Having it both ways

PFI 758 - 29 Nov 2023 - 12 Dec 2023
5 min read
Americas, EMEA, Asia

Renewables project cost prices are shooting up, renewables project cost prices are collapsing. Consumers are paying a lot less for renewable generation these days as technological gains have driven costs down, which is great news. Consumers are being asked for pay a lot more for renewable generation these days which is great news. It has not all been bad news of late on the renewable costs front but some of the good news is not good news.

I have to say I found the glee with which the announcement by the UK government of the offshore strike prices for the next contract for difference (CfD) round in summer next year a little off-putting. The strike price will move up by 66% for fixed projects to £73/MWh and by 52% for floating offshore to a whopping £176/MWh. Don't forget these prices are at 2012 levels, so the real price for fixed is nearly £100 and for floating, well above £200.

One caveat renewables developers mentioned was the comparison with the current power spot price, which is around the £100 mark, which is a fair point – although of course the CfD will run for 15 years whereas it can be fairly assumed spot prices will fall back to normal levels in the medium term. And wind power is intermittent. But still, the government seeing sense is interesting. Yes, there were no offshore wind bids in this year's CfD competition but until now the renewables industry mantra has been lowering costs.

Now, with the strike price secured, the developers are calling for a big pot in next year CfD tender to allow more projects to be bid. Fair enough, it is great to get projects up and running but lets not pretend this is good news.

It will be interesting to see what happens shortly in New York. Last month, the New York Public Service Commission (PSC) rejected a request from power generators for higher contract prices on wind and solar projects. The affected projects include four offshore wind and 86 onshore renewables projects, representing 25% of the state's projected power demand in 2030. New York State is now launching an accelerated procurement process for offshore and onshore renewables projects to backfill any contracted projects that are ultimately cancelled, with bids due by January 25 and January 31.

But at what price? Equinor and BP, which each own 50% of the equity, recently said they were originally seeking a 54% increase from the PSC in the price of the power produced at their Empire Wind 1, Empire Wind II and Beacon Wind offshore wind farms off New York to US$160/MWh, US$178/MWh and US$190/MWh respectively. In the meantime, they recently booked impairment charges of US$300m and US$540m on their offshore wind farm projects, respectively.

Construction prices are up. Just as importantly, the cost of debt has risen. Orsted chief executive Mads Nipper recently told analysts rising interest rates were the biggest structural challenge facing the offshore wind industry.

So where is the good news in the renewables industry I referred to as the counter-cyclical, or indeed cynical, point in my introduction? Well actually, prices are coming down in the popular solar and battery sectors.

Polysilicon prices have plummeted this year by more than half. Solar module prices may approach US$0.10/W by the end of 2024 or eventually in 2025, according to Tim Buckley, director of Australia-based think tank Climate Energy Finance, despite growing demand for panels, he told pv magazine. Buckley believes solar module prices will end up dropping by 40% this year.

“At a time of massive capital investment cost blowouts, to be able to invest in deflationary solar is a massive global boon that will provide cost of living pressure relief as well as improved energy security,” he told the magazine.

Battery storage prices are on the wane. Lithium-ion battery prices are back to their declining trajectory in 2023, after an unprecedented year of increases in 2022, according to a recent survey from BloombergNEF. Average battery pack prices reached a new record-low of US$139/kWh, a 14% decline from last year. This is the largest decline observed in the survey since 2018.

The drop in battery prices is mainly due to lower raw material and component costs causing significant growth in production capacity across all parts of the battery value chain, at a time when demand was lower than expected. In the long term, battery pack prices are expected to fall below US$100/kWh in 2027 according to the survey.

To build out major energy and infrastructure projects, long-term fixed-price contracts are essential in order to reduce the cost of project debt. Allowing offshore wind developers a massive price increase is fair given the pain to which they have been subjected to through no fault of their own. But let this be a one-off.