High commodity prices unlikely to slow renewable energy adoption

Renewable energy is no free lunch – both wind and solar power require significant amounts of commodities.

Steel is the foundation stone for renewable energy infrastructure. Each new megawatt (MW) of solar power requires between 35-45 tonnes of steel, while each new MW of wind power requires 120-180 tonnes of steel. Other commodities such as aluminium, copper, polysilicon, plastics, etc. are also needed in huge quantities.

According to the IEA, commodities make up about 15% of the investment cost for utility-scale solar PV, and some 8% for onshore wind (steel comprising the majority of the commodity cost), while freight is also a big cost, especially for onshore wind:

Solar PV’s largest cost component is the manufacturing and shipment of the module, which is directly affected by the price of polysilicon, steel and aluminium. Inverter and electrical installation costs depend on the price of copper, while all components are impacted by increasing freight rates. Steel contributes the most to the final cost of wind installations, as large quantities are used in manufacturing and construction of the tower, nacelle and mechanical equipment. Freight can make up to 6% of total onshore wind investment costs, as the transport of bulky elements with specialised ships is required.

However, since the beginning of 2020 the price of PV-grade polysilicon has more than quadrupled, steel has increased by 50%, copper by 60% and aluminium by 80%. All of these commodities are highly energy intensive, and so the recent spike in natural gas, coal and power prices has fed through into the crucial ingredients for renewable energy. Finally, freight rates have increased almost six-fold on some measures since the start of 2020.

The long term trend of decreasing costs resulting from technological improvements has come to an abrupt halt. The prices of wind turbines and PV modules have increased by 10-25% depending on country and region as a result of higher commodity and freight costs. The exception is China where the phasing out of subsidies in 2020 reduced demand for turbines. According to estimates from the IEA, in the event that commodity prices stay high until the end of 2022, 5 years of cost reductions for wind power would be wiped out, and 3 years of reductions for solar PV.

The renewable energy supply chain typically make use of long term contracts so the impact of higher prices may not be felt for some years yet. Offshore wind project construction typically takes 3-5 years, and so contracts often allow turbine makers to feed higher raw commodity prices through to customers. Onshore projects are shorter, 12 to 15 months and so manufacturers usually lock in raw-material prices at the start of the contract.

The increase in costs looks unlikely to derail the rollout of renewable energy. The cost of renewable investment might have gone up, but the cost of fossil fuels has also increased, driving the relative competitiveness of wind and solar.

Meanwhile, the recent surge in commodity prices may only be a mere blip in the longer term trend of gradually lower renewable energy costs. For example, the spike in prices may incentivise turbine and PV manufacturers to become more efficient in their use of commodities.

Wright’s Law offers a smart way of thinking about technological change and the rate at which costs decline. Rather than being a function of time (as is the case with Moore’s Law), Wright’s Law forecasts cost as a function of the number of units produced. While studying production costs during the 1920s, Theodore Wright determined that for every cumulative doubling in the number of airplanes produced, manufacturers realized a consistent cost decline in percentage terms.

Researchers at the Imperial College London’s (ICL), Grantham Institute for Climate Change and the Environment examined forecasts for the cost of offshore wind from 2014 and compared them to the observed global average change. ICL found that the actual cost of offshore wind fell much faster than any of the forecasts predicted. Other research has also found that Wrights Law, despite its challenges provides a more accurate forecast than either Moore’s Law or aggregated expert predictions.

Investors in the miners that extract these metals and produce these materials should have nothing to fear. In fact, the ongoing efficiencies will only increase the rate at which wind and solar is rolled out, increasing the absolute amount of raw materials required.

Once the cost of producing wind and solar falls below a critical threshold production can be scaled up, enabling further cost improvements to take place, and the pace of adoption to accelerate. This, in turn, will drive even more demand for the essential commodities and raw materials required by the renewable energy sector.

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