October 05, 2022 | S&P Global Commodity Insights | 2 minute read

During a recent media roundtable, Bracewell’s Andrej Kormuth, Ro Lazarovitch and Tom Swarbrick described for S&P Global Commodity Insights how inflation and currency effects are squeezing Europe’s wind and solar developers as they strive to meet challenging project deadlines.

“Capital costs are significantly higher this year,” said Kormuth. “EPC contractors are reporting steel and copper costs up 55%, aluminium up 50%, silicon for solar PV modules up 270% and logistics up 700%.”

With internal rates of return falling below 10%, renewable assets were getting harder to deliver across a number of jurisdictions, including the Middle East, Kormuth said. “Developers that were jubilant [at winning project tenders] a year ago are now finding it very difficult to execute,” he added, with some even weighing up the possibility of walking away from deals.

Currency fluctuations were also an important factor in non-US dollar jurisdictions, Kormuth said. “If you are a bank lending in euros you have a problem.”

While debt could be refinanced within a year or two of operation start, capital costs were crystalized “for up to three decades, so even if the cost of commodities are projected to come down, deals [done under current conditions] are invariably more expensive,” said Kormuth.

Higher wholesale power prices helped offset a number of these effects, added Ro Lazarovitch. “Renewable projects are banked over a certain period – there is the possibility to extend that period to account for the rise in costs without having to change the [awarded] tariff.”

Higher prices also improved the outlook for battery storage investments, said Swarbrick. Interest had spread from the UK, focus for over a third of the overall European market, to Germany, Greece and southern Europe, he added, with the global shortage of lithium ion the only caveat to future growth.

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