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Volatile input costs pose a threat to the viability of developers of renewable energy projects, which may require offtakers to be more flexible in contract negotiations.
By Megan Jarvis & Tyron Theessen*
Soaring costs of commodities and energy have resulted in an unprecedented level of cost uncertainty in the inputs needed for developing renewable energy projects. Cost uncertainty is compounded by the logistical woes being faced by developers in South Africa and elsewhere. Even where component parts are available, they may not be at a cost that is recoverable in terms of the contracts in place with buyers or that is sustainable for suppliers.
Megan Jarvis from Webber Wentzel
According to the International Energy Agency (IEA), in its “Renewable Energy Market Update 2022” released in May 2022, prices of raw materials and freight costs for renewable energy projects have been rising since the beginning of 2021. By March 2022, it said: “the price of PV-grade polysilicon more than quadrupled, steel increased by 50%, copper rose by 70%, aluminium doubled, and freight costs rose almost five-fold. The reversal of the long-term trend of decreasing costs is reflected in the higher prices of wind turbines and PV modules as manufacturers pass through increased equipment costs. Compared with 2020, we estimate that the overall investment costs of new utility-scale PV and onshore wind plants are from 15% to 25% higher in 2022.”
Other input costs, predominantly energy, have risen substantially because of the Russia/Ukraine war. For South African developers of renewable plants which rely on imported components, these cost increases will be magnified by the depreciation of the rand against the dollar, from ZAR15.95/USD in January to ZAR16.70/USD by mid-August – especially where the power purchase arrangements are dominated in local currency.
These cost increases have further compounded difficulties, initially arising from pending litigation, in closing projects bid under the Risk Mitigation Independent Power Procurement Programme (which was gazetted on 7 July 2020). Similar issues may be faced if other programmes are delayed and could apply equally where private offtaker deals suffer from their own delays.
In this uncertain environment, where fixed pricing on long-lead items cannot always be secured, developers may be unable to sell power at the prices they bid and still make a profit. The same phenomenon affects other private sector power projects under way, such as those being developed to supply renewable energy to offtakers in the mining and other industries, where the developer has undertaken to supply power at a certain agreed price. The client in turn has budgeted for that cost and may also have limited room for cost escalations.
Article credit: www.miningnews.co.za
Author Dineo Phoshoko