As 2021 ended, an energy crisis crippled European markets, with prices reaching their zenith (averaging 620.80EUR/MWh in the EU) on 21st December. Although prices remain high, the market experienced a reprieve in the new year thanks to greater shipments of LNG coming into Europe, especially from Asia & the US.
The energy crisis is unavoidable, initially resulting from a perfect storm of significant reductions in Russian natural gas supply to Europe, risk of even steeper declines, and natural gas storage levels that have trended well below normal over the last year. The predominant reason for price spikes starting in December was political tensions between EU members and Russia. As the risk of broader conflict continued to climb, Germany halted Nord Steam 2’s start indefinitely, and Russia continued to squeeze several existing key pipeline routes to EU markets. At present, flows remain reduced, but largely unchanged even as conflict has escalated. While LNG and other sources have moved into fill the gap left by reduced Russian flows during January and February, further loss of Russian supply has no clear replacement, creating an environment where uncertainty and upside price risk are at modern highs.
Much attention has been given to the ability of renewable sources to avoid future crises as plans grow to increase the share of renewables in energy generation in response to climate policies. Central to this has been the concern over supply chain bottlenecks that have increased the cost of solar and wind energy in 2021 for the first time in a decade. As a result, average PPA offer prices increased slightly in Q4 from Q3, reaching €51.84/MWh in Europe. However, all signs suggest that renewable energy will continue to grow through 2022 as supply issues are resolved, despite a challenging year.
In 2021, the solar industry experienced price increases as supply shortages of raw materials, social concerns in China, and increased shipping costs drove prices higher. It is thought, however, that increased production will ease bottlenecks and reduce the price of silicon to $20-25/kg in the second half of 2022, down from $37/kg in October 2021. Aided by this decline, 2022 is expected to be the first year in which more than 200GW of solar will be installed, indicating a quick recovery for the market. For markets with a large solar capacity, this is a strong indicator of the endurance of solar energy, making it an attractive investment for corporates looking to sign a PPA.
In contrast, wind turbine cost increases are set to remain throughout the year as supply challenges continue. Following the second largest price increase of the decade in 2021 (Bloomberg) Logistics will be a larger issue for wind turbine construction compared to solar PV as it is more heavily impacted by port congestion and ship container availability. However, this has not resulted in reduced demand, indicating that concerns specific to wind power are short- rather than long-term challenges. In fact, wind power is expected to break new installation records in the EMEA market as developers commission 22GW of projects for 2022, an increase of 3GW from last year. Although slower to recover than the solar market, installation records and government confidence seen through ambitious policy targets demonstrate the long-term resilience of the sector.
Despite last year being unprecedented for energy markets throughout Europe, the industry enters 2022 following a record-breaking US$755 billion in global clean energy investment in 2021. Of this, US$366 billion was invested into renewable energy, a 6.5% increase from 2020 levels. Increasing investment demonstrates the support from public and private sectors. The increase in investment, easing of logistic challenges, and relative stability of PPA prices throughout market volatility will ease the concerns of corporates looking to enter a PPA. Likewise, the lowering of levelized cost of electricity for renewables will also continue to depress prices and increase the attractiveness of resilient PPAs offers.
Although renewable costs are increasing, in the long-term they can stabilize power prices and reduce dependence on fossil fuels. Connect with our team to learn more.