The surge in spot electricity prices in Europe has decreased the payback period for wind and solar projects from 11 years to under a year. Investments in renewables are picking up and this year they could beat the oil and gas sector for the first time.
The utility wind and solar investment narrative is changing as potential payback periods of under a year could start a race to develop renewable energy assets purely based on project economics, according to the research prepared by Rystad Energy.
Returns on solar PV and wind projects have so far been primarily relying on subsidies, for example feed-in tariffs, and the recent commodity and supply chain issues threatened to make things worse. However, Rystad Energy’s analysis demonstrates that current spot prices in Germany, France, Italy, and the United Kingdom would result in paybacks of 12 months or less.
In its research, Rystad Energy used a generic 250-megawatt (MW) solar PV project and modeled it in Germany. With a long-term electricity price of EUR 50 per MWh, the expected payback period is 11 years.
With a long-term electricity price of EUR 50 per MWh, the expected payback period is 11 years
A price of EUR 350 per MWh or above results in a payback period of only one year while a price of approximately EUR 180 per MWh – the European Commission’s proposed price threshold – cuts the payback to five to six years, according to the document.
At EUR 350 per MWh, the payback comes in at up to 12 months in France, Italy, and the UK. With relatively low operating costs, returns would remain robust even if the long-term power prices were to drop significantly.
However, while it can also take years to clear regulatory and other hurdles before construction can begin on a renewables project, if one believes high prices are here to stay, developers and financiers alike should be trying to get projects up and running as quickly as possible and with maximum exposure to wholesale prices – as once the upfront costs are recouped, returns will be very attractive even if prices drop back close to historical levels, said Rystad.
Countries strive to source secure and affordable energy
The results also show that capital investments in renewables are set to reach USD 494 billion in 2022, outstripping upstream oil and gas, at USD 446 billion.
More capital is being pumped for the first time into renewables than in upstream oil and gas including brownfield and greenfield but excluding exploration, said Rystad.
According to Michael Sarich, senior vice president at Rystad Energy, capital investments in renewables are set to exceed oil and gas for the first time this year as countries scramble to source secure and affordable energy.
Investments into renewables are likely to increase further moving forward as renewable project payback times shorten to less than a year in some cases, said Sarich.