Nov 11, 2021
The growth in wind and solar capacity in the past decade has been driven in large part by policy support, but also by plummeting costs for solar modules and wind turbines, alongside a relatively stable commodity price environment. However, upward cost pressures following the global pandemic are now challenging this trend, with prices of steel, copper and aluminum, key materials used in renewables plants, reaching all-time highs.
Supply chains around the world are still reeling from the disruptions caused by COVID-19, particularly the elevated shipping and freight rates. Solar and wind producers are competing for supply of steel and other metals along with all other end-use sectors, which are seeing demand tick up as COVID-19 restrictions ease and the economy recovers. New supply is coming online, but there is nevertheless significant structural demand support due to a booming economic cycle. While higher renewable generation is lowering the utilization of thermal plants on average, new-build renewables are simultaneously underpinning the need for materials, which in turn results in higher industrial emissions and demand for gas or coal.
Cost declines have been a constant feature in the renewables sector over the past decade, especially for solar PV plants. According to the International Renewable Energy Association, global average installed costs for utility-scale solar PV projects are now in the $900/kW range, having declined from $1,800/kW in 2015 and $4,700/kW in 2010. While learning rates have contributed, it should be noted that these cost declines have occurred in a relatively stable commodity pricing environment. Surging prices for key materials used to build solar PV plants are making further cost declines increasingly difficult in the near term. Copper, a key material used in modules, wiring, inverters and other electrical components, and steel, used for system support structures and trackers, have both reached historical highs in 2021, and overall have traded much higher than last year’s levels. In addition, a shortage of polysilicon, a basic raw material used in most solar modules, has led to an increase in solar PV module prices, with bifacial and low-cost modules up 6% – 12% YTD, according to PV Exchange data. Overall, with surging prices of basic materials and higher module prices, this year will see an increase in solar PV capital expenditure in a competitive industry with already thin margins.
Power prices have also been increasing across major markets as a result of the surging commodity pricing complex, notably gas prices. PPA prices among key markets in US and Europe appear to be mirroring to some degree the major price increases in the power pricing complex.
However, market revenues cannibalization risks remain a concern for solar PV plants. S&P Global Platts Analytics is doing extensive power sector modelling work through 2050 to derive renewables power capture prices across key markets. While policy risks have been emerging, market risks are also increasing as the penetration of renewables grows, if the system flexibility is not adequately scaled up to cope with rising intermittent generation. Among the key markets for solar PV growth, Germany is the European market where cannibalization risks are highest for solar PV plants. Interestingly, we have seen PPAs in Spain being quoted at surprisingly low levels, around Eur 30/MWh. This is probably tied to oversupply of PPAs, as S&P Global Platts Analytics solar PV power capture prices over the upcoming 10 years are well above current PPA quotes.
In their latest financial results, key wind manufacturers have clearly highlighted increased cost pressures as a pressing issue. The price of steel, which is one of the main raw materials used in the construction of wind plants, has more than doubled in the past year, impacting project capex. Additionally, turbine costs generally represent a greater portion of the total installed cost for onshore projects, therefore raw material price increases could have a proportionally larger impact on these (around +7%) than offshore projects (around +3%), where balance-of-system costs are larger. S&P Global Platts Analytics Global Wind Outlooks have been noting how onshore wind newbuild already faces constraints in Europe and to a lesser extent in the US. CAPEX increases add another layer of uncertainty to projects development. Some 50 GW of capacity across Western Europe might be at risk by 2030, with projects in Spain (15 GW) and Italy (11 GW) the most exposed to changing costs.
With solar PV and wind plants using a relatively larger amount of steel, copper and other minerals, total material requirements from power sector newbuild activity reached new highs in 2020 and are hovering at similar levels in 2021. Platts Analytics estimates that steel requirements from wind and solar PV newbuild activity might be growing at a rate of 18 million-19 million mt/year, based on our capacity forecasts and typical amounts of steel per MW, bringing power sector requirements to over 23 million mt/year. This compares with an average of about 15 million MT over the past decade and about 8 million mt/year on average in the decade 2000-2010.
The increased amount of steel to build wind and solar plants means greater coal use, since metallurgical coal is a key component in coke/steel manufacturing. Although there is a sizeable amount of steelmaking in the US and Europe that uses natural gas, steel production in other markets such as China relies more heavily on blast furnace production, and therefore, coal. Over the past decade, wind and solar plants may have required some 100 million mt of steel, or about 70 million-80 million mt of coal. To put things in context, this is equivalent to coal imports for the whole of the EU over 2020.
The impact of renewables new build on the copper market has the potential to be even more significant, since wind and solar additions combined may be adding roughly 1.2 million mt/year, which against total global demand of about 25 million mt/year. In addition, forecasts for materials use in solar PV and wind show limited reductions in tons per megawatt out to 2030. Based on a recent technical report by the Joint Research Centre, the European Commission’s science and knowledge service, the steel, aluminum and copper intensity per megawatt of both wind and solar PV installations is unlikely to see significant reductions in the coming years. In the case of solar for example, the report points to a less than 4% reduction in steel and aluminum intensity between 2018 and 2030, while copper intensity is reduced by only 2%. These metals are difficult to replace given their properties and the key role they play in critical components of solar and wind power. Shortages of both steel and copper will likely carry over well into 2022 as these sectors are already supply constrained following a strong global demand recovery, supported by government stimulus measures. Strong growth in renewables, and therefore in demand for metal-intensive components such as wind turbine towers, will place further strain on supply. In the absence of any big increase in steel plate production capacity, prices are expected to increase markedly and add to installation costs.