between Rising interest rates and input costsGreen-minded investors have a lot to worry about these days. Their biggest concern may be to end the old red tape.
Wind and solar, which require huge upfront investments, have grown rapidly in the US over the past decade when few conditions were quite right. Interest rates were close to zero for nine of the past 13 years, during which wind and solar generation grew more than six times. Over the same period, the cost of installing solar has dropped by about 90%, while for wind it has fallen by 72%, according to lazardo, Tax credits also helped reduce costs.
That’s Changing Fast This Year As the Federal Reserve Raises Rates to calm inflation, In addition, the declining cost trend for solar and wind reversed last year as input costs are rising on everything from steel for wind turbines to copper and polysilicon for solar installations. The cost of installing wind and solar power is expected to remain above 2020 levels this year, according to estimates from BloombergNEF.
Despite those challenges, a parallel trend has been an unusually high streak of natural gas prices hitting 14-year highs. The futures market is expecting US benchmark prices to be $4.47 per million British thermal unit over five years, a marked drop from today’s roughly $7 per mmBtu, but compared to the $3.25 average seen over the past decade. Still at a high level. Volatile and high natural-gas prices are making it desirable for utilities and corporations to lock in electricity prices through long-term power purchase agreements with solar and wind farms.
For the first time in some time, companies are “opening their books and wanting” To sign power purchase agreementsJohn Carson, chief executive officer of renewable developer Cordelio Power, said earlier this month at the Accor Finance Forum. In its most recent clean-energy market outlook, BloombergNEF noted that renewable energy developers have “strong bargaining power”, given the “serious imbalance between the demand for renewable electricity and the supply of projects” over the next two years. Power supply can start.
Cost challenges can be manageable in the end. BloombergNEF forecasts still envision a decline in solar and wind installation costs in the coming years. And when a Commerce Department evasion investigation into solar tariffs halted solar development earlier this year, President Biden only recently took action. using emergency authorization To allow import of solar parts from Southeast Asian countries duty free for two years.
The thorny issue may seem more logical for wind and solar going forward, whether it’s a lack of resources to work quickly through interconnection requests or the painfully slow process of permitting and building transmission lines. “Developers say this is not a PPA [power purchase agreement] It’s a scarce resource, it’s interconnection,” said Keith Martin, partner at Norton Rose Fulbright, at the Accor Finance Forum.
PJM Interconnection, the largest electrical grid operator in the US, proposed a two-year moratorium on a review of interconnection requests in February. It works through over 1,200 projects-Mostly renewable energy- Introduced before 2021. After taking feedback from its members, the grid operator said in April that it was looking at ways to fast-track the process. PJM has said that the number of projects looking for interconnection has “nearly tripled in the past four years” due to the rapid growth in renewable energy.
The backlog looks bad across the country. In a report published in April, Lawrence Berkeley National Laboratory found that projects are spending more time in queues before reaching commercial operation. The typical time for a power plant – whether solar, wind or gas – to submit an interconnection request for commercial operation, ranges from approximately 2.1 years between 2010 to 3.7 years for projects built in the decade from 2010 to 2010 and was made between 2021. Last Thursday, the Federal Energy Regulatory Commission proposed a Rule to speed up some interconnection requestsWhich would be a good first step.
Meanwhile, even though wind and solar diffusion have occurred, construction of transmission lines Important for their development has not been caught. The number of miles of newly constructed high-voltage transmission lines has decreased from an annual average of 2,000 miles from 2012 to 2016 to an annual average of 700 miles between 2017 and 2021, According to the US Department of Energy, According to the Department of Energy, less than a quarter of projects demanding interconnection to the grid have been built from 2000 to 2016, and the share of those making it to the finish line has declined since 2013.
Over the years, the declining cost of inputs and capital helped the solar and wind industries reach new heights. Those are both areas where money and policy—particularly tax credits—were able to rally behind and provide a means to deal. Interconnection and transmission line constraints have always been important, but red tape around permits and jurisdictions just isn’t an attractive target or can be easily solved by throwing resources away.
The impending roadblocks to renewable energy seem modest—all the more reason for investors to be concerned about them.
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