Supply chain concerns, higher steel prices seen increasing US PPA prices

North American renewable energy power purchase agreement prices continued to increase in the second quarter, LevelTen Energy said July 19, citing solar power industry supply chain hiccups and steel price increases pushing up wind power project costs.

P25 Index prices for solar PPA offers rose 0.3% in the second quarter, while P25 wind prices increased by 8.5%, and the technology-blended Index rose by 4.3%, the renewable energy transaction infrastructure provider said in its latest PPA Price Index report.

The P25 price — the price at which 25% of the offers submitted were lower than and 75% were higher — is used to show the most competitive 25th percentile offer prices.

Year over year, the technology blended P25 Index of wind and solar PPA offer prices rose 14.4%, or $4.07/MWh, the report said.

"Much like we're seeing supply constraints in other areas of the economy, the most desirable [renewable energy] projects are going fast," Rob Collier, vice president of developer services at LevelTen, said in the report.

"The key takeaway for organizations with fast-approaching emissions reductions targets is to act now to capture high-value PPAs in the market," Collier said, adding that "as demand from public and private entities escalates and barriers to interconnection and permitting remain, delaying procurement will only result in less choice in the market."

Rising project costs

The US solar power industry, which was hit with project delays related to the coronavirus pandemic, hit another potential snag June 24 when the Biden administration took enforcement action on solar products from China's Xinjiang region due to concerns about the use of forced labor. The US has accused China of genocide against Uyghurs and other Muslim minorities in Xinjiang.

In response to the reports, many solar power project developers and module suppliers began shifting their supply chains away from certain producers, LevelTen said.

With solar module costs already on the rise, increasing 18% this year, this issue could push prices higher, as Xinjian produces 45% of the world's polysilicon supply, according to the report.

According to a Q2 survey of developers with solar projects on LevelTen's Energy Marketplace, 73% of the respondents said they are increasing PPA prices because of the rising cost of polysilicon and solar modules.

With increasing supply chain constraints and PV module price increases, a rise in solar PPA prices was expected for Q2, LevelTen said. And although the P25 Blended Solar Index only increased 0.3% during Q2, the rise was more significant in some of the regional power markets.

The solar P25 Indices ranged from $27.20/MWh in the Electric Reliability Council of Texas market to $35.90/MWh in PJM Interconnection.

Only 12% of developers said they are delaying projects, no survey respondents said they are planning fewer projects and almost one-third plan to lower their own rate of return, "likely in an effort to stay price-competitive among other renewable projects in the market," LevelTen said.

Southwest Power Pool solar PPA prices continued increasing for the sixth consecutive quarter, rising by 1.7% during Q2 2021, and year over year, P25 solar prices in SPP have risen by 15.4%, the report said.

P25 Index prices for wind projects ranged from $20.90/MWh in ERCOT to $51.60/MWh in the California Independent System Operator market.

"CAISO's high wind PPA prices are primarily driven by project siting and permitting challenges, a lower wind resource than the wind belt in SPP, MISO, and ERCOT, and to a lesser extent, solar curtailments," Collier said in an email.

"Many of the best wind sites in California have already been built out because the state was such an early leader in onshore wind production and California also has stringent permitting regulations that further restrict where wind projects can be developed in the state," he said.

Midcontinent Independent System Operator P25 Index wind prices jumped by 19.4% during Q2 2021 to reach $33.90/MWh.

North American wind PPA offer prices increased 19.1% year over year in Q2, the report said, which could be related to the phase-out of production tax credits and recent steel cost increases.

Wind turbine-makers Vestas Wind Systems and Nordex SE said in May that higher steel prices will translate into more expensive machines in the medium term, with limited willingness from the manufacturers to tweak margin requirements to accommodate the higher cost.

Steel prices increased by more than 70% in some global markets earlier this year, Vestas CEO Henrik Andersen said during a Q1 earnings call.

The increase was driven in part by an increased infrastructure investment drive from countries spending their way to recovery after the pandemic, which has been boosting commodity prices for iron ore, the material used to make steel.