Renewables Cost and the Energy Crisis

The cost of solar and wind energy generation continued to fall for projects commissioned in 2021, despite rising commodity, equipment and materials prices, reported Michael Taylor, senior analyst of the International Renewable Energy Agency (IRENA).  That was largely because of the lag in the impact of higher material costs and continued technology-driven efficiencies.

But continued declines in generation cost are “probably not going to be the case for 2022 and 2023,” Taylor said in presenting the latest IRENA data¹. With the curtailment of Russian gas imports and the rise in inflation, “all bets are off” as higher equipment and materials cost and general inflationary effects work their way through the current and future projects, he noted.  In such market conditions, the solar and onshore wind capacity added in 2021 has proved a lifeline, he added. 

The 2021 global weighted average levelized cost of energy (LCOE) - a measure of the average net present cost of electricity generation for a generator over its lifetime - fell 13% for photovoltaic (PV) solar, 13% for offshore wind and 15% for onshore wind, IRENA data showed.  That meant another year of significant declines in a decade-long trend of lower LCOE for renewables. From 2010 to 2020, LCOE for solar photovoltaic (PV) generation fell 88%, onshore wind 68%, concentrating solar-thermal power (CSP) 68%, and offshore wind 60%.

For solar, the cost landscape in 2022 and beyond will be driven by the rise in prices of polysilicon and modules, Taylor noted.  The current spike in module prices is significantly lower than those of previous years as a result of innovation in the manufacturing process and in cell efficiency.  But those advances are swamped by the increase in the cost of polysilicon.

Worth noting is that PV modules account for only 30% to 50% of a typical solar project, Taylor said.  Other factors are the costs of racking, cabling and mounting, which is where the rising costs of steel, aluminium and copper come into play.  These impacts may prove marginal in the future cost picture, but much depends on trends over the next few months, Taylor said.

On the positive side, polysilicon prices look set to fall over time, and 2023 should see average module prices at or below 2020 levels, Taylor said.  Chinese polysilicon production capacity is expected to double by the end of 2023, he noted.

In onshore wind markets, the increase in the price of steel and other materials in 2021 and 2022 has made turbines more expensive.  As a result, material costs have increased faster than wind power prices.  To support margins, manufacturers have raised prices by approximately $75 to $80 a kilowatt over 2020 to 2021.  That only covered about half their increase costs Taylor noted.

While some of those materials costs have come down a bit, wind turbine manufacturers have continued to increase prices The expectation is that materials price increase will moderate, and manufacturers will have better margins under the new pricing and more sustainable businesses.

Looking at the current energy crisis in Europe and other regions across the globe, the savings available from renewable energy generation compared to gas and other fossil fuels argues for a vastly increase allocation of resources to renewables, Taylor said.  Highlighting IRENA data, he noted that German businesses and consumers in one hour on a single day in March saved $29 million.   From January to May 2022, the benefits of renewables, solar and wind generation let Europe avoid in the order of $50 billion in the cost of fossil fuel imports, predominantly gas. That data brings into sharp focus the value of achieving energy security, he noted.

To secure Europe’s energy future, Taylor said, policy makers should lean into four solutions:

• Massive acceleration of renewable power capacity build combined with strong measures to promote energy efficiency across residential and business markets
• A “grand industrial bargain” that brings together manufacturers and regulators
• Redesign of energy markets to promote policy objectives
• Support for customers in the next one to two years, while avoiding policies that would dilute price signals