Utility-Scale Renewables: An Analysis of Pricing Inputs

• Our analysis indicates that power purchase agreement (PPA) prices are not expected to decrease significantly in the foreseeable future.
• PPA tailwinds include record-low solar module prices and a more favorable interest-rate environment.
• PPA headwinds include interconnection, transformer availability and sustained high labor costs, all of which contribute to extended project timelines.
• These headwinds point to uncertain project availability and quality.

Introduction

In recent years, the pricing landscape for utility-scale power purchase agreements (PPAs) in the United States has increased notably, prompting many stakeholders to reconsider their timing for entering new agreements. This article delves into the critical factors driving PPA offers and availability. We consider broader market trends and evaluate the potential for changes in market dynamics.

Overall, our analysis shows that PPA prices are not expected to decrease significantly in the foreseeable future. While some inputs are stable or potentially improving—such as record-low solar module prices and a more favorable interest rate environment—significant challenges persist. Key challenges include interconnection, transformer availability, and sustained high labor costs, all of which contribute to longer project timelines. As a result, even if prices remain relatively stable, concern is growing about the availability and timeliness of quality projects.

It is important to consider that for a project to be successful, all factors must be addressed in concert. Even something that is traditionally a relatively modest cost component of a renewable project (e.g. transformers) can turn into an existential threat to project development by delaying projects and causing a cascade of cost increases, which may ultimately cancel a project.

• Current Status: Favorable for solar, unfavorable for wind
• Favorability Outlook: Potentially negative

Definition: Generation equipment encompasses solar photovoltaic (PV) modules and wind turbines, both of which have experienced significant price volatility due to supply chain disruptions stemming from the COVID-19 pandemic and subsequent inflationary pressures.

Wind: As of July 2024, prices for onshore wind turbines remain approximately 39% higher than pre-pandemic levels. Notably, 2024 has already witnessed an increase of over 10% in reported wind turbine prices.¹

Key inputs to wind turbine pricing—such as copper, steel and resins—soared significantly during the supply chain shortages of 2021. While recent trends show a rise in copper prices, other materials like steel and resins have stabilized. Despite some cooling input prices, the end prices of wind turbines continue to escalate. This phenomenon is primarily attributed to manufacturers operating at very low or even negative margins on orders filled in the last two years.² Manufacturers are now attempting to chase higher margins, keeping prices elevated.

Favorability Outlook: Potentially negative. A substantial reduction in wind turbine prices would necessitate a significant decrease in input material costs and demand. Given the extensive global use of steel and copper, demand is likely to remain sufficiently high to prevent a drastic drop in prices. Additionally, the limited number of wind turbine manufacturers diminishes the likelihood of reaching a global oversupply, as has occurred in the solar sector. These manufacturers will also need time to fully recover from the negative margins experienced over the last few years and thus may be reluctant to drop prices.

Figure 1: Wind & Solar Generation Equipment Prices

Solar: Solar modules are currently being sold at record-low prices. Intense competition, coupled with historically low input costs, has driven down the cost of solar modules. Polysilicon prices, for instance, have decreased by nearly 50% in 2024, reaching all-time lows by July 2024. As a result, the price of solar modules has fallen to $0.10 per watt, a considerable decline from over $0.25 per watt two years ago.³  While input prices remain low, the intense competition and the need to maintain high utilization rates in manufacturing facilities have led many players in the solar supply chain to operate at a loss. The overall result is a global oversupply of solar modules.⁴

Favorability Outlook: Potentially negative. The current very low solar module prices may not be sustainable for the industry in the long term. Although polysilicon prices are low and manufacturing capacity is ample, the prevailing low prices across the supply chain may compel some suppliers to reduce output, constricting supply. Furthermore, other price inputs of solar modules have recently increased. The spot price of silver—relatively stable for the last few years—has recently surged. Another input—freight—has also recently surged to the highest price since 2022, as shipping capacity has decreased due to less efficient routes as ships avoid conflict areas.

Another driver of potentially higher prices is the return of tariffs. The U.S. government raised import tariffs on solar panels in May 2024 and moved to lift its two-year exemption on tariffs from Southeast Asian countries, where many Chinese manufacturers have been operating.⁵ The next administration may elect to further increase tariffs. This could shift more interest to domestic panel supply, which has increased following incentives in the IRA,⁶ though domestic panels may still struggle in the near term to be cost-competitive with imported panels.

Figure 2: Renewables Supply Chain Input Prices

• Current Status: Unfavorable
• Favorability Outlook: Potentially positive, but will be slow to evolve

Definition: Interconnection refers to the process and associated costs of connecting renewable energy projects to the electrical grid, facilitating the transmission and distribution of generated electricity. Practically speaking, interconnection means “plugging in” the project.

Broadly, the interconnection timelines are increasing.⁷ Many of the most accessible interconnection points have already been utilized, leading to increased complexity and difficulty as additional projects come online. In markets such as PJM, challenges—including multi-year interconnection delays and localized opposition to renewable energy initiatives—further complicate the development landscape. Moreover, the inability to expand essential infrastructure, such as substations and transmission lines, exacerbates financial burdens when developers must absorb the costs of necessary upgrades. For example, the Midcontinent Independent System Operator (MISO) is experiencing grid saturation, where the influx of new projects is not matched by a corresponding expansion of transmission infrastructure. This imbalance leads to increased interconnection fees, as developers are required to finance new switchgear or wait for substation expansions.

Even if developers do not fully bear the cost of interconnection, lengthy and uncertain projects can lead to cascading effects, resulting in delays, cancellations and increased costs, ultimately constraining the overall supply of renewable energy.

However, some notable positive developments support interconnection, primarily initiatives from the Federal Energy Regulatory Commission (FERC). In May 2024, FERC approved Order 1920, aimed at updating the transmission planning process.⁸ Additionally, Order 1977 was implemented to reduce permitting burdens.⁹ These measures, along with other infrastructure investments facilitated by Department of Energy grants, are expected to bolster transmission buildout.¹⁰ Nonetheless, the effects of these changes in transmission planning and permitting will take time to influence PPA pricing.

Figure 3: Duration Between Interconnection Request and Online Date (All Utility-Scale Projects)

Favorability Outlook: Potentially positive but will be slow to change. Ongoing permitting and interconnection reforms, coupled with the development of new transmission projects, could alleviate some of the current pressures. Policymakers are increasingly focused on aligning interconnection with broader infrastructure investment initiatives. However, near-term relief is unlikely, as grid upgrades needed to broadly alleviate interconnection constraints would be extremely large and expensive, with very long lead times. Without significant upgrades to the transmission system, the most favorable points of interconnection risk overuse, creating further complexities in the interconnection process for new projects.

• Current Status: Unfavorable
• Favorability Outlook: Negative

Definition: Balance of System (BoS) refers to the components of a renewable energy system that are not part of the generation equipment itself. This includes transformers, switchgear, electrical wiring and other equipment.

Demand for BoS equipment has reached all-time highs as more renewable projects flood interconnection queues. Corporate renewable energy procurement, utility development and data centers’ growth have all contributed to record demand. Additionally, key components for renewable energy systems are facing competition from transmission and distribution utilities, which also require equipment with similar inputs to modernize and expand the grid.

The tightening market for transformers has resulted in increased costs and project volatility. Since 2020, transformer costs have risen by over 60%, and acquisition lead time has extended to nearly three years. Consequently, even if developers manage to secure orders, the backlog in filling orders poses a significant risk to project timelines, potentially leading to increased costs or even project cancellations.

Favorability Outlook: Negative. The demand for BoS components is expected to continue its upward trajectory. Moreover, the manufacturing capacity for BoS components—especially transformers—is unlikely to expand due to high capital costs and the resulting barriers to entry in the market.¹¹

Figure 4: Electric Power and Specialty Transformer Price Index (1980=100)

• Current Status: Favorable
• Favorability Outlook: Stable

A primary mechanism the federal government uses to incentivize renewable energy development is the tax code, employing a “carrot” approach that provides tax credits to developers.

The Inflation Reduction Act (IRA) of 2022 represents a historically significant expansion and extension of federal incentives for renewable energy projects. The IRA enhanced the financial viability of such projects by extending and increasing tax credits for solar, wind and energy storage, thereby lowering the effective cost of project development. Additionally, the IRA introduced tax credit transferability, which broadens the pool of potential buyers and financiers.

Favorability Outlook: Uncertain. While the next presidential administration may consider changes to the IRA, the likelihood of a complete repeal remains relatively low, albeit not impossible. Importantly, the tax credits in the IRA have received bipartisan support due to positive economic contributions.¹²

Figure 5: Solar & Wind Capacity Forecasts – IRA Impact from EIA Annual Energy Outlook

• Current Status: Unfavorable
• Favorability Outlook: Negative

Definition: Engineering, Procurement and Construction (EPC) costs represent the expenditures associated with the construction of renewable energy projects—notably, labor costs for constructing these facilities. EPC costs, along with related challenges, have emerged as obstacles to development, particularly exacerbated by pandemic-induced labor shortages. The continued volatile environment for EPC costs is driven by a confluence of factors, including inflationary pressures, increased demand for renewable energy projects and rising wage requirements.

General inflation has contributed to rising labor costs, while regulatory mandates have further elevated EPC costs. Notably, the IRA introduces incentives linked to prevailing wages and apprenticeship programs, which compound these cost pressures. Additionally, a concurrent shortage of skilled labor in the construction and renewable sectors has intensified the competition for talent, resulting in higher wages within the EPC labor market.

Consequently, EPC firms are now positioned to command higher premiums. In response to these market dynamics, some developers have initiated long-term framework agreements with selected EPC firms. While this strategy may enhance project timeline stability, it does not inherently reduce costs. CBRE Trading Advisors has identified numerous instances where securing an EPC firm has become a critical bottleneck for project advancement.

Favorability Outlook: Negative. Given the sustained high demand for renewable energy solutions, the significant lead time required to cultivate a skilled workforce in the renewable energy EPC sector, and the federal incentives exerting upward pressure on labor costs, a material decline in EPC pricing appears unlikely in the near term.

• Current Status: Neutral
• Favorability Outlook: Positive

The majority of developers in the renewable energy sector utilize debt as a key component of their project financing strategies. Consequently, the economics of renewable energy projects are highly sensitive to fluctuations in interest rates.

Currently, the sector is contending with the highest interest rates since September 2007. Elevated rates have a direct effect on the cost of capital for developers, leading to increased return requirements from project financing partners and higher overall financing costs. This scenario presents substantial challenges to project economics, compelling developers to pass these costs onto electricity buyers.

Developers are now facing significant financial uncertainty, as the sector contends with rising capital costs. With high interest rates and inflation persisting, developers have responded by raising PPA prices to cover the increased financing costs. This trend has been particularly pronounced given the current corporate demand for renewable energy, allowing developers to continue to pass through these costs to buyers.

However, higher costs can be partially mitigated through new sources of project financing now open to developers and by IRA tax credit transferability. Tax credit transferability allows a streamlined and cost-effective solution for developers to monetize tax credits.

Figure 6: Effective Federal Funds Rate (U.S.)

Favorability Outlook: Positive. In September 2024, the Federal Reserve reduced interest rates by 0.5% and signaled the possibility of further rate cuts.¹³ This outlook alleviates some pressure on renewable project economics. However, interest rates remain significantly higher than they were just three years ago.

The pricing landscape for PPAs reflects broader economic and regulatory dynamics. In recent years, inflationary pressures have increased costs throughout the supply chain, while grid connection queues have introduced delays and increased costs for project developers, exacerbating financial uncertainty. Pricing has been further complicated by rising interest rates, which have driven up the cost of capital for renewable energy projects, making financing more challenging.

Some trends provide tailwinds to an improved PPA market. Notably, lower solar module prices and a more favorable interest rate environment all offer potential relief. However, stronger headwinds are likely to overpower the tailwinds. Such headwinds include key commodity price inflation, interconnection and uncertainty (notably pertaining to transformers), and sustained high engineering, procurement & construction (EPC) and balance of system (BoS) costs. Consequently, PPA prices are likely to remain elevated and not revert to pre-2020 levels.

Overall, our analysis indicates that a seismic shift in PPA pricing is unlikely in the short to medium term. However, project timelines face clear headwinds, driven by extended interconnection delays and lead times on critical components such as transformers. As such, we see more concern about the availability of projects than continued price increases.

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