Renewable energy projects expecting to achieve financial close or break ground globally will not avoid taking a hit from Covid-19’s effect on the economy. A Rystad Energy analysis shows that forecast growth in newly commissioned solar and wind projects will now be wiped out for 2020 and cut by a further 10% next year as the US dollar surges and currencies fall across the globe.
We expect these movements in the foreign exchange market to cause companies to pause contracting key components, which are typically procured in US dollars. Renewable projects in Australia, Brazil, Mexico and South Africa will be especially impacted, as projects in the procurement phase could face capital cost increases of up to 36% due to the rapid depreciation of local currencies in these countries.
Before the novel coronavirus epidemic, Rystad Energy expected 140 gigawatts (GW) of global solar PV additions and 75 GW of wind capacity additions in 2020, a year-on-year increase of 15% and 6% respectively. This eradication of this growth is due to government restrictions on movement that will impact construction timeframes, bringing this year’s commissioned projects on par with 2019.
In 2019, about 126 GW of solar and 71 GW of wind capacity were commissioned. The effect of the virus will be felt even more from 2021, when a reduced amount of financial investment decisions due to capital expenditure reductions, and the strengthening of the US dollar, will reduce commissioned projects by at least 20 GW, or 10% versus this year.
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“The foreign exchange impact will decimate the 2021 outlook for solar installations and the outlook from 2022 and beyond for wind installations, as orders for new equipment will halt from currency-hit emerging countries, which would otherwise account for much of this growth,“ says Rystad Energy’s Product Manager for Renewables Gero Farruggio.
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The full extent of the impact of Covid-19 on the renewable energy market is just beginning to reveal itself. Initial reactions focused on possible mass production shutdowns and supply chain bottlenecks in China. The lion’s share of renewable asset components is sourced from China, and projects under construction or in the procurement phase appeared particularly exposed when Covid-19 first struck.
Yet thus far, it seems that global shipments have more-or-less arrived as expected, as Chinese panel and turbine suppliers returned to work relatively quickly, and production stabilized; panel prices have ultimately remained steady in recent weeks.
Companies typically procure key project components in US dollars despite reaping revenue in local currency. Given this, projected returns on developments under procurement are already plummeting as unfavorable exchange rates result in soaring equipment prices. Utility wind is most at risk, as the percentage of wind development capex procured in US dollars is 25% higher than that of a utility solar PV.
Which countries with renewable ambitions will feel the squeeze?
“We expect macro-economic knock on effects will reach into 2021 and beyond, with companies pausing on procuring solar PV projects which would have been commissioned in and after 2021. Countries most impacted in this sector will be from emerging markets in Asia, the Middle East, India and Latin America, where the bulk of solar growth had previously been expected,“ says Farruggio.
China and the US will be least impacted by exchange fluctuations, and we expect the number of solar installations in these countries to remain fairly stable. Nevertheless, they will undoubtably feel some slowdown affect, casting doubt on China’s ability to increase its solar capacity by 40 GW as initially forecasted.
In Europe, over 20 GW of solar capacity was expected pre-crisis. However, all of the Euro’s gains on the US dollar from the beginning of the year have now been lost. Foreign exchange issues for projects in Europe are less of an immediate concern but could take the forefront if the Euro falls further. Strict travel restrictions implemented across the continent have now halted projects under construction.
In Latin America, Mexico and Brazil have the greatest capacity of utility solar PV projects under construction. However, both countries are experiencing steep currency declines versus the US dollar and procurement is expected to come to a complete halt on most – if not all – projects yet to be committed. Projects hoping to be commissioned in 2021 will be significantly slowed or even indefinitely delayed.
Procurement in India is not expected to be impacted as much as in other regions facing depreciation. Previously Rystad Energy estimated the country would see 5.8 GW of utility solar PV projects starting up in 2020, increasing by 9.9 GW in 2021. We also expected India to see 1.7 GW of wind farms start up in 2020 and 5.1 GW in 2021. The country is more self-sufficient in terms of turbine production than for solar PV panels, and therefore we feel India’s expected wind additions are more likely to reach the forecasted levels.
In Australia, whose dollar hit a 17-year low, developers already appear to have cooled on orders that were otherwise imminent. Much of the 2 GW utility PV solar expected to start in 2020 in the country is already built and in the commissioning phase and work will continue on these projects. However, the key determiner of success will be the process of grid connection.
On the other hand, projects seeking financial close and currently procuring will surely stop, reducing the likelihood that the country will achieve its goal of 1.8 GW of utility solar PV capacity coming online in 2021. Given the longer lead times for wind energy, the 4.5 GW of wind turbine capacity that is committed is still expected to come online between 2020 and 2021.
The 1.5 GW worth of approved projects scheduled for 2022 are at risk of delay, however, and we feel it is now unlikely that Australia will see a standalone wind farm reaching financial close in 2020.
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Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry. Our products and services cover energy fundamentals and the global and regional upstream, oilfield services and renewable energy industries, tailored to analysts, managers and executives alike. Rystad Energy’s headquarters are located in Oslo, Norway with offices in London, New York, Houston, Aberdeen, Stavanger, Moscow, Rio de Janeiro, Singapore, Bangalore, Tokyo, Sydney and Dubai.