Electricity generation costs from new utility-scale onshore wind and solar PV plants are expected to decline by 2024, but not rapidly enough to fall below pre Covid-19 values in most markets outside China. Although commodity and freight prices have dropped from last year’s peaks, they remain elevated. At the same time, developers’ financing costs have increased due to rising interest rates. As a result, global average levelised costs of energy (LCOEs) for onshore wind and solar PV are expected to remain 10-15% above 2020 levels in 2024.

Initial investment accounts for the majority of solar PV and wind power plant generation costs, as operations and maintenance expenditures are low. In late 2020, the prices of major inputs such as steel, copper, aluminium and polysilicon began to rise sharply, as did freight and land transport costs, due to supply chain challenges and growing demand during the post Covid-19 global economic rebound.

At its highest point in 2022, the average monthly price of polysilicon – a crucial material for crystalline silicon solar PV cell production – was four times higher than at the beginning of 2020. The price of steel, the main construction material for both utility-scale PV and onshore wind plants, increased 75% in China, 160% in the

United States and 270% in Europe, while copper and aluminium became 60-80% more expensive. The highest growth was in freight rates, which rose almost sixfold.

In 2022, the share of main commodities and costs associated with transportation accounted for an estimated 30-35% of overall CAPEX for utility-scale and wind projects, twice as much as in 2020. Taking the full impact of higher prices on project development costs into account, and the usual annual cost reductions from continued technological innovation, the resulting LCOE increase for 2022 is estimated at 15-20% for these technologies. 

In 2023, commodity prices have fallen significantly below their peaks, but they remain elevated compared with 2020. Average prices in Q1 2023 compared with January 2020 were higher by over 200% for polysilicon; by 100% for steel in the United States and Europe; and by 20-40% for aluminium, copper and freight. In many cases, commodity price changes have not yet been directly reflected by equipment manufacturers because of their supply contracts. However, many suppliers may attempt to recover their increased costs by raising prices in upcoming years, leading to higher investment costs.

In addition, macroeconomic risks in the global economy – associated with rising inflation, higher interest rates and the energy crisis caused by Russia’s invasion of Ukraine – lead to a higher cost of capital, including for renewable energy projects. In real terms (i.e. excluding the impact of inflation), the weighted average cost of capital (WACC) is expected to increase in most large solar PV and wind markets, excluding China. The higher cost of capital could offset most of the cost decreases resulting from lower commodity prices and further technology innovation in the next two years. Consequently, the average LCOE for utility-scale PV and wind could be 10-15% higher in 2024 than it was in 2020.

Although their costs continue to exceed pre Covid-19 levels, solar PV and onshore wind remain the cheapest option for new electricity generation in most countries. Furthermore, power contracts for the end of 2023 and into 2024 in the European Union, the United States, Japan, Australia and India all indicate wholesale electricity prices two to three times above 2020 averages, increasing the economic attractiveness of wind and solar PV. Continued innovation is also expected to reduce costs further, improving competitiveness even with existing fossil fuel-fired plants.