Renewable costs: what goes up must go down?

In this new quarterly publication, the Capital Economics’ Climate and Commodities teams will track and analyse developments in the transition to a greener global economy.

The sharp increases in the lifetime costs of wind and solar projects since 2021 demonstrate that the days of ever-cheaper renewables are firmly behind us. Higher costs for renewables are partly a function of higher interest rates – which disproportionately affect renewables over fossil fuels owing to the capital cost-heavy nature of green projects – and the rise in prices for raw materials, mainly metals.

Crucially, with nominal interest rates likely to top out in most developed economies this year, and higher commodity prices helping to incentivise supply, many of these factors will cure themselves, albeit with a lag. More generally, the greater emphasis on energy security in the wake of the war in Ukraine will lead governments to continue to subsidise the cost of renewables installations in many cases.

Over the longer term, much of the focus tends to be on the potential for supply pinch-points and geopolitical factors to push up prices of renewables, not least given the concentration of green technology supply chains in China. However, as renewables rollouts continue to gain momentum, demand will be an increasing source of inflation in its own right. The upshot is that upward blips in prices will become the norm.