The linked Siemens Gamesa news could not have been a more clear example of one of our key research themes of the last year – backlog up, suggesting strong demand for new wind power capacity – deliveries and profits down because of material shortages – price inflation and logistic issues. While the company is getting squeezed because of higher costs on contracts that have limited opportunity to pass through the cost, at the same time slide 8 of the earnings release deck shows that selling prices rose in fiscal 1Q 2022. This breaks a declining trend in pricing and one of the core assumptions behind many energy transition plans – that renewable power prices can keep falling. Onshore wind orders are falling, but offshore orders are rising – and these come with higher costs and the need for more materials as we showed in a chart in yesterday’s daily. The added costs burden of more offshore wind projects may only serve to tighten markets for materials further, leading to further increases in installed costs.
Source: Bloomberg, C-MACC Analysis, January 2022
The wind and solar industries are in a bit of a bind here as their high growth backdrop is predicated on costs falling, rather than rising. This will likely lead to further project delays, but also some price inflation, as we discussed at length in our ESG and Climate report this week. In that report, we also touched on the follow-on effects, which is the likely shortfall in renewable capacity installations and the implication that will have for other sources of power, especially natural gas and coal – which are the primary swing fuels. We believe that the only way to achieve many of the country and regional net-zero goals will be to bring down assumptions around the growth of renewable power and support more natural gas use with CCS, whether that is natural gas-based power with carbon capture or natural gas to hydrogen with carbon capture.
Source: IEA, Natural Gas Intel, January 2022