“Renewable energy is cheap” has become a political mantra in many countries since Russia’s invasion of Ukraine. Most western governments set bold new goals to build more wind farms and solar arrays cheaply — and quickly — in response to Russia’s squeeze on gas supplies.
But inflation-busting rises in supply chain costs, plus higher interest rates, mean the era of sharply falling renewables prices is over. Governments that do not recognise the pressures on the industry risk deterring investors — and missing clean energy targets.
That could be catastrophic. The Intergovernmental Panel on Climate Change warned this week that the world has already warmed by 1.1C above pre-industrial levels.
At the end of March, the UK will test how cheaply new renewables projects can be built in an era of pricier money, commodities and labour. Rishi Sunak’s government will invite bids to build new projects from the likes of Sweden’s Vattenfall.
Companies compete for “contracts for difference”, securing them a guaranteed price for their electricity for 15 years. The auctions — in which companies bid lower rather than rising prices — have been a roaring success since the first of them eight years ago. Prices at which companies agreed to build offshore wind farms have fallen more than two-thirds since 2015 to £37.35 per megawatt hour in the last year, expressed by convention in 2012 prices.
But energy companies and their investors are currently wary. They argue the UK has set maximum prices, which vary according to technology, that do not adequately account for factors such as rising wind turbine prices. These have jumped by a third since the end of 2021 alone.
Companies that have already sunk hundreds of millions of pounds into developing projects are still likely to bid, although some may wait to see if conditions improve. The longer-term danger is that energy groups will prioritise more favourable jurisdictions such as the US — with its tempting clean energy tax breaks.
The Lex team is interested in hearing more from readers. Please tell us where you think renewables projects costs are headed in the comments section below