The impressive rise in the price of raw materials that we are seeing is affecting all industries, and renewables are no different. But let’s take a closer look at the impact on wind and solar, trying to guess whether this rise is temporary or here to stay.
The main raw materials used to build wind farms are concrete and steel. In fact, according to data from the EU report on raw materials and renewables, around 70% by weight of the materials is concrete (basically foundations) while another 25% is steel (rebar foundations, tower and nacelle components). The rest is fibreglass (blades) and other elements such as polymers, copper (generator and trafo) and aluminium. Obviously the total cost distribution will be different as the price per tonne of each element is very different.
Let’s see how the prices of these elements have evolved over the last year:
According to FRED data, the rise has been very pronounced since November last year. Obviously, the price will vary a lot according to countries but this gives us a clue of the trend.
On the LME website the prices of the main metals can be accessed and for steel we can see that in the last year it has risen by 75%, reaching its peak a few weeks ago.
In the case of copper, the rise has been even greater than that of steel, exceeding 80% in the last year.
Aluminium has risen in the last 12 months by 57%.
It is clear that the increases in raw materials, which account for more than 98% of the weight of a wind farm, have been very important and will have a very significant impact on the costs of projects in 2021 and 2022.
Will OEMs be able to pass these increases on to their customers?
In general, supply contracts include price revision clauses in the event of raw material increases, but these are limited and it is difficult to compensate for the large increases of recent months. Moreover, manufacturers are in a difficult position as the big suppliers of steel and other metals are large companies with very high bargaining power, so it is likely that, despite the good work of the purchasing departments, they will be able to pass on a large part of the increases to the manufacturer. So it is very likely that in the contracts that are being closed now, prices will have increased significantly. In fact, we already see in the first quarter of the year a certain increase in the ASP of Vestas and SiemensGamesa.
Is it a temporary increase or will it continue?
It is difficult to know, but everything points to the fact that it could be the perfect excuse to increase prices and keep them high. Both Vestas and SiemensGamesa have said publicly that they will prioritise profitability over volume and this rise in raw materials justifies a price increase that will be generalised throughout the sector. We will have to wait and see if this commodity turmoil will finally bring a period of profitability for OEMs.
And the developers?
They are clearly the biggest victims, as civil and electrical works are much more expensive and turbines, as mentioned above, will probably also suffer price rises. As always, large utilities will be able to weather the storm better thanks to their greater purchasing and bargaining power, while small developers, who are already starting from a tighter business case, will suffer significantly in the coming months.
On the other hand, solar PV has a more even distribution of the weight of its raw materials, as can be seen in the EU report, with steel, concrete and glass being the main materials.
We have already seen the behaviour of steel and concrete, but in terms of cost, in solar photovoltaic projects, the greatest weight falls on solar modules and the main component of these is Polysilicon.
Polysilicon price evolution
As can be seen in the graph from PV Magazine with data from PV Infolink, the rise in the price of the base material used to manufacture the modules has been meteoric. The causes have been varied but it seems that it all started last summer with an explosion at the factory of the world leader GCL-Poly which reduced world supply and triggered buying, entering a spiral of rise-buy-rise that continues to this day.
Although experts predict that prices will soon fall, there is a variant that could increase the pressure even more: the Uyghur problem. As the article in El periódico de la Energía summarises very well, there are many eyes on the main Chinese manufacturers that dominate the market because of the alleged use of forced labour from the Uyghur ethnic group in the Chinese province of Xinjiang. If international pressure grows and this becomes another diplomatic crisis, the consequences could affect the solar industry.
What about modules?
Although modules have risen in price by around 20% in recent months, cell and module manufacturers have so far absorbed most of the rise in polysilicon as explained in this article.
This situation is clearly unsustainable and sooner rather than later module manufacturers will have to increase prices even further. Unlike wind power, however, the solar module industry is almost entirely controlled by Chinese companies that are directly or indirectly dependent on the central state. Therefore, it is difficult to make predictions based on market rules, as some of the behaviour of these companies is based more on strategic decisions of the Chinese government than on market criteria.
What about developers?
As in the case of wind power, developers are already suffering the higher costs of EPC (due to increases in concrete, steel and copper), modules (due to polysilicon), trackers (steel) and converters (steel, copper, aluminium). In fact, there are developers who are delaying their projects because they cannot make a profit at current prices. The problem will come if this situation is prolonged over time and they have to cancel the projects. And everything indicates that it will last a few more months until, at least, the polysilicon situation returns to normality.
And what about transport by ship?
As if all of the above were not enough, the price of sea containers is at an all-time high.
This makes solar products even more expensive as they are mostly transported in containers by sea.
It is clear that we are facing a perfect storm of rising prices that will have a major impact on both wind and solar. And the part of the industry that will suffer most from this situation are the small developers whose projects will not be profitable at current price levels. At least the high pool prices are partly compensating for the worsening business cases, but as soon as this effect is gone, we will see consequences in the industry.