Rystad Energy expects that previously forecast growth in newly commissioned solar and wind energy projects will wiped out for 2020, and cut by a further 10 percent next year as the value of the US dollar surges and currencies fall across the globe.
Renewable energy projects in Australia, Brazil, Mexico and South Africa will be particularly impacted. Projects in the procurement phase could face capital cost increases of up to 36 percent due to the rapid depreciation of local currencies in these countries.
Before the Covid-19 pandemic, Rystad Energy expected 140 GW of solar PV additions and 75 GW of wind capacity additions in 2020 – a year-on-year increase of 15 percent and 6 percent, respectively.
However, government restrictions on movement will impact construction time frames, bringing 2020’s commissioned projects on par with 2019.
The effect of the virus will be felt even more from 2021. Rystad expects to see a reduced amount of financial investment decisions due to capital expenditure reductions, and the strengthening of the US dollar, which will reduce commissioned projects by at least 20 GW.
“The foreign exchange impact will decimate the 2021 outlook for solar installations and the outlook from 2022 and beyond for wind installations, as orders for new equipment will halt from currency-hit emerging countries, which would otherwise account for much of this growth,” said Rystad Energy’s product manager for renewables, Gero Farruggio.
Companies typically procure key components in US dollars while recovering revenues in local currency. Given this, projected returns on developments under procurement are already plummeting as unfavourable exchange rates result in soaring equipment prices. Utility wind is most at risk, as the percentage of wind development capital expenditure procured in US dollars is 25 percent higher than that of a utility solar PV.
Tilt to green energy
Nevertheless, a recent report from the European Bank for Reconstruction and Development (EBRD) said efforts to counteract the pandemic create an opportunity to “tilt to green” and focus investments in environmentally friendly projects.
Despite calls from some countries in Eastern Europe to ignore climate concerns and pour stimulus money into existing high-carbon businesses, the EBRD report urges governments not to be seduced into supporting fossil fuels.
After the 2008-9 financial crisis, global greenhouse gas (GHG) emissions initially dropped, as they have in recent weeks, as economic activity stalled. GHG emissions rebounded in 2010 and have been rising steadily since, partly because the chance was missed to use the vast amounts of public money to set the world on a green path, said EBRD.
Failure to switch to green alternatives following this crisis would be a lost opportunity, said EBRD, urging governments to work together to address the climate emergency more effectively.
In return for public money, EBRD recommends that firms should commit to reduce their environmental footprint. More broadly, governments should put climate action and resilience at the core of economic stimulus packages and prioritise support towards green firms.
The article was first published in the April 14 edition of Capital Projects and Contracts. to learn more about a subscription, click here.