The wind-and-solar song keeps booming despite false notes

Global wind and solar growth on track to meet climate targets, Reuters reported this week. The news story cited a report by a climate think tank called Ember, which concluded that if current wind and solar addition trends continued and if they could be replicated globally, “the power sector would be on track for 1.5C.”

There’s two ifs too many for comfort above and this is not all. The Ember report praises the Netherlands, Australia and Vietnam for their quick buildup of wind and solar capacity in the past two years. “What’s more, that new wind and solar directly replaced fossil fuels,” the author of the report, Dave Jones, notes.

This is certainly an achievement worth the praise and it will be for a while yet. Then higher production costs will likely kick in. Costs have been on the rise for a while now because of the pandemic fallout and the trend is unlikely to reverse in the observable future as governments intent on greening up their energy mix stick to the plan. So let’s talk about wind and solar costs.

I first came across the abbreviation LCOE years ago when I began covering the renewable energy industry. As a mathematically challenged individual, it took me a while to make sense of what this levelised cost of energy/electricity means but I believe I eventually did. And I found something odd.

Per this article from the Corporate Finance Institute, a Canadian online business training platform, the LCOE of an energy project is calculated by dividing the cost of building and operating the project by the amount of electricity it is expected to generate throughout its lifetime.

This is straightforward enough in the first part but not so straightforward in the second part, about the energy generation. And the reason it is not so straightforward is that one cannot make accurate calculations based on something as inconstant as the weather. Did anyone forecast last year’s wind drought in Europe? That’s unlikely, given that even ten-day weather forecasts are often inaccurate, let alone forecasts for months ahead.

So, the second part of the LCOE equation, unless I’m profoundly wrong, depends on assumptions that probably involve some wishful thinking, seeing as the most renewable-heavy countries have in place subsidies for wind and solar projects. These subsidies are a great tool for wind and solar installation developers to reduce their risks.

The first part of the equation, on the other hand, depends on prices of raw materials as well as energy inputs for the production of things like photovoltaic panels and wind turbines. The Ember report says that “To be on a pathway that keeps global heating to 1.5 degrees, wind and solar need to sustain high compound growth rates of 20% every year to 2030. That’s the same rate of growth as their average over the last decade. 

This is now eminently possible: wind and solar are the lowest cost source of electricity on a levelised basis, with ever-increasing global experience of integrating them into grids at high levels.”

The “lowest-cost” mantra is as strong as ever and until two years ago it was perhaps true for some parts of the world such as China where cheap fossil fuel-sourced energy made the country dominant in solar panel production. The contribution of cheap energy to consistently lower costs of wind and solar is something habitually overlooked, as natural resource investment firm Goehring & Rozencwajg noted in a recent report.

The link between energy and wind and solar capacity costs, however, has now become quite obvious: with the prices of fossil fuels surging, so are the costs of wind and solar installations. The price rally in metals and minerals is contributing to the reversal of the ever-lower-cost trend, too. Yet it seems like it would take some time for think tanks such as Ember to recognise the new trend.

This could be risky. Ember’s report says “wind and solar need to sustain high compound growth rates of 20% every year to 2030”. Failing to do that, the author warns, could cause a “relapse” into coal. Yet sustaining annual growth of 20% in wind and solar installations could be rather challenging.

I spoke with Leigh Goehring, partner in Goehring & Rozencwajg, about renewables and energy, and asked him whether these latest cost trends in wind and solar might lead to a change in the narrative, which is quite well demonstrated in the Ember report.

According to him, the truth is already beginning to surface, with a recent example being Canadian Power Corp’s warning it was going to incur impairment charges from renewable energy projects that were currently under construction.

“Expect to see more and more of these types of announcements,” Goehring said. “The cost of renewables, because of rapidly rising energy costs, are becoming more and more non-economic—not more and more competitive.  For example, poly-silicate  prices have doubled in the last 8 months, and LG has announced that they were closing their entire solar panel manufacturing business globally.  Renewables have never really worked, and now that energy costs are surging, these shortcoming are being exposed.”

Indeed, the Wall Street Journal report about rising production costs linked above also notes that the situation is particularly dire in the United States because wind and solar developers there were already troubled by trade tariffs on Chinese imports of, among other things, solar panels and other components essential for wind and solar installations.

Thirty percent of of utility-scale solar installations scheduled for completion by the end of 2021, the report said, citing Wood Mackenzie and Solar Energy Industries Association data, were delayed by at least a quarter and 13% were delayed by a year or cancelled. At the same time, the price of the electricity produced by such installations has risen as well, by double-digit rates, the WSJ also noted, citing figures from renewable electricity marketplace LevelTen Energy.

So, the lowest-of-them-all LCOE of wind and solar is not something immutable or even universally true as this chart shows by detailing all the expenses associated with energy generation by type. In fact, reality refutes the lowest-of-them-all mantra and nowhere has this become more obvious than in Europe. Says Goehring:

“Europe is living through hell right now because of the massive mal-investment that has been made over the last 12 years in renewables. Can you imagine if European governments spent $1.5 trillion over last 10 years investing all this money in nuclear power plants instead of incredibly inefficient wind-mills and solar panels?  Do you think Europe would be in a full blown energy crisis today?  The answer is simple: no.”

The answer begs another question: how did Europe — and the U.S., for that matter — got themselves into this?

According to Goehring, despite the much publicised scientific consensus on climate change and the causes for it, scientists are in fact deeply divided over the issue. Governments, on the other hand, “all love to expand their presence and influence, and have logically embraced the alarmist “Greta Thunberg” interpretation — fear gives them the greatest chance to expand their influence and government power.”

Now, voters are paying for these decisions with soaring electricity prices, shutdowns of fertiliser plants and metal smelters, and governments are finding themselves forced to subsidise electricity bills and natural gas. What’s worse, from a climate change perspective, Goehring says, is that “10 years of work trying to reduced CO2 emissions have been wiped-out in 8 months. So much for all those green initiatives.”

What this seems to suggest is that the divide between energy policies, energy investments, and energy reality is deepening. The false notes in the wind-and-solar song are multiplying. And this directly threatens the future of the energy transition amid calls for even greater investments in it.

A comment piece from Wood Mackenzie earlier this month listed the likely consequences of the price surge in metals and minerals. The list included capex uncertainty and demand destruction: blows to both the supply and the demand side of the energy transition enterprise. This will really make it difficult for that 20% annual growth in wind and solar installations to pan out.

On the flip side, this gap between energy ambitions and reality will likely become obvious enough to force a reconsideration of these ambitions or at least the means to fulfill them.