Investments in renewables have surpassed oil and gas for the first time, according to research by Rystad Energy, with capital investment in renewables reaching $494 billion in 2022, compared to $446 billion in oil and gas this year.
The state of capital investment in renewable energy
A statement from Rystad Energy said that high spot electricity prices, particularly in Europe, have changed the idea of investing in wind and solar energy, where potential payback periods of less than one year could start a race to develop renewable assets based solely on project economics.
Capital investments in renewables are set to surpass oil and gas for the first time this year as countries scramble for safe and affordable energy. Michael Sarish, Senior Vice President of Rystad Energy, explained that investments in renewables are likely to increase even further as the payback period for renewables projects is shortened to less than a year in some cases.
He added that so far, returns from renewable energy projects (such as solar PV and wind) have been unsurprising and rely primarily on subsidies to get projects across the line. Moreover, although cost pressures due to recent commodity and supply chain issues should have made matters worse (due to reversing years of rapid unit cost improvements in the sector), the analysis from Rystad Energy found that current spot prices in Germany, France, Italy and The UK will all result in returns for 12 months or less.
“To understand the impact of higher prices on the economics of the project, a public 250 MW solar PV asset in Germany is modeled in the graph below. Assuming a long-term electricity price of €50/MWh ($49/MWh), the expected tax return After tax it is around 6% with a payback period of 11 years,” the company said in the report.
Prices were then assumed to rise in the starting year, falling uniformly in years 2 and 3 until returning to the long-term assumption. As shown below, a price of €350/MWh or more results in a payback period of only one year while a rate of around €180 – the minimum rate proposed by the European Commission – halves the yield to 5-6 years. The data shown is for Germany, but 350€/MWh will also result in a 12-month payback in France, Italy and the UK.”
The analysis said that given the August spot monthly average prices in the mentioned countries were all above €400/MWh, the economics of utility-scale renewables appear compelling.
The relatively low operating costs of renewables strengthen their case as returns will remain strong even if long-term energy prices fall dramatically.
“Historically, projects have required certainty of cash flows to secure financing, often by feeding into tariffs and/or power purchase agreements (PPAs). Although these mechanisms protect the project from low price risk, they mean limited exposure or Lack of exposure to high spot market prices. In fact, most European solar and wind projects do not benefit from the current high prices for this reason.”
“However, while it may take years to remove regulatory and other hurdles before construction can begin on a renewable energy project, if one believes that high prices are here to stay, developers and financiers alike should try to get the projects up and running as quickly as possible. With maximum exposure to wholesale prices – once the initial costs are recovered, the returns will be very attractive even if prices fall back near historical levels.”
Additionally, our research and analysis shows that more capital is being pumped into renewables from upstream oil and gas (including greenfields and greenfields but excluding exploration) for the first time. If higher prices are really here to stay, and developers bring new capabilities online quickly, disguised economies may accelerate the growth of the renewable energy sector in Europe.”
Originally published at San Jose News Bulletin
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