4th November 2022
Chris Bowden, MD, Squeaky
7 minute read
Renewable energy costs are on the rise. Here’s how it could impact your business
Despite the cost of renewable energy dropping significantly over the past decade, a perfect storm of events has suddenly triggered an increase in the price of cleaner fuels.
It’s an increase that could have big consequences for the development of renewable energy projects and, subsequently, businesses who are striving to go green.
Not to mention the impact it could have on the planet.
Renewable energy became cheap, fast.
The cost of renewable energy has increasingly undercut fossil fuels. This has largely been driven by new and improved technologies, competitive supply chains, reductions in capital costs and increased competition.
As the renewable energy sector matured and continued to make improvements in efficiency, scale and technology, the Levelized Cost of Energy (LCOE) for wind and solar declined significantly.
In fact, according to Lazard’s LCOE analysis - version 15.0 - in 2009 a MWh of electricity obtained from solar photovoltaic had an LCOE of $359. But by 2021, that LCOE had reduced to just $36 – significantly less than the LCOE of coal, nuclear and gas. Both on and offshore wind energy have also seen a dramatic decrease in costs since 2009.
It’s this decline in the LCOE that’s led to the rapid upscaling of renewable energy sources. And as a result, businesses have been able to secure a competitive rate for renewable energy relative to fossil fuel energy.
However, what does the future hold?
The cost of renewable energy in the UK increases
For the first time in a long time, the LCOE for renewables has increased. And not just increased slightly but it’s doubled in price in the last couple of years.
In the UK the LCOE for solar, has risen from circa £40/MWh in 2020 to over £80/MWh in 2022.
Renewable energy is not exempt from global trends that are driving costs upwards globally. Some of the increase is related to increased capital costs as interest rates rise around the world to tame inflation, other factors include global supply chain disruptions, soaring cost of materials - particularly steel - and an inflation in the cost of labour.
In fact, the cost of steel for wind turbine blades had risen by more than 50% since the start of the Covid-19 pandemic.
European PPA prices also double in 2022
As a result of these increased costs globally, 10-year PPAs for solar, onshore wind and offshore wind technology doubled in price in 2022 to an average of €107.80/MWh.
With uncertainty continuing in the energy market, inflation rising and developers still tussling with disruption to the global supply chain, there’s no telling how long the hike in the cost of PPAs will last.
The cost of renewable energy is increasing. What’s the impact?
For years, the cost of renewables has increasingly undercut fossil fuels. But what we’re witnessing now is a global reset in the cost of the resources we need the most - renewable energy.
It’s a change that could have a huge impact on the expansion of renewable energy projects, businesses and our planet.
Slower expansion of renewable energy projects
As the cost of generating power from renewable energy increases developers will be debating whether they can move ahead with building renewable energy projects at all.
As a result, investors could lose confidence and the expansion of renewable energy could stall at a time when Europe needs it the most.
Businesses could pay double the price to go green
System costs are now higher and with that, the cost of going green increases, too. For many, the journey to net zero will cost more in the future.
With rising costs, those businesses that failed to hedge wisely may now struggle to deliver on their net zero commitments, without paying significantly higher prices.
It’s no secret how damaging it can be for businesses who fall short on their environmental, social and governance (ESG) promises.
The disconnect between fossil fuel and renewable power pricing
The worrying thing is: if the price of gas decreases, that does not mean the cost of renewables will decrease with it.
There’s no doubt that renewable energy buyers will need to reset their expectations on pricing. And perhaps reset their stakeholders’ expectations on delivering on their green agenda, too. It could be sometime before the LCOEs of renewable energy start falling again.
What if renewables become more expensive than gas?
For some time, renewable power has freed economies from volatile fossil fuel prices by curbing costs and enhancing market resilience. The whole world has experienced a reduction in the LCOE of wind and solar power. A report showed that, in 2021, two-thirds of renewables were cheaper than coal.
But the important question now is - although renewables are currently cheaper than gas, how long will that remain the case?
What can businesses do to secure a cost-effective, long-term supply or renewables?
Businesses are not only desperate to protect themselves against price volatility right now, but they are also under growing pressure from investors and consumers to decarbonise and deliver on their net zero promises.
However, these net zero commitments could be under threat from the rising price of renewable energy.
The only way businesses can mitigate against the risk of these costs rising further and lock in a long-term supply of clean energy is with a CPPA.
A CPPA is a long-term contract between an energy buyer and an energy generator. The two parties agree to buy and sell an amount of energy which is, or will be, generated by a renewable asset. A CPPA is usually agreed over a period of 10-15 years, although we are starting to see shorter terms.
Big tech are the big winners of renewable energy
Big tech has long been the leading buyer of CPPAs and 2021 was no different.
In 2021, tech companies were the biggest buyers of corporate renewable energy. In fact, Amazon’s total CPPA capacity made its portfolio the 12th largest globally - across all sectors - ahead of EDF.
Amazon’s decision was for good reason. CPPAs offer parties who have long term power needs the chance to secure a clean energy supply, at a fixed price.
There are few who’ve made it out as winners during the current energy crisis. But this was a smart move made by several tech giants and it certainly puts them up there.
Take action or risk the consequences
The UK’s biggest organisations are now exposed to eye-watering energy prices, as well as uncertain renewable energy costs.
Now’s the time to act and protect your business from financial and reputation risks of inaction.
Interested to hear more? Reach out to us, we’d love to help you.