56% Solar Projects Planned for 2022 at Risk due to Mfg Cost Hike: Rystad

The earliest estimates on the impact of price volatility and rising costs on solar projects worldwide are finally coming out, and the news is not good. The surging cost of manufacturing materials and shipping could threaten 50 gigawatts (GW) – a staggering 56% – of the 90 GW of global utility PV developments planned for 2022, a Rystad Energy analysis shows. For markets like India which barely made it out of 2020 and had started on a strong note in 2021, the signs are ominous.

Commodity price inflation and supply chain bottlenecks could lead to the postponement or even cancelation of some of these projects, impacting demand and consumer pricing for solar-generated power.

Riding a perfect storm of supply disruptions, power shortages and natural disasters, and zooming freight costs this year, manufacturing costs for PV modules have surged from below $0.20 per watt peak (Wp) in 2020 to between $0.26 and $0.28 per Wp – a near 50% increase in a year.

A significant driver of this surge is a more than 300% hike in the cost of polysilicon, a core component in PV manufacturing, manufactured mostly in China. In addition, other raw materials – silver, copper, aluminum and glass – have also climbed steadily since January 2020, increasing the pressure on module prices.

“The utility solar industry is facing one of its toughest challenges just days ahead of COP26. The current bottlenecks are not expected reduce anytime in the next 12 months, meaning developers and off takers will have to decide whether to reduce their margins, delay projects or increase offtake prices to get projects to financial close,” says David Dixon, senior renewables analyst at Rystad Energy.

Key suppliers in China have already requested major buyers to defer or delay starting new projects to prevent order cancellations and issues.

Even marginal costs like the cost of shipping have risen to a level where they make a significant impact by accounting for almost 3% of the final cost , from barely a percent earlier. From $0.005 per Wp in September 2019 to $0.03 per Wp in October 2021.

Modules and their associated shipping costs typically comprise between a quarter and a third of the total project capex and together represent the single-largest item of a project’s cost. When the cost of modules – and shipping – increases, it can significantly impact project economics.

Rystad Energy performed a sensitivity analysis to determine the levelized cost of electricity (LCOE) for different plant sizes comparing last year’s module and shipping costs with current costs. The results show that the LCOE of new projects has increased by between 10% and 15%, a major cost bump for most of the projects planned for 2022. Seeing their projects at risk, developers may have to resort to negotiating higher power purchase agreements (PPA) or absorbing some of the cost inflation, accepting higher project costs and lower margins.

In India, where there are plans to impose a customs duty of 40% on module imports and 25% on cells from the new Financial year, there is already a clamour to extend the date from some developers. Something that is being pushed back by domestic manufacturers equally strongly. With tenders having been awarded at very competitive costs right upto a few months back, the situation, when the it time to place module orders for these projects, could be very interesting indeed.