A new study published in the journal Nature Energy finds that a global increase of 2-4% in overall inflation levels might be needed before countries can successfully make their transition to clean, renewable energy. The research revealed how some economies and regions may need even higher rates of inflation, up at 6%.
The “climate change inflation” is the increase in cost of clean energy transition. This has been a growing trend that is expected to continue as countries try to reduce their carbon footprint.
Cost inflation and supply-chain issues have forced energy firms to pay more to develop solar and wind farms for the first time in years, putting a financial stumbling block in the transition away from fossil fuels.
Because they rely on minerals like silicon and copper, clean-energy initiatives are vulnerable to inflation in traditional commodity markets. According to Martin Schachinger, general director of pvXchange Trading GmbH, the wholesale price of solar panels has grown 19 percent in Europe this year, reaching levels last seen in late 2018. Prices are still a third lower than they were five years ago.
Higher equipment costs partly reverse a years-long price decline that has accelerated the move to renewable energy sources. They indicate that the billions of money invested by investors, banks, and other businesses to slow global warming won’t go as far as they had hoped.
“There have been three certainties in life over the last ten years: death, taxes, and decreased pricing for solar panels,” said Nick Parsons, director of research at ThomasLloyd Group in Switzerland. “That isn’t the situation now,” says the author.
Higher expenses, according to some renewable energy investors, have made projects less financially viable. They don’t have much space to maneuver since the flood of money pouring into green energy has already knocked down returns on wind and solar assets. Developers may mitigate growing expenses to some degree by securing contractors ahead of time and passing costs on to consumers in the form of increased electricity rates.
Money is a stumbling block in global climate change discussions. As experts warn that reducing global warming to 1.5 degrees Celsius would cost much more than previously estimated, the Wall Street Journal examines how the money may be spent and who would pay. Preston Jessee/Wall Street Journal
“There’s so much interest in deploying money into green infrastructure that it’s driving costs up and returns down,” said Jonathan Maxwell, chief executive of London-based investment company Sustainable Development Capital LLP. Simultaneously, the cost of raw materials has risen, he noted.
Solar panel prices have grown to 28 cents per kilowatt from 18 cents a year and a half ago, according to Eyal Podhorzer, CEO of Israel-based Econergy Renewable Energy Ltd. Mr. Podhorzer believes that transportation issues and a supply scarcity will keep prices high for up to 18 months, however he has been offered somewhat reduced pricing for the second and third quarters of 2022.
The cost of solar panels isn’t the only thing rising. According to Mr. Podhorzer, the cost of purchasing licenses to build solar projects in Italy has climbed to between €200,000 and €300,000, up from €100,000 a year ago. Because there aren’t enough projects to meet investor demand, the price of ready-to-build solar projects in Europe has doubled in the last year.
Due to rising equipment prices, Econergy has passed on several solar projects in the United Kingdom, although it still has a busy pipeline of projects there.
Renewable energy companies have reacted by requesting higher rates for the electricity they create in government-led power auctions in Spain, India, and other countries, reversing a long-term downward trend in clean-energy costs. This month, an auction began in the United Kingdom, which will be the world’s biggest offshore wind market by 2020.
Since the beginning of 2020, the cost of the basic component of solar panels has more than doubled.
Photo courtesy of The Wall Street Journal’s Audra Melton.
According to the International Energy Agency, prices for polysilicon, a key component of solar panels, have more than doubled since the start of 2020. It forecasts that assuming material prices don’t rise, an additional 95 gigawatts of solar-power capacity might be constructed by 2026, enough to power nearly 71 million households in the United States.
Wind has also been harmed, with wind turbine manufacturers unable to meet deadlines owing to supply-chain issues.
Developers that haven’t yet set rates for selling green energy have a safety net. According to Michael Bonte-Friedheim, chief executive of NextEnergy Capital, whose activities include a solar farm in Cornwall, U.K., power costs have soared in Europe this year amid a growing energy crisis, offsetting rising input prices.
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Renewable investors, on the other hand, were already pursuing returns, and cost inflation is adding to the stress for some. According to one European fund manager that invests in renewables, increased expenses might reduce a solar project’s return by 1 to 1.5 percentage points.
“Valuations are incredibly toppy,” said Fabian Chrobog of North Wall Capital in London. According to him, North Wall, which oversees about €1 billion in assets, or slightly over a billion dollars, recently rejected to lend to a UK energy-storage project because the returns didn’t make sense.
Pantheon Ventures’ head of global infrastructure and real assets, Andrea Echberg, claimed that prices for onshore wind and solar farms had reached a point where the business would rather sell than purchase the assets. The fund, according to Ms. Echberg, is looking for greater returns through constructing and developing assets rather than purchasing them ready-made.
She’s also ventured outside of the well-trodden green areas, finding success in smart meter rollouts, for example.
Julie Steinberg and Joe Wallace can be reached at firstname.lastname@example.org and Joe.Wallace@wsj.com, respectively.
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