for example, to satisfy this demand (USDA, 2021). In the United States increased renewable diesel demand for soybeans has also contributed to cost increases by limiting the soybean harvest available for export.
In the case of sugar, used to produce ethanol, high costs are in part driven by a poor harvest in Brazil; sugar production in 2021 is down by 7% compared to 2020. In Europe, high shipping costs – up nearly 700% from 2019 levels for a shipment from China – have contributed to higher used cooking oil costs. Nearly 70% of used cooking oil for biodiesel production in Europe is imported according to IHS Markit estimates.
- The impact of cost increases on the prospects for renewable diesel and biojet
Production of renewable diesel and biojet is set to expand by 9 billion litres over the next two years in the main case, at a time of high feedstock costs. Despite the combination of high feedstock costs and growing demand for those feedstocks, renewable diesel and biojet facilities in the advanced stages of development remain on track. To date only one advanced project, CVR’s Wynnewood facility, has delayed start-up, citing high feedstock costs. To mitigate cost increases, producers are building facilities that can process multiple feedstocks, buying agricultural supply chains and investing in non-crop feedstocks.
Refiners can produce renewable diesel from plant oils, used cooking oil and animal fats. One way to mitigate costs is to build renewable diesel facilities that can use a variety of feedstocks. This flexibility allows producers to purchase whichever feedstocks are the least costly at the time.
Owning feedstock supply chains also helps ensure supplies and keep costs in check. Some renewable diesel and biojet producers are pursuing this strategy by purchasing seed oil production and used cooking oil collection companies. For instance, Neste, a renewable diesel producer, purchased used cooking oil collection and refining companies in the United States and the Netherlands to improve the used cooking oil supplies it uses to produce renewable diesel.
Some investment continues as well in technologies to process wastes and residues that would avoid competition with food demand or for limited supplies of used cooking oil. Wood and agricultural wastes, for instance, can be processed into biofuels and have other benefits such as meeting sustainability requirements in regulations such as Europe’s Renewable Energy Directive. These investments remain limited, however, with most new plants planning to use oil crops and used cooking oil.
- What are the long-term implications?
The long-term implications depend primarily on whether feedstock and biofuel prices stay high or not. Feedstock demand and weather impacts, mostly unrelated to biofuel demand, are driving high prices. There is little indication of changes in project plans for renewable diesel and biojet production, and governments seem willing to reinstate mandates should prices decline.
High prices are nevertheless a clear reminder of the links between feedstocks, biofuel costs and government and consumer exposure to them. This comes at a time when the United States, Europe, India, China and Indonesia are all discussing new policies or working to implement existing plans that could increase global biofuel demand by 30% by 2026. The greatest risk of high costs may therefore be how they affect these policy discussions. Current high prices draw attention to important questions. Where will the feedstocks come from? How sustainable are they from an economic, environmental and social perspective? Will costs drive investment into new feedstocks? And what will be the cost impacts not just on fuels, but on agricultural products?
References
In the case of onshore wind, China was excluded from the analysis due to specific market dynamics.
In the case of onshore wind, China was excluded from the analysis due to specific market dynamics.