While we would generally avoid quoting work from a company that we might consider a peripheral competitor, we are happy to do so when it backs up one of our central themes – in this case, inflation in renewable power costs. The quote is taken from the Wood Mackenzie report flagged article linked here and discusses a view on how challenges that renewable power installers have faced in 2021 will extend into 2022. The quote talks about shortages of renewable power equipment, and the obvious consequence will be higher prices for that equipment, especially as raw material prices for components remain high and possibly move higher. In our ESG and Climate report today, we talk about the need for some commonsense oversight such that impractical ESG investing targets do not limit the ability of producers of critical fuels and materials to operate.
“China’s economic growth at over 8% in 2021 fired up soaring power demand: China’s electricity consumption grew by 10%, which was the fastest annual growth for any major economy in the recorded history of the industry. This has led to a massive surge in wind and solar investment in China, and given that the country accounts for over 50% of wind turbine manufacturing capacity and almost 70% of all solar panel output, that will exacerbate the challenges facing already tight global supply chains for renewable energy in 2022. Those challenges will be added to by Beijing’s unwavering commitment to its zero Covid policy: efforts to keep out the Omicron variant are likely to mean even more stringent border controls and quarantine measures in 2022. The difficulties that renewable energy developers worldwide have faced this year look set to increase.”
Source: IEA – Coal 2021, December 2021
Note that this same report predicts a significant production uptick in Permian basin-based oil and gas production in 2022. We are seeing the rig count rise, slowly, in the region, but if oil and gas prices remain high in 2022, we would expect the rig count to increase again. With LNG supply constrained by available export capacity, the net effect of shortfalls in renewable power capacity additions as well as general power demand is likely to lead to the coal scenario shown in the exhibit above. Somewhat ironically following the focused COP26 meeting in November, coal demand and use in power generation is expected to rise in 2022 for the first time in 8 years.