Charles Russell November 12, 2021

Renewable Cost Inflation

56% (50 GW) of global solar PV developments planned for 2022 are at risk of delay or cancellation due to rising material and shipping costs according to a recent analysis by Rystad Energy.


PV module costs have increased by roughly 50% in the last year, largely driven by a 300% price increase in polysilicon and supported by 50% price increases in copper and aluminum.


Source: Rystad Energy


Analyst David Dixon at Rystad notes: "the utility solar industry is facing one of its toughest challenges…developers and offtakers will have to decide whether to reduce their margins, delay projects or increase offtake prices to get projects to financial close".


We discussed the risks of inflating capital costs on solar development in a post back in June. Project returns on solar developments are disproportionately impacted by upfront capital costs (there is no fuel and thus less variable cost as a percent of total costs than say a natural gas plant). Comparing last year’s PV module and shipping costs to current costs, Rystad finds that the levelized cost of energy has increased between 10% and 15%; a significant increase for projects that earn single digit returns.


Surprisingly, we have yet to see publicly traded PV manufactures and developers comment on what could be a staggering reduction in 2022 solar development.


Among the five largest publicly traded semiconductor companies that manufacture PV modules, price (or cost) inflation did not make the top ten topics discussed in any public filing or transcript released in the last year. The sole exception is Canadian Solar which began to briefly discuss cost inflation in September 2021. The same holds for project developers and electric utilities. We see little evidence to-date of companies adjusting expectations to corroborate Rystad's forecast.


Wind turbine manufacturers appear to be a few months ahead. Siemens Gamesa attributes a "challenging fiscal year 2021" to sharp increases in commodity prices and supply chain conditions. In early November, the Danish OEM, Vestas, cut its full year guidance after its operating profit was cut in half from the third quarter a year ago. Again, citing cost inflation and supply chain pressures. Lastly, US based manufacturer TPI saw quarterly profits swing from a positive $42 million a year ago to a $30 million loss in the third quarter, citing a "challenging macroeconomic backdrop".


Just this week, Nordex, the German based wind turbine manufacturer, slashed its 2021 profit guidance due to inflation and logistics issues. Like many renewable OEMs Nordex margins were already slim and management cut the pedestrian 2021 EBITDA outlook of 4.5% to 5% to just 1%. Nordex management also noted, as did Vestas management, that they expect current inflationary pressures to still be impacting results next year.  


Demand for utility scale renewable energy development remains healthy, but rising costs will be a good stress test for an industry that has seen nothing but precipitous cost declines for a decade.