According to the International Energy Agency, new capacity additions to photovoltaics, wind and other renewable energy generation worldwide increased to a record level in 2021. That number is set to grow further in 2022 as governments increasingly look to harness renewable energy for energy security and climate benefits.
A record 295 GW of new renewable power capacity will be installed globally in 2021, overcoming supply chain challenges, construction delays and rising raw material prices, according to the latest IEA Renewable Energy Market Update. The report expects new installed capacity globally to rise to 320 gigawatts this year—equivalent to nearly enough to meet Germany’s electricity needs or match all of the European Union’s natural gas-generated capacity. Photovoltaic power is expected to account for 60% of global renewable energy growth in 2022, followed by wind and hydropower.
In the EU, new installations of renewable power generation surged nearly 30% to 36 GW in 2021, surpassing the EU record of 35 GW set a decade ago. New renewable energy capacity coming online in 2022 and 2023 has the potential to significantly reduce the EU's reliance on Russian gas in the power sector. However, the actual contribution will depend on the success of concurrent energy efficiency measures to control energy demand in the region.
So far in 2022, renewables have grown much faster than initially expected, supported by strong policies in China, the European Union and Latin America. This more than compensated for lower-than-expected growth in the U.S., where the outlook for the renewable energy market has been clouded by uncertainty over new incentives and its protectionist actions against PV imports from China and Southeast Asia.
Many raw material prices and freight costs have been on an upward trend since early 2021. By March 2022, solar-grade polysilicon prices have more than quadrupled, steel prices have risen 50%, copper has risen 70%, aluminium has doubled and freight rates have risen nearly fivefold. For the first time in a decade, the continuous decline in the cost of photovoltaic power generation and wind power has reversed, as the price of wind turbines and photovoltaic modules has risen, and manufacturers have passed the increase in equipment costs downstream. Compared to 2020, the report expects the overall investment cost of new utility-scale PV and onshore wind to increase by 15% to 25% in 2022. Soaring freight costs have been the biggest driver of the overall price increase for onshore wind, and for PV, the impact of higher freight, polysilicon and metal prices has been more balanced.
High prices for oil, gas and coal have also led to higher production costs for renewable power generation materials, as both the industrial sector and the power generation sector use fossil fuels. While this price increase is significant in absolute terms, the increased cost of renewables has not cut their competitiveness, as fossil fuel and electricity prices have risen faster and more aggressively since the fourth quarter of 2021.
Globally, electricity prices are breaking records in many regions, especially those countries that use natural gas as the “pricing anchor” for the final time-of-use and daily electricity prices in wholesale electricity markets. This is especially prevalent in EU countries, where wholesale electricity prices in Germany, France, Italy and Spain have risen by an average of more than 6 times compared to the 2016-2020 average. Historically, long-term contract prices for PV and wind auctions have been higher than wholesale electricity prices in many large EU markets. However, even the most expensive onshore wind and utility-scale PV contracts signed in the past five years are only half the average wholesale electricity price in the EU today.
For newly contracted projects, long-term contracts offered by onshore wind and PV companies are well below the average wholesale electricity price of the past six months, despite the increased costs. For example, at the Spanish electricity market auction in December 2021, electricity prices for utility-scale photovoltaics and onshore wind increased by 15-25% to $37/MWh and $35/MWh, respectively. Today, these results are one-tenth of the average wholesale electricity price in Spain over the past 14 months.
In the large renewable energy market, the report lowered its forecast for the U.S. market due to uncertainty about new incentives for wind and photovoltaics. The authors argue that several policy proposals, including extending long-term tax incentives, have yet to be approved by the House and Senate, and protectionist PV trade policies targeting China and Southeast Asia have added challenges to the U.S. PV market, particularly reducing PV module accessibility .
The Russian-Ukrainian conflict has added urgency to the clean energy transition, and deploying more renewable energy is now a strategic priority for many countries, especially the European Union.
EU countries vary in their reliance on Russian gas. Among EU member states, Germany and Italy have the highest dependence on Russian gas in terms of absolute power generation. However, according to the report's market expectations for wind and photovoltaic power generation in 2023, Germany's potential to reduce its reliance on Gazprom through renewable energy is significantly higher than Italy's - unless the latter introduces new, stronger policies and accelerates the pace of implementation. France and the Netherlands have relatively low reliance on Russian gas, making it more potential for renewables to replace natural gas. In contrast, in Austria, Hungary and Greece, the role of renewable energy expansion in reducing reliance on Russian gas remains limited.
This year and next year, the world is expected to set a new record for new PV installations, with 200 gigawatts of new capacity added by 2023, the report said. The growth of photovoltaics in the Chinese and Indian markets is accelerating, thanks to strong policy support for large-scale projects that can achieve lower costs than fossil fuel alternatives. In the European Union, households and companies installing rooftop solar is expected to help consumers save money as electricity bills rise.
Global offshore wind capacity will double in 2022 compared to 2020, thanks to incentives introduced in several Chinese provinces and the expansion of the EU market. China is expected to overtake Europe by the end of 2022 to become the world's largest offshore wind market.