The overall capacity boom in 2021 – another record setting year – has been driven by the surge in solar PV, both utility scale and residential. Emerging sectors such as offshore wind, batteries and other forms of energy storage were also a big part of the year-on-year growth. For instance, utility batteries installed capacity tripled from 2020 levels, while offshore wind doubled year-on-year installations.
By year-end, 2021 will be remembered as the period in which multiple, decade-long trends in the global renewable energy sector were overturned. This year, the number of onshore wind installations tracked lower than in 2020 with costs for solar PV and wind increasing significantly due to rising commodities prices, leading to higher power purchase agreement (PPA) prices. However, while the renewable energy industry is facing some of its most significant challenges yet over the short term, the future has never looked brighter with new and aggressive commitments from governments and companies set to spur major growth. In this commentary, we look back at a crucial year for the renewable energy sector globally.
Who’s more bullish on global solar build to 2026: Rystad Energy or the IEA?
Despite rising commodity, energy and shipping prices increasing the cost of producing and transporting solar PV modules worldwide, the International Energy Agency (IEA) still has a bullish outlook on the sector’s global growth potential between now and 2026. According to the IEA’s recently published report Renewables 2021, the agency sees a 15% combined annual growth rate (CAGR) for solar PV globally under its main case, and 18% under its accelerated case between 2021 and 2026. This compares to a CAGR of 14% under Rystad Energy’s 1.8 degrees Celsius temperature scenario and 25% under our 1.6°C scenario over the same period.
According to the IEA report, solar PV is projected to grow strongly in 2021 and 2022 but growth will then slow to a steadier pace up to 2026. By end-2021, the IEA expects between 894 gigawatts (GW) and 915 GW of global solar PV to be installed across all types (residential, commercial and industry and utility-scale) under its mean and accelerated cases, respectively. Between 2022 and 2026, the IEA sees between 933 GW and 1,151 GW of new capacity added under its mean and accelerated cases respectively. This compares to Rystad Energy’s assessment that 142 GW would need to be installed in 2021 and some 781 GW between 2022 and 2026 to limit global warming to 1.8°C. By contrast, over 155 GW would need to be installed in 2021 and some 1,814 GW between 2022 and 2026 to limit global warming to 1.6°C (Figures 1 and 2).
The analysis indicates that Rystad Energy is more bearish than the IEA when it comes to global growth in solar PV in the coming few years, but more bullish when the outlook is expanded out to 2026. Under the IEA’s Net Zero Emissions by 2050 Scenario (NZE) which is consistent with limiting the global temperature rise to 1.5°C, average annual additions of solar PV would need to be almost double the IEA’s main case forecast over the next five years – which would require policy and regulatory support to scale up extensively.
Can you pay for it? US solar PV projects at risk as PPAs set to rise
Solar PV developers in the US should exercise caution – at least in the short-term – as power purchase agreements (PPAs) are set to rise to cover ongoing supply chain constraints and higher development costs. PPAs provide renewable energy projects with stable revenue and hedge developers against the volatility of wholesale electricity markets. In the US, PPAs are the primary driver behind a project securing funding, thus no need to downplay their importance for industry players looking to develop projects or seeking investments. And while PPA prices have been declining for years, this year tipped the trend. Solar PV PPAs in the US have increased by nearly 30% in 2021 from previous year’s levels and are expected to see a further boost as we move into 2022. Higher PPAs mean that those developers of under-construction solar PV projects that have already agreed a price for the energy they need to supply to their customer could potentially be out of pocket once they switch the lights on as the deal in place will no longer cover their costs. As much as 30% of solar PPAs are at risk of being canceled because of rising costs of raw materials and global shipping delays.
Since 2012, PPA prices for solar projects have fallen nearly 75% from a peak of about $92 per megawatt-hour (MWh) to approximately $23/MWh in 2020. In 2021, Rystad Energy expected the national average price of a PPA to be approximately $30/MWh, a 30% jump from the previous year. Wind projects, meanwhile, have been relatively stable over the same period, averaging between $28-$33/MWh. This year, wind PPAs settled around $23/MWh and will remain in the low $20s for the next few years.