Power And Renewables Key Themes For 2022

Fitch Solutions / Power / Global / Fri 03 Dec, 2021

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Key View

  • We expect to see an increase in the development of low-carbon hydrogen power generation technologies and projects over 2022.
  • Corporate PPAs will become more prevalent over 2022 as wholesale electricity consumers seek to mitigate the risk of spot price volatility brought on by energy price fluctuations.
  • Wind and solar power project prices will remain elevated over 2022, resulting from continued disruptions throughout the solar and wind power value chains which include an ongoing shortage of raw materials and elevated shipping, module and turbine prices.
  • SMR developments will increase with the growing focus to decarbonise power sectors globally, as it offers a carbon-free, safe and lower-cost baseload alternative to large scale nuclear to complement the growth in renewables.
Theme Description Metrics Winners Losers

Low Carbon Hydrogen Power Generation

In the wake of the energy price crisis and COP26, the need for flexible low-carbon power sources has become increasingly more pertinent. With the rapid increase in hydrogen production systems coming online, we expect to see a rise of hydrogen power generation projects both in gas-based technology as well as fuel cell systems.

Power generation project announcements Non-hydro renewables developers and markets looking at an energy transition, electrolyser manufacturers, gas-handling infrastructure and logistics industries

Long term natural gas consumption and suppliers

Non-Hydro Renewables Technology Prices To Remain Elevated Over Near-Term Amid Supply Chain Disruptions And Material Shortages

We expect wind and solar power project prices will continue to rise over the coming months and remain elevated over 2022. This is due to continued disruptions throughout the solar and wind power value chains, elevated shipping, module and turbine prices, and an ongoing shortage of raw materials. While prices will begin to recover towards the end of 2022, elevated near term prices will create risks for wind and solar project cancellations and delays.

Wind and solar project delays or cancellations & wind and solar power project component prices, including modules and turbines. Non-renewable electricity generators  Renewables developers, solar and wind power equipment manufacturers, renewables project off-takers

Renewables PPA Uptake To Rise In Response To Energy Price Volatility

Energy Price volatility will drive an uptake in PPAs through 2022, setting long-term prices and allowing wholesale electricity consumers to more accurately predict future power expenditure. PPA announcements and/or share of total electricity supply among corporates Renewable electricity generators, PPA offtakers. Wholesale electricity generators, non-renewable electricity generators
Small Modular Reactor Developments To Increase  The development of SMRs will increase as a carbon-free method to increase baseload that can complement renewables in a safer, more affordable way than that of traditional large-scale nuclear power. Project announcements. Markets with need for baseload electricity supply to complement renewables, SMR developers. Fossil-fuel power plant operators
Source: Fitch Solutions

Hydrogen Power Generation Projects To Accelerate

We expect to see an increase in the development of low carbon hydrogen power generation technologies and projects over 2022, as more markets and developers look to alternative sources of flexible power supply.

In the wake of the energy price crisis and COP26, the need for such power sources has become increasingly more pertinent. We foresee sustained growth in hydrogen production capacity through the coming decade, and new hydrogen-fuelled electricity generation projects coming into the pipeline over 2022. We expect this to take on two major forms:

  • Combustible Fuels: We expect that gas generation operators will increasingly look towards the adoption of new hybrid technologies to enable the adoption of a blend of gases, including hydrogen and hydrogen-based ammonia, while still being able to utilise existing gas assets and infrastructure. Preparations for the use of low-carbon gases in the power sector will become more prevalent, as gas power operators look to diversify their portfolios.
  • Fuel Cell Plant: Over Q421 it was announced that a 78MW fuel cell power plant would be developed in South Korea. The technology operates like a battery and will use hydrogen fuel cells to convert hydrogen into electricity.

Both of these systems can operate at large scale, but would require a large volume of hydrogen gas. However, we expect hydrogen supply to be delayed as development of the sector ramps up to commercial levels, as highlighted in the graphs below. Therefore, we expect these initial power systems to operate at smaller scale, providing grid balancing and short-term power supply reducing intermittency of renewables over 2022.

Hydrogen Production Projects Slated To Come Online Middle Of The Decade

Regional - Electrolyser Project Capacity And Estimated Completion Dates By Capacity, MW (LHS) And Count (RHS)

Source: Fitch Solutions Key Projects Database. Note: LATAM = Latin America, NAWE = North America/Western Europe, MENA = Middle East/North Africa, CEE = Central and Eastern Europe, SSA = Sub Saharan Africa.

Non-Hydro Renewables Technology Prices To Remain Elevated Over Near-Term Amid Supply Chain Disruptions And Material Shortages

Over 2021, we have seen rising prices throughout the wind and solar power value chains as a result of a shortage of raw materials, elevated shipping costs and delays, and the disruption of production for wind and solar power components, including solar modules and wind turbines. We expect wind and solar power project costs will continue to rise over the coming months and remain elevated over 2022, with prices only set to begin recovering once material shortages and production capacities recover over the coming quarters. As such, we anticipate a handful of projects will be cancelled or delayed by developers beyond their initial 2022 construction timeline in order to reduce costs. This creates downside risks to our global wind and solar capacity growth and generation forecasts for the coming year.

Regarding the solar power sector, the price of polysilicon, a highly-conductive material required for solar PV technology such as wafers and modules, has more than tripled over 2021 from USD10-12 per kg in Q121 to around USD40 per kg in Q421. The current price increase is primarily the result of elevated power prices in China leading to decreased production of polysilicon as well as a shortage of silicon. Given that China accounts for the production of 64% of silicon materials, 80% of solar PV modules, and nearly 100% of solar ingots and wafers, the resulting solar supply crunch from the materials shortages and elevated energy prices has yielded increased prices throughout the solar value chain both within China and globally. We do not anticipate that costs will decline significantly before mid-2022 given that additional polysilicon production capacity is set to start coming online over H122. Continued elevated shipping costs and prices for copper, aluminium, and steel will also contribute to high prices over 2022.

For the wind power sector, wind turbines are comprised primarily of five major components, including copper, aluminium, steel, fibreglass and iron, which account for 98% of their total mass. Prices for major wind turbine metals have risen by an average of 45% over 2021 as a result of supply shortages being exacerbated by factors such as the Covid-19 pandemic, elevated shipping prices, rising protectionism, and the energy price crisis. We expect that a rapid increase in demand for growth for wind power, coupled with the ongoing supply crunch of components and materials, will also add significant price pressure to developers over the coming year - presenting downside risks to our forecasts. 

PPA Uptake To Rise In Response To Energy Price Volatility

We expect to see an increase in PPAs signed over 2022 as wholesale electricity consumers seek to mitigate the risk of spot price volatility brought on by energy commodity price fluctuations. An unprecedented spike in natural gas prices over 2021 plays into this view, with the EU region’s average spot price rising above EUR135/MWh and some markets exceeding EUR210/MWh in October 2021. The impacts of energy price volatility were felt across the world, most prominently in markets with wholesale electricity markets and high levels of natural gas in their respective power mixes. In response to this spot price volatility, we expect large corporate consumers to seek out the pricing stability offered by PPAs and self-generation. This trend is highlighted by the RE100 Climate Group, a collection of 342 companies who have committed to reach 100% renewable electricity by 2050. According to its 2020 annual report, 26% of all renewable electricity sourced by its members came from PPAs, up from 19% in 2019. World Bank energy price data – which is a weighted average of coal, oil and natural gas prices – shows that global energy prices have more than doubled between end-October 2020 and 2021, up from USD51.33 to USD122.92. With global energy prices set for further fluctuation over the coming years, we expect high-volume commercial and industrial electricity consumers to increase their uptake of corporate PPAs and self-generation through 2022.

Energy Price Volutility To Drive PPA Uptake

Global - Monthly Average Energy Prices

Note: energy price made up of brent crude oil price /bbl (84.57%), natural gas price /mn BTU (10.77%) and thermal coal price /tonne (4.66%). Source: World Bank, Bloomberg

SMR Projects To Increase To Aid Global Shift Towards Decarbonisation

We expect that there will be an increase in project announcements for the development of small modular reactors (SMR) in 2022. This follows as markets across the globe are increasingly looking to decarbonise their power sectors and move away from thermal power generation. We also expect that energy-intensive industries such as mining and other industrial operations will look towards using SMR technology to help them mitigate variations in power prices and supply, particularly in the aforementioned shifts in global gas and coal prices. While many markets are boosting their targets for non-hydroelectric renewables capacity, we expect that some will also use SMRs as baseload capacity alongside intermittent power sources such as solar and wind. Further underlining our view is the fact that the development of SMRs bypasses the concerns regarding traditional nuclear power plants, as they are much safer, more efficient in terms of space and can be developed at much lower costs. The scalability of SMRs also ensures that extra power capacity can be added if required. An SMR developed by American firm, NuScale, can also alter its production from 20% to 100% to complement the output of non-hydropower renewables and therefore ensure continued security of electricity supply.

Recent examples of such planned developments include:

  • Poland: Copper manufacturer KGHM announcing plans in 2021 to procure a 77MW NuScale reactor to shield itself against price volatility. Energy firm ZE PAK has also announced a joint venture to develop six 300MW reactors.
  • USA: The Eielson Air Force Base in Alaska is planned to have its own 5MW SMR by 2027 to boost its energy security and reduce its reliance on coal power.

Overall, we highlight that the US, Russia, China and the UK will be the leaders globally in the development of new SMR technology. We expect that the development of these SMRs by these aforementioned markets will boost interest from other markets as well once they prove to be viable.

Large-Scale Nuclear Power Capacity Growth Mostly In Asia and CEE Region

Global – Net Nuclear Capacity Addition By Region, MW

e/f = Fitch Solutions estimate/forecast. Source: EIA, World Bank, IRENA, Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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