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Rising costs will hit solar investment

Prices for polysilicon and steel are rising sharply, putting upward pressure on solar costs. Utility-scale projects will be the most exposed

1 minute read

When Alexander the Great invaded India, its kings sent him a peace offering not of gold or silver, but of the country’s steel, highly prized for making weapons. We are not quite yet back to that sort of valuation, but steel prices have been soaring this year, driven by the global economic recovery and expectations that the US will soon commit to spending hundreds of billions of dollars on infrastructure. US steel prices hit record highs this week, with the August contract for Midwest domestic hot-rolled coil reaching $1,878 per short ton, up from about $550 a year ago. 

Rising steel prices are having an impact across the economy, and the energy industry is no exception. For renewable energy in particular, rising prices for steel and other inputs such as polysilicon are interrupting the long-term decline in costs. The price pressures have prompted some developers in the US and other major markets to consider project delays or cancellations. Higher costs are putting a brake on the growth of the renewable energy industry, at a time when the US and other countries need it to accelerate, to put them on course to achieve goals for cutting emissions. 

In solar power, action by the Biden administration is adding to those input price pressures. The US government last week issued a Withhold Release Order on solar imports containing silicon metal sourced from Xinjiang-based Hoshine Silicon Industry (Shanshan) Co, which is estimated to supply 25-35% of the Chinese polysilicon market. The effect of that order is that any US imports, including modules, thought to contain silicon from Hoshine will be detained unless the owner can prove otherwise. The order “sends shockwaves through the industry”, Wood Mackenzie analysts commented.

Module manufacturers hoping to sell to the US may need to reconfigure their supply chains, and even if they do not use any silicon from Hoshine will have to have the paper trails to prove it. Providing that proof can be difficult, because polysilicon producers have generally used silicon indiscriminately from a range of sources.

These new US requirements come after polysilicon prices have already been rising strongly, jumping 90% in the second quarter and almost quadrupling over the past year. Some of the most recent increase appears to have been anticipating the US restrictions, but there is still likely to be further upward pressure on prices as manufacturers work to comply. The rise in polysilicon is likely to add another 1c-2c per watt to the price of a module, which in the US averaged 32-34c per watt in the second quarter, and the paperwork required to satisfy the US authorities about sourcing will create additional costs on top of that. 

Meanwhile, the rise in steel prices is driving up the cost of the tracking systems used in most utility-scale projects. More than 65% of the cost of a tracker is typically in steel. If steel prices this year end up being double 2020’s average, that could mean the cost of tracking systems rising by about 30%, although manufacturers who bought supplies before the market took off will be able to avoid some of that impact.

Modules typically represent 35-40% of the total capital cost of a US utility-scale project, with trackers a further 10-15%. Equipment manufacturers may not pass on all the input price increases they are facing. But all-in utility-scale solar system costs are still likely to increase by 5-10% on average this year, says Molly Cox, a Wood Mackenzie solar analyst.  

US solar installations have been roaring ahead, rising by a remarkable 46% last year. They were expected to keep going, rising 24% to 24.4 gigawatts in 2021 and a further 10% to 26.8 GW in 2022, according to Wood Mackenzie’s most recent forecasts.

With costs rising, however, project economics face new challenges. Modules are typically bought before a project starts construction, so some of the impact of this year’s increases will spill over into 2022 and beyond. The full impact of the rise in costs is not yet clear. But there is a good chance that these forecasts for installations will soon be revised downwards. 

Steel price impact moderated in upstream oil and gas 

Meanwhile, rising steel prices are also an issue for the oil and gas industry. Steel casing and tubing typically represents about 9% of the cost of an onshore well in North America, according to Nathan Nemeth, senior analyst for unconventional plays. But with activity in the upstream industry still recovering only slowly from its sharp downturn last year, the rise in steel prices over the past nine months has not yet had a noticeable impact on overall costs. 

Fuel and chemicals prices have also been rising along with steel, Nemeth says, but other well costs have remained subdued, with utilisation for rigs and pressure pumping still below pre-pandemic levels.  There were 470 oil and gas rigs active in the US last week, according to Baker Hughes. That is almost double the number at the lowest point last August, but well below the 796 that were active at the start of 2020. 

That pattern of cost increases means inflation can vary widely from location to location. Wells that need additional casing strings and power from diesel generators have been subject to greater cost inflation. On average, though, drilling and completion costs for wells in the US Lower 48 states in the second quarter were still 5% below pre-pandemic levels, and only a modest increase of 3% is expected for the year as a whole. 

Cost pressures from steel may start to fade. PowerAdvocate, Wood Mackenzie’s sister company that collects and analyses cost and pricing data, argues that steel is now “unsustainably high”, and that prices are likely to drop back for the remainder of the year. 

In brief

Oil prices hit three-year highs on Thursday as ministers from OPEC countries and their allies in the OPEC+ group held their online meetings to discuss how quickly the continue the unwinding of the production curbs agreed in response to the slump in demand last year. Brent crude hit $76.69 a barrel, while WTI hit $76.12. At the time of writing, the meeting had not yet concluded. Wood Mackenzie’s analysis will be available soon after a decision is reached. 

The UK will stop using coal for power generation in October 2024, a year ahead of its previous schedule, the government has announced. Coal provided just 1.8% of the UK’s electricity last year, down from almost 40% a decade ago. The shift away from coal is one of the fastest energy transitions by any country in modern times. 

The same day as that announcement, the UK benchmark price of natural gas, which provided 40.6% of the country’s electricity in 2019, rose to a 15-year high. 

The New Jersey Board of Public Utilities has approved the largest ever offshore wind award in the US, giving the green light to two projects: Shell and EDF’s Atlantic Shores Offshore Wind, and Ørsted’s Ocean Wind II. The new projects are New Jersey’s second and third offshore wind developments. When in service, they will bring the state’s total offshore wind capacity to over 3.7 GW. 

Hundreds of people are believed to have been killed by the extreme heat that hit the northwestern US and western Canada this week. Temperatures reached all-time record highs for the whole of Canada, as well as for the cities of Seattle and Portland. 

The northeastern US has also been sweltering. On Wednesday, New York City issued its first ever alert urging residents to conserve power by not using washing machines, dryers and microwaves and limiting the use of air-conditioning, as temperatures rose to 97 °F (about 36 °C). The appeal appears to have some effect, but not an enormous one. The alert was issued at about 4.15pm, and within 25 minutes demand had dropped by about 240 megawatts. 

The Dutch government must do more to assess the impact of wind turbines on the environment before approving new projects, the Netherlands’ Council of State has ruled. 

Industrial and Commercial Bank of China has said it will not fund the development of the proposed 2.8 GW Sengwa coal-fired power plant in Zimbabwe, Bloomberg reported. ICBC previously gave a formal expression of interest in the project. It’s withdrawal was described as “a red light for Zimbabwe’s coal future”. 

The Canadian government wants all the country’s car and passenger truck sales to be zero-emissions by 2035. The new objective brings forward by five years the target date for ending sales of internal combustion engine vehicles, which had been 2040. 

And finally, some (possibly) energy-related pop music. The new album from the New Zealand singer Lorde, out next month, is called Solar Power, and it may or may not be about climate change and renewable energy. The first single, also called Solar Power, seems to be more an anthem for having fun on the beach than a reflection on long-term trends in PV costs. But fans suspect that the beneath her sunny exterior, the singer may be intending to communicate a hidden agenda. 

Other views 

Gavin Thompson – Opportunities abound in Asia Pacific’s transforming power markets 

Simon Flowers – Why upstream needs to be more ambitious to cut emissions 

Julian Kettle – Could Africa become the home of green metals? 

Ram Chandrasekaran – Electric vehicles continue to get the green light 

Tom Brookes and Gernot Wagner – Economics needs a climate revolution 

James Manyika and Michael Spence – A better boom: how to capture the pandemic’s productivity potential 

Felix Matthes et al – The hydrogen strategy 2.0 for Germany 

Houston: leading the transition to a low-carbon world 

Quote of the week 

“We elected you: the youth vote carried the election. If you are going to negotiate on our lives and liveability of our planet, negotiate with us… We will sit here until you commit to the side of climate justice, commit to an American Jobs Plan written with bold ambition against the climate crisis including a Civilian Climate Corps, and pass it through reconciliation immediately. Or you will not pass a bill at all.”

Nikayla Jefferson, an organizer with the Sunrise Movement, the climate campaign group, spoke at a protest intended to put pressure on President Joe Biden in negotiations over a planned bill to spend more on US infrastructure. President Biden said last week that a deal had been struck over a spending proposal from a bipartisan group of senators, but that plan excluded some climate-related proposals that Democrats have supported, including large-scale new incentives for electric vehicles. One specific idea backed by the Sunrise Movement and the president is for a Civilian Climate Corps: an organisation that would put young people to work on projects such as protecting forests and wetlands, in emulation of the Depression-era Civilian Conservation Corps. 

Chart of the week

This comes from a recent paper by Ram Chandrasekaran, Wood Mackenzie’s head of road transport research, and shows our forecast for vehicle sales in 2050. As you can see, we expect battery-electric vehicles to dominate the global market by then, with traditional internal combustion engine vehicles and hybrids in second and third place. By the middle of the century, we expect more than three out of every five vehicles on the roads in China, Europe and the US will be EVs. Chandrasekaran says the rush of countries and automakers committing to the goal of being carbon neutral has transformed the competitive landscape. “Net-zero is the new mantra, and road transport is one of the low-hanging fruit,” he says.