The development of renewable energies is strongly affected by the inflation of input costs, to which is added a higher cost of financing. A hiatus could follow next year after new record capacities are added in 2021 and again in 2022.
Last week, the International Energy Agency (IEA) indicated that, under the influence of the increase in transport costs and the explosion in the prices of raw materials, the bill for investments entering into the construction of new renewable energy production jumped 15 to 25% between 2020 and 2022. Vladimir Putin’s war against Ukraine amplified an upward movement that was already taking hold under the influence of the energy transition and which was eroding a decade of cost relief in this sector before the pandemic.
The price of cobalt has more than doubled in one year. That of nickel jumped 94% from January 2021 to March 2022, 76% for aluminum, 34% for copper… 738% for lithium. For lithium-ion batteries in electric cars, the share of cathode alloys has increased from 3% of the total cost in 2015 to more than 20% due to increased excess demand, the IEA illustrated, in a text from Agence France-Presse (AFP).
Sanctions in response to Ukraine’s unprovoked attack will add to their effect. Manulife Investment Management wrote in February that Russia is one of the world’s largest producers of critical metals. It is the largest exporter of palladium (20.7% of total volume) and ranks second behind Chile in refined copper (7.1%). The country also holds the third position for nickel (11.2%) and aluminum (9%).
As for transport costs, there is no easing on the horizon. In addition to the impact on oil prices of growing demand in the face of tight supply, there is a rather felt constraint in refining capacity. Russia is the second net exporter of oil, but also of petroleum products. Before the war, it directed 75% of its exports of refined products to Europe and the United States, recalled Monday the Financial Post in a blog. It stems from the sanctions of strong pressure on refining capacities outside Russia already under pressure, propelling upwards the prices of gasoline and diesel already stratospheric.
We see the influence of refining in the pump price data collected by Kalibrate. For regular gasoline in Montreal, as of June 2, the wholesale price showed the strongest increase over one year, of 84%, against 63% for the price of crude. The refining margin accounted for 25% of the price at the pump, compared to 16% in June 2021. This is an increase of 56%, while the weight of crude remained ultimately unchanged.
Still competitive
The IEA is pleased, however, that renewable energy remains competitive with other energies. It is even more so, and by far, if we add the negative externalities of fossil fuels to the game of comparisons. Crude oil, which is now the cheapest fossil fuel per unit of energy according to the World Bank, has seen its price quadruple since the April 2020 low, and up 63% year on year.
And the IEA said in May to expect new records this year in terms of new production capacity. Added to substantive energy security and climate change concerns is the conflict in Ukraine, which is forcing European Union countries to shed their dependence on Russian oil and gas, in a more broad overhaul of their energy mix. The agency predicts that 320 gigawatts of renewable energy will come online this year, equivalent to Germany’s total annual demand, surpassing its record of 295 gigawatts, set last year under the action of commitments in solar energy from China, the European Union and Latin America. This was a 6% increase from 2020, which must be seen in the context of supply chain distortions.
“The impact of the COVID-19 pandemic and Russia’s invasion of Ukraine have pushed inflation to multi-decade highs and led to soaring energy prices in some advanced economies, leaving policy makers scramble to find cheaper and reliable energy,” reads an AFP text.
Growth is expected to plateau next year, however, as advances in solar power are offset by a 40% decline in hydropower expansion and stagnant growth in wind power generation, the IEA predicts.
But as for the Earth’s biocapacity to meet this exponentially growing demand, the IEA invites manufacturers to innovate in order to greatly reduce their metal needs.