Prices for wind and solar power increased nearly 30 percent in the past year due to supply chain issues and rising costs, impacting shipping, parts and labor, and reversing a decade of cost declines. Contract prices for renewable energy increased 28.5 percent in North America and 27.5 percent in Europe, according to a quarterly index that tracks power purchase agreements (PPAs). Supply chain issues have taken a toll on developers in terms of rising costs and shipment delays. Wind and solar projects are facing delays because of shortages of raw materials, bottlenecks in international shipping and a backlog of applications for grid connections with regional grid operators. A survey of 57 developers during the past quarter indicated that 40 percent were able to find new suppliers that could more reliably deliver components, but another 28 percent were unable to make changes.
Issues Affecting the Price Increase
In Europe, the war in Ukraine has led governments to try to reduce dependence on natural gas from Russia, boosting what was already a robust demand for renewable energy from the continent’s aggressive climate agenda, thereby increasing costs for wind and solar power. Germany, for example, plans to speed up growth of its solar energy plus onshore and offshore wind projects.
In North America, developers are uncertain whether U.S. lawmakers will extend tax credits for renewable energy facilities, which President Joe Biden tried to do in his Build Back Better bill that did not pass the Senate. Production tax credits for wind energy ended last year and for solar power, the investment tax credit phases down to a permanent 10 percent for commercial properties and zero percent for residential properties in 2024.
Developers also are worried about a U.S. Commerce Department investigation initiated this year that could result in tariffs on solar panel imports from Asia, raising costs. A U.S. probe into whether Chinese solar manufacturers are sidestepping tariffs is leading to delivery delays and cancellations. Three-quarters of solar companies indicated that deliveries have been affected since the U.S. Commerce Department announced its investigation. The United States depends on Malaysia, Thailand, Vietnam and Cambodia to meet much of its demand for new solar panels; 80 percent of solar cells are imported from these Southeast Asian countries. The Commerce Department is investigating whether Chinese manufacturers are evading tariffs by sending components to other Asian nations for assembly before exporting the finished products.
Renewable energy project developers are also facing hurdles to development as a result of regional and federal regulatory activities. In the PJM independent system operator region, which serves 13 states in the northeast, regulators are working through a backlog of thousands of interconnection applications that represent almost 300 gigawatts of new sources of renewable energy capacity awaiting to be added to the grid. Slow progress on clearing the backlog has contributed to the increase in the region’s PPA prices. Since last quarter, PJM’s wind PPA prices increased 15.6 percent to $55.10 per megawatt hour and solar prices increased 2 percent to $44 per megawatt hour.
Developers also are having to deal with more challenges in obtaining state and local building permits, sometimes in the form of counties passing ordinances restricting new projects. In Indiana, county ordinances are restricting projects from being adopted in large areas of the state. The same is true for transmission facilities in many areas, need to transport electricity from distant areas to the large consuming areas in and around cities.
Producing energy from wind and solar power, and storing it in batteries, requires a huge increase in supplies of copper, nickel, aluminum, graphite, lithium and other minerals. The minerals necessary to build the tens of thousands of wind turbines and hundreds of millions of solar modules needed for U.S. and European energy transition plans is not expanding as fast as the demand for them, causing prices to increase. Lithium prices increased nearly 1,000 percent in the past two years. Prices of copper and nickel, increased 200 percent and 300 percent, respectively, over the same period. Aluminum, the second-most-used metal after iron ore, increased 200 percent and is trading at a 30-year high. Minerals constitute over half the cost of fabricating solar modules and about 20 percent of the cost for wind turbines. Even before the latest mineral escalations, forecasters projected cost increases in 2022 of 10 percent for wind turbines and 25 percent for solar modules.
Commodity materials inflation has already ended the long-run decrease in battery, solar-module and wind-turbine costs. Supply chain issues and rising costs have resulted in almost a 30 percent increase in renewable energy contracts in North American and European markets. Pushing up the price also is a supply and demand imbalance in contract availability, similar to what is occurring in oil markets. Despite decades of growth in renewable energy and government tax credits and mandates, the world still gets only 3 percent of its energy from wind and solar power. Rushing into renewable energy as the Biden administration is doing, while at the same time moving to electrify most of our energy system which increases demand for more electricity, is escalating prices for Americans and likely to cause disruption to energy supplies.