The rate of clean energy additions has grown every year for a decade - but are the rising energy, labour, and raw material costs straining wind energy supply chains set to put an end to this trend?
The International Energy Agency (IEA) has warned that growth in renewable power is set to slow down for the first time in a decade next year. The amount of money flowing into clean power is on track to rise, but this investment will go less bang for the buck than it used to, as inflation soars and the costs of energy, labour, components, raw materials, and freight continue to rise.
The good news is that renewable power is expected to remain the best-value option for energy investors for years to come, because the price rises in the clean energy industry pale in comparison to the rising cost of gas- and coal-fired generation. But the projected slowdown of renewable power deployment has undoubtedly left some experts worried. The IEA has stressed a net zero power system will require a 12 per cent increase in capacity of clean power globally each year through 2030. And so, the organisation's projection of "little change" in wind deployment next year does not bode well, nor does its prediction that ever-rising solar capacity will not be able to "fully compensate" for lower hydropower and flatlining wind additions.
Barnaby Wharton, director of future electricity systems at UK trade body RenewableUK, acknowledges there are a number of factors contributing to the wind sector's current supply chain woes. "We are seeing a general post-covid increase in commodity prices as demand picks up, as well as the more acute impact of fuel prices from Ukraine," he told BusinessGreen. "And then, on top of that, everyone is trying to decarbonise right now. Demand for product in renewables is increasing, and that is feeding into supply chain costs too, whether that is blades and turbines, or cables for networks."
Indeed, soaring gas prices triggered by Russia's invasion of Ukraine earlier this year have driven up the cost of industrial production of the materials and components required to build wind turbines, electricity transmission infrastructure, and solar panels. This has exacerbated an pre-existing trend of rising raw materials and components costs with prices of polysilicon, steel, resin, and copper all climbing in recent years. Meanwhile, freight bottlenecks that built up during the covid-19 crisis are yet to fully ease, with the cost of transporting raw materials and parts across borders also soaring.
These issues are already being acutely felt by Europe's wind turbine manufacturers, whose supply chains are significantly more exposed to international gas prices than their Asian rivals. In financial results last week, Siemens Gamesa announced that it had seen a 10 per cent decrease in its revenues in the second quarter of 2022 compared to the year previous, blaming its weaker performance on supply chain delays, energy, and raw materials costs and other "volatile market dynamics". A financial update from its Danish rival Vestas, meanwhile, highlighted that it, too, is struggling to break even as costs climb. It noted that revenues last quarter fell be seven per cent compared to the same period the year before amid supply chain instability.
Albert Dominko, global head of offshore procurement at Siemens Gamesa, said the sector was grappling with a complex cocktail of issues that had started with covid and been turbocharged by soaring energy prices driven by the price of gas. "Starting with covid, it has been a global situation of shortages and logistics," he told BusinessGreen. "In 20 years in the supply chain environment, I have never seen a situation like this."
Skyrocketing energy costs in Europe and port congestion in Asia are just two issues that resulted in Siemens Gamesa's weaker financial performance over the last three months, he explained. Many of the firm's European suppliers of large castings and iron-based items from suppliers have rapidly increased their prices to avoid being put out of business by soaring energy costs, and this has put Siemens Gamesa in a bind.
"The lead time on big components is typically 200 days plus," he said. "It is not always possible to switch to a different continent, to a new supply base, at short notice - not without hitting your supply chain. It becomes a case-by-case decision on how to proceed - whether to accept the increased price or shift, and face [different] challenges around availability." Importing components from Asian manufacturers come with their own set of supply chain issues in the form of major backlogs in ports and rising freight costs, he says. Siemens Gamesa's departing CEO told investors earlier this year that delivery time for some wind parts had increased from five to nearly 50 weeks.
Despite these significant headwinds, Dominko does not expect demand for offshore wind turbines to be dented by the supply chain challenges, noting there was huge appetite for clean energy spurred by national clean energy targets and governments' drive to secure energy independence. But he concedes timing of projects could slow down as supply chains continue to come under strain. "The timing of implementation [will be affected] because capacity will be the scarcity," he warned.
European manufacturers like Vestas and Siemens Gamesa now face a difficult task ahead, Dominko explained, which involves encouraging more suppliers to join a market dogged by major challenges in order to remain profitable in the future, whilst simultaneously working out how to navigate the current supply chain crunch.
"On the one side I need to survive today, and make sure that the production is running and my supply base is stable," he said. "But at the same time, I need to look on a three-to-five-year plan about how to cope with the [future] capacity. We are firefighting today, whilst also discussing with suppliers about how to bring them into this industry. Because with the existing supply chain in the world, neither Siemens Gamesa nor our Western competitors, will not be able to deal with that demand for components, solutions and all kinds of parts."
These bad tidings have prompted questions among some investors about whether European and North American wind manufacturing firms are heading for the same fate as their peers in the solar industry, which dominated the market in the 2000s but were ultimately outcompeted by Asian companies that had access to lower labour and production costs, cheap state finance, and greater economies of scale.
The demise of Europe's solar manufacturing industry should be cautionary tale to European policymakers, Dominko admitted. "Europe was a technology leader on solar, and it was not capable to survive on that," he said. "I believe the [current] situation is no different. And so, I think the comparison to the solar industry is right to remind the lawmaking parties that [support for clean energy manufacturing] requires not only nice PowerPoints and statements, but actions and commitments." Ambitious local content requirements in state-backed clean energy auctions and tax credits - like that introduced in the US' new Inflation Reduction Act - are two mechanisms that can boost domestic manufacturing, he said.
Meanwhile, Siemens Gamesa and its rivals GE and Vestas must embrace a far more involved approach to supply chain management if they want to ensure their supply chains are ready to capitalise on the clean energy boom, Dominko said. "We have seen many suppliers in serious situations, and we are trying our utmost to discuss with their banks how to how to support them," he said. "We are also discussing with suppliers how we can help them in first year or second year and get access to materials and suppliers. It is a totally different approach to the classic [way of doing things, which is] to go shopping around, put a 'spec' out, and then somebody will jump on."
At any rate, it will be some time until price spikes of raw materials and energy will feed through to the cost of electricity generation from offshore wind, given the majority of wind projects coming online in across Europe are backed by contracts drawn up well before the pandemic and gas price crisis.
"We've seen incredibly low prices in the most recent Contracts for Difference (CfD) and that will continue to feed through into production of electricity through to 2026," said RenewableUK's Wharton. "We're not going to see that impact in the UK [in the near-term]. The projects that have just won CfDs have probably hedged their commodities prices as well. So, immediately its not a direct concern."
As pressure on supply chains mount, Wharton said it was critical that future CfD rounds were structured in a way that enabled companies to invest in UK manufacturing despite its various supply chain challenges. "[It is about] moving away from a pure focus on the lowest cost, to delivering renewable energy at what will still be a very low cost - particularly when compared to gas prices - but in a way that also is sustainable for UK manufacturing, and the supply chain," he said.
He added that it was too early to say whether current supply chain headwinds would have a significant impact on the cost of building offshore wind projects in the UK, noting that construction and turbine efficiency was improving at the same time that capital costs rose. "We have to wait and see how those commodity prices rises, versus the greater efficiency of large turbines, feed through," he said. "It is probably a bit too early to say exactly what its going to look like over the coming years. But there are certainly headwinds."
Overall, Wharton said he was not concerned that supply chain issues placed a major threat on the trajectory of renewables deployment and the wider net zero transition in the UK, given that wind and solar power were set to remain the overwhelmingly more economic choice for energy investors compared to legacy fossil fuel projects. "The strength of renewables is that they are still the cheapest generation we now have," he said. "So even if you look at any potential increase in the costs of future projects as capital costs increase compared to where gas prices and are likely to be for the next couple of years, renewables are still a much better bet for lower costs, for decarbonisation and for security of [energy] supply."
This article is part of the Net Zero Commodities Hub, hosted in partnership with Wood Mackenzie.
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