The cost of renewable energy is going up, and that could be bad news for corporate renewable energy commitments — and global climate goals.
Edison Energy Renewable Market Update for Q3 (registration required) outlines how a confluence of factors are making renewable technologies more expensive, including:
- Increased costs for the raw components key for the manufacturing of wind and solar, including steel (up 210 percent over last calendar year), aluminum (up 67 percent) and copper (up 43 percent)
- Higher costs for shipping and logistics, including an increase in freight costs from Asia and a shortage of truck drivers in the U.S.
- The tariff on Chinese solar panels, which has driven up the cost of solar panels since it was enacted in 2018. It is scheduled to expire next year
- Constricted supply as a result of a federal ban on imported solar equipment with materials produced by a Chinese company accused of forced labor
At the same time, the demand for renewable energy projects is high, with offtakers and developers racing to ink deals before the Investment Tax Credit, a federal tax credit for solar, is set to step down if projects aren’t online by the end of 2025. This run on the market is driving up the cost for the finite labor and equipment needed for the engineering, procurement and construction (EPC) of new projects.
How much more expensive are we talking?
While costs vary by region and resource, Edison found an increase in prices for power purchase agreements (PPAs) in all power markets and all technologies between Q2 and Q3.
The markets most popular for renewable projects — Texas’ ERCOT and the Mid-Atlantic’s PJM — increased around $2 to $3 per megawatt hour. Renewable energy credits (RECs) started the year at under $2, and spiked to almost $7 during Q3.
To put that in perspective, for a 100-megawatt project, that cost difference could be $350,000 to $525,000 per year (roughly speaking).
What does this mean for corporate renewable procurements?
New clean energy projects may take longer to come online as developers strive to ease cost pressures.
Compared to last quarter, the projects expected to come online in 2022 are down by 67 percent, while projects with an online date of 2024 are up 22 percent.
As a result, companies with near-term clean energy targets need to act quickly.
"If you have a renewable energy goal that's tied to the year 2025 or sooner, then you don't really have a choice. You need to pursue a transaction today," Mary Kate Francis, senior director of renewable energy supply at Edison Energy, told GreenBiz. "Even though there are a number of challenges and these pricing pressures in the market."
Companies that don’t have goals tied to a specific date may choose to wait until next quarter and see what the market does. If an offtaker is motivated to move forward, wind may look like a better option, as wind projects are facing relatively fewer hurdles.
As for projects that are contracted but not built, developers that are locked into a price may look to push back the date of completion in the hopes that prices come down.
If you have a renewable energy goal that's tied to the year 2025 or sooner, then you don't really have a choice. You need to pursue a transaction today.
"They're hoping that if they move their project from '23 to '24, they'll be able to get a better price on EPC and be able to hold the price that they committed to," said Francis. "I think that is a little bit unfortunate, because it's also delaying the year that that project is actually impacting our grid."
When it comes to RECs, Edison doesn’t think we’ve seen the end of price spikes.
"Corporates who purchase RECs should allow for more flexibility in purchasing and be prepared to transact quickly to better protect against the volatility," Edison wrote in the report.
What does this mean for decarbonization?
Seeing what companies do in this moment of volatility will put to the test how serious organizations are about their clean energy commitments.
For years, it’s been economically smart for companies to procure clean energy, and a public relations boost to signal they are on the right side of decarbonization. But when the economics are tested, where will corporations land?
A report out this week from BayWa r.e. sheds some light on how corporations prioritize money versus the climate. According to a survey from 350 corporate energy decision-makers, the cost of energy is 1.7 times more important than the act of contributing to sustainability efforts and is a leading reason why energy buyers consider renewables. Additionally, cost is 1.5 times more important than the image of being a sustainable company.
Of course, it’s worth noting that larger energy crises are happening globally, and the price of PPAs is far from a holistic view of the value of clean energy. The cost of clean energy doesn’t change the imperative to act on climate, and the fact that a marginal increase in costs could derail important progress reflects the moral hazard of focusing on economics as the motivation to decarbonize.
"We have no time to lose; we're already behind schedule on this," said Francis. "We have corporate buyers who are interested in moving this energy transition forward faster. But these challenges are giving them reason to pause and potentially consider pushing off their procurement when I think that the real reason they're in the market is to make this change happen faster."