Key View:

• Elevated material prices will continue to increase capital costs for wind technologies.
• Paradoxically of the sector, the demand for wind turbines will remain high despite elevated costs owing to increasingly aggressive decarbonisation strategies
• Global wind CapEx will see upwards pressures amid the combined rising prices and rising capacity.
• Historically, costs have varied between regions and technologies with variations not necessarily uniform across the globe.

We expect that elevated material prices will continue to have an impact on the capital costs for wind technologies. The International Renewable Energy Agency (IRENA) has outlined that capital expenditure (CapEx) incurred by developers for offshore and onshore wind had fallen steadily between 2009-2019, by 18% and 28% respectively. This has been brought on due to increasing manufacturing scale, rising output, maturing of supply chains and practices and low material prices. Wind turbines are primarily built from five major components - fibreglass, copper, aluminium, steel and iron - which account for the majority of their material construction costs. Furthermore, offshore wind requires significantly more metal for the support structures used in deep water. In our previous wind pricing outlook, we outlined how commodity prices and supply chain risks were creating near term risks to wind technology prices and growth forecasts. While our commodities research team had expected these pressures to ease steadily, they now expect to see key cost drivers remain elevated over the near term over the 2020’s as outlined in the chart below.

The global steel sector will continue to be driven by China from both a production and consumption perspective, and will display solid growth in the next five years. However, Chinese steel production growth will slow down in the longer term. While the global steel price rally since Q420 had shown signs of peaking in Q321, the commodities team expect that prices will be boosted from general positive investor sentiment towards metals, actual reduction in global seaborne supply due to weaker Ukrainian steel production, and strong demand from the Mainland Chinese construction industry as domestic infrastructure projects gear up once again.

Furthermore, the team are revising up our copper price forecasts as persisting supply issues in Latin America combined with positive investor sentiment towards metals (as a result of the Russian invasion of Ukraine) have pushed prices to new historic highs. The global market deficit of copper will continue in 2022, driven by strong Chinese consumption amid a global economic recovery. The team believe that the market will remain largely undersupplied over the coming decade as demand will once again out-pace production growth, driven by China's power, infrastructure and autos sectors.

Paradoxically of the sector, the demand for wind turbines will remain high despite elevated costs owing to increasingly aggressive decarbonisation strategies. We expect to see demand for wind capacity increase over the near term as outlined in the chart below. This comes at a time of increasing energy import security concerns, elevated energy prices and an increasing will to decarbonise the power sector. We therefore expect that demand for wind turbines will increase as prices increase, creating a highly pressured environment. This will pose risks to smaller developers who are unable to bear the burden of higher costs, and we expect the risk of project delays to rise. That said, we also highlight that in the context of volatile and significantly elevated energy prices, developers and consumers of renewable power are willing to shoulder the higher capital costs.

Global wind CapEx will see upwards pressures amid the combined rising prices and rising capacity. Our Research highlights that global metal price pressures alone could add an approximated average USD73,000 per MW for the offshore sector and USD35,0000 per MW for onshore wind over the decade, with the peak being felt over the short term between 2022 and 2024. This, coupled with strong growth in wind capacity will cause the global wind capex spend to sharply increase. We expect this to increase the global wind capex spend for onshore and offshore technologies higher than the five year average of USD73.8bn and USD17.7bn.