A combination of unfavorable economic conditions and protectionist trade policies are threatening the progress of the renewable energy revolution. Profit margins for wind and solar energy have become discouragingly tight as inflation has soared, and policies limiting the import of cheap Chinese infrastructure are making them even tighter. The timing of this trend is particularly problematic as the window is closing for global governments to get serious about curbing emissions by midcentury.
At last year’s COP27 UN climate conference in Sharm El-Sheikh, Egypt, 118 nations pledged to work together to increase global clean energy capacity from 3,400 gigawatts (gw) to 11,000gw by 2030. But with the current economics of renewable energy investments, that kind of explosive growth – which would amount to adding the entire generating capacity of the United States each and every year – is looking increasingly unlikely. “At a meagre 6%, the average return on capital for solar and wind developers will not entice the $8trn or so of investment needed over the rest of this decade to honour the 11,000gw pledge,” the Economist reported earlier this month.
The cost of adding renewable infrastructure is rising. Rising interest rates have slowed investing in the sector, Covid-related supply chain woes continue to impact the cost and timing of manufacturing and procurement, and long and arduous permitting processes have all converged to create long and sometimes unpredictable project timelines and component price shocks, making many projects untenable. “Although regulators’ standards for transparency and customer affordability continue to rise, these authorities often lack the staffing, capabilities, and tools to handle the permitting process efficiently,” McKinsey & Company wrote in a report on the significant hurdles faced by the renewable sector. “As a result, permitting can span up to ten years, from project start to permits granted.” Related: U.S. Drillers Cut Drilling Activity Amid Stabilizing Oil Prices
The longer a renewable project’s timeline is delayed, the more expensive it becomes – especially with the cost of components rising sharply – and the further the bottom line gets from the original agreement. As a result, projects are often dead in the water financially before they’re able to get off the ground. This trend has been particularly pronounced in the offshore wind industry, which has gone from being the bright star of the decarbonization movement to being economically unviable in the last couple of years. Five offshore wind projects have been canceled in the United States in 2023 alone.
On top of these already considerable economic deterrents for would-be renewable energy investors, we are also witnessing a changing policy environment stemming from the energy war between Russia and the West. As Europe struggles to wean itself off of Russian gas, the United States has become increasingly nervous about its own high level of dependency on Chinese energy markets to keep the lights on and keep the clean energy transition in motion.
U.S. Treasury Secretary Janet Yellen has openly called for a shift toward “friend-shoring”, a trade strategy in which countries shift supply chains to “trusted countries” with similar values and political allegiances – in other words, away from Russia and China. The European Commission’s Strategic Foresight Report 2022, too, has called for a similar approach. “Staking out spheres of influence and assessing the reliability and trustworthiness of suppliers and countries is the order of the day,” stated a geopolitical analysis from Stiftung Wissenschaft und Politik, the German Institute of International and Security Affairs.
The problem is that no other countries are really in a position to compete with China when it comes to clean energy manufacturing. China absolutely dominates the global sector and is therefore able to produce and sell components like wind turbines and solar panels at much lower prices than Western producers. In fact, when the United States Treasury tried to mandate the use of domestically produced solar cells, some of those involved in the U.S. solar sector itself cried foul, saying that such a mandate would put them out of business.
Already, the price of solar panels in the United States is almost double anywhere else, in large part due to protectionist anti-dumping duties on Chinese suppliers. These duties are set to be expanded to other Asian nations that are suspected of back-channeling restricted Chinese goods. While the Inflation Reduction Act is giving a needed boost to U.S. solar panel production, the sector has a whole lot of catch up to do, and won’t make a dent in current solar panel demand, much less the kind of demand that would be in line with reaching a 11,000gw by 2030 scenario.
By Haley Zaremba for Oilprice.com
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