Onshore and offshore wind had been on course to add 670 gigawatts (GWAC) of capacity between 2020 and now, with solar set for an additional 1,150 GWAC. Over the past three years, however, the low-carbon sector has been dominated by high inflation after the Covid-19 pandemic significantly disrupted supply chains and international turmoil disrupted trade routes. The solar PV sector saw module costs and prices skyrocket after China, the world’s largest polysilicon supplier, was forced to shut manufacturing facilities during the pandemic. The wind sector also struggled as key materials such as steel, copper and rare earth elements experienced significant price inflation as suppliers slowed production during the pandemic. Increased freight costs escalated things further, with rates up almost 20% on average between 2020 and 2022. Wind manufacturers, which lock in prices at the time of order commitment, struggled to pass increased costs onto customers and were forced to rethink pricing mechanisms.

By 2023, key material price inflation started to slow. Polysilicon facilities came back online and production ramped up, resulting in overcapacity, which led to an around 30% drop in module costs. Steel and aluminum prices also started falling in 2023, providing some relief for wind turbine manufacturers – however, some materials are set to rebound. Inverters will see some upside risk this year due to a shortage of key materials for computer chips. This may result in longer lead times and supply-demand imbalances that could push prices up. For wind, China’s monopoly on rare earths that are key for permanent magnets in nacelles, as well as bottlenecks in installation vessel supply, could bring upside risks. Copper is also forecast to remain at elevated price levels, which could drive up prices of array and export cables, both for solar and wind.

Although material price inflation is slowing somewhat, 2024 will likely bring new risks associated with freight, labor and financing. Since October 2023, Houthi attacks have disrupted shipping in the Red Sea and Suez Canal, increasing lead times by 15 days on average, as well as raising freight costs. The Russia-Ukraine war continues to disrupt gas prices, which has led to higher input costs and rising rates. Labor rates are also rising across the globe. The average age of skilled workers is typically higher than the average across the workforce, indicating a lack of new supply entering the sector. As this supply drops but demand increases – and as the energy transition requires significant numbers of skilled workers both for manufacturing and installation – rates are increasing and becoming a risk for developers.

Lastly, financing has become a particular burden for developers. The Bank of England has since 2022 steadily increased interest rates, currently at 5.25%. The European Central Bank increased its interest rate to 4.5% in September, while the US federal funds rate has been increasing since early 2022 and sits at 5.33%. Large-scale offshore wind projects typically finance upwards of 70% of their capital, turning heightened interest rates into a significant risk for economic viability. As offshore wind projects typically bid for contracts for difference (CfD) and commit to strike prices several years ahead of commercialisation, many projects are likely to suffer as the increased cost of capital and price inflation pushes costs past predetermined prices. Despite markets expecting rates to decrease between 100 and 150 basis points in the UK, US and Europe in 2024, interest rates will remain high and will prove a challenge for many developers.