In 2022, President Joe Biden signed the Inflation Reduction Act, which provided $380 billion of Grants tax credits and other subsidies for renewable energy. This was expected to create a massive surge in demand for wind and solar farms and provide a huge windfall for companies all along the renewable energy supply chain. Yet surprisingly, renewable energy stocks have performed terribly. The Icln Clean Energy ETF has has declined by 35% in the past year, massively underperforming the S&P 500.

Large solar companies like Nase Solar Edge and Sun Power have seen their share prices fall by More than 70% due to deteriorating demand. in both the US and Europe. Wind Energy hasn't fared much better. Orad one of the largest producers of wind power in the world, has seen its share price cut in half over the past 12 months.

They recently recognized $5.6 billion of impairment charges after terminating a massive offshore wind development in New Jersey citing a lack of economic viability. So what's happening? Renewable energy was already supposed to be a growth sector. Adding hundreds of billions of dollars of subsidies should have turbocharged this growth even further. In this video, we'll take a deep dive into the economics of renewable energy and determine what will have to happen for the industry to recover while the renewable energy industry has been under pressure.

One area where profits are soaring as data: Brokers Data Brokers Profit by selling your personal information including your name, address, address, phone number, email address, or even your social security number. They sell them to robocallers, telemarketers, scammers, or anyone else who wants your information. That's why I'm excited to tell you about today's video Sponsor Aura Aura is an all-in-one identity Protection Service that identifies Brokers Selling your info Brokers are legally required to remove your info if you ask them to, but they make it super hard to do Aura handles all of it for you and if they find your credentials on sales on the dark web, they'll alert you so you can change your passwords and stay one one step ahead of the scammers. The best thing about Aura is it has all the internet privacy Services you need in one app.

It's really easy to set up so you don't have to download several different apps to get things like parental controls, anti virus VPN password management, identity theft Insurance and more. You get everything at one affordable price. You can either let people continue to exploit and profit off your private information or you can go to https or.com wallet to start your twoe free trial. also linked Below in the description and now back to the video.

As climate change has become a policy priority over the past couple decades, governments around the world have invested hundreds of billions of dollars in subsidies to develop carbon- free, renewable energy. Historically, hydroelectric has been the most abundant source of renewable energy. Hydroelectric power is economically viable in many areas and was competitive with fossil fuels long before climate change became a problem. If you happen to live near a river, hydroelectric is a great idea, but if you don't it's obviously not an option for most rivers where hydroelectric makes sense.

Dams have already been built a long time ago, so in recent years, substantially all the growth in renewable energy generation has come from wind and solar, and the growth has been impressive. In 2010, there were 23 terts of installed solar capacity in the US. By 2022, this has increased 10-fold to 233 ter. In the same period, installed wind capacity has more than tripled from 150 ter to 523.

Together, Wind and solar now represent about 15% of all electricity generated in the US. According to the International Renewable Energy Agency, The cost of wind and solar electricity has fallen precipitously over the past decade. As of 2022, the cost of new onshore wind farms has fallen below even the cheapest form of fossil fuels, and the cost of new solar Farms is cheaper than most fossil fuels. In recent years, there's been a proliferation of media headlines saying that wind and solar are now the cheapest forms of energy.

While this is technically true, it is a gross oversimplification due to advances in technology and economies of scale, especially in places like China. The cost of solar panels has decreased dramatically over the past decade, but there's a limit to how low costs can decline. When solar panels were new, it was a relatively primitive technology. There were large, easy gains to be made.

As solar technology advances, it becomes more and more difficult to make further improvements. Between 2010 and 2017, the cost of fixed tilt utility grade solar power declined at an average rate of 19% per year. Between 2017 and 2022. this rate of decline slowed to 4.5% per year.

For tilting solar panels that follow the Sun The cost declined at an even more impressive 20% per year between 2010 and 2017. Since 2017, the rate of decline has slowed to 4.5% per year. Wind energy is a far more mature technology. Cost declines in recent years have not been nearly as dramatic.

In the mid to late 2000s, wind power prices actually increased dramatically as existing Supply chains couldn't keep up with the demand and the global real estate bubble pushed up prices of raw materials. There have been some advancements in technology. Most significantly, the blades have been getting bigger which makes them more efficient, but the laws of physics must be respected and we are getting close to the physical limits of what's possible. Technological progress is not the only Factor impacting Renewable Energy Prices The economic viability of a renewable energy project depends on where you build it.

For example, a solar farm in Arizona will be far more efficient than one in Alaska You might not be able to build the cheapest forms of renewable energy in every area. For example, onshore wind farms are often the subject of push back from locals who fear that loud and Visually imposing wind turbines will destroy the scenic nature of their communities and disrupt. Wildlife There might not even be any windy locations available in a given region due to mountains or other terrain features which block the wind. So in recent years, governments and utility companies have spent billions of dollars developing offshore wind farms which cost two to three times more than onshore wind.

And finally, there's the issue of intermittency. If your entire electric grid uses solar power, what happens when the sun is not shining? What happens when the sun is shining very brightly and you're generating too much electricity. When you see headlines saying that Renewables are the cheapest form of energy, this seems difficult to square with a disastrous result of solar and wind companies over the past year. To compare the cost competitiveness of various forms of electricity generation, we must familiarize ourselves with two key terms: the levelized cost of electricity or Lcoe and the levelized avoided cost of electricity or lace.

The Lcoe is a total cost per megawatt hour over the entire life cycle of the project. This includes both the cost of capital and the cost of operations. Wind and solar projects require much larger upfront Investments than coal or natural gas powered power plants. This is offset by lower operating costs once they are built.

Coal and gas power plants require fuel, which can be very expensive. Wind and solar plants require maintenance, but this is used usually much cheaper than fuel costs. So for renewable energy, you have a much larger upfront investment, but you recoup this with lower operating costs over time. The levelized cost of energy considers both capital and operating cost.

Construction cost, fuel cost, and interest rates are the major inputs according to the US Energy Information Agency New. Solar and wind plants coming online in 2024 have Lcoes of about $3 per megawatt hour after federal tax credits. This is lower than natural gas power plants which have Lco of about $35 So does this mean that renewable energy is now cost competitive with fossil fuels? Not exactly. We also have to look at the next acronym Lace.

This measures the value of the new electricity supplied to the grid. For example, let's say a utility company already has a large number of solar panels. When the sun is shining bright, they have enough electricity. In fact, their supply of electricity May exceed demand.

If they have no means to store the electricity, the excess capacity is useless. If you added even more more solar panels, they would give you no benefit. You still need to use alternative energy sources. When the sun is not shining.

by adding additional solar capacity. You will not avoid any of your existing costs. Thus, the Lace is zero. This is an extreme example, but in general, wind and solar energy have a lower lace per megawatt hour than natural gas.

You can set a natural gas power plant to generate electricity whenever it is most needed, regardless of the weather. This flexibility makes each megawatt hour more valuable. According to the Energy Information Agency's 2022 report, the lace of natural gas is about $40 per megawatt hour on average across the US. The lace of wind and solar electricity varies significantly by region depending on environmental factors as well as the current electricity mix, but it is about $35 per kilowatt hour on average.

These charts compare the Lcoe and Lace of each energy type by region. It only makes sense to build a new project If the lace is greater than the Lcoe. This is represented by the portions of the graph above the dotted diagonal line. The Lcoes for wind and solar are calculated after subsidies.

In a few regions, the lace of onshore wind power is equal to the Lcoe, meaning that the new wind farms would barely Break Even Solar power looks a little better. In some regions. the LA is slightly higher than the Lcoe. This means that a new solar project would generate a profit slightly in excess of the cost of capital.

Remember that this is all after Federal subsidies. Based on these numbers, the renewable energy industry appears to be in pretty good shape. If you build solar and wind farms in the right locations, you can make a return at least equal to your cost of capital. But this report was published in March of 2022.

A lot has changed since then. In March of 2022, the yield on a 10-year Government Bond was about 2% With the Fed's rate hikes, this has increased to about 4.6% Today, This has drastically changed the economics for renewable energy. According to the National Renewable Energy Lab, which is a part of the US Department of Energy Building an Offshore Wind Farm cost about 4 Mill million of upfront Capital expenditures per megawatt of capacity. This includes buying and installing wind turbines, building transmission.

Cables To The Shore Etc After the wind farm is built, it requires about $124,000 of Maintenance every year and its estimated useful life is 25 years. Even offshore wind is not always blowing, so it will generate electricity 49% of the time. Thus, each megawatt of capacity will generate 4,300 megawatt hours of electricity per year. Over 25 years, you spend 7 .2 million to generate 107,000 megawatt hours of electricity, which gets you to $67 per megawatt hour.

This does not take into account subsidies. The majority of the costs are incurred upfront. While the electricity is generated Over 25 years, you need to Discount the value of the electricity to determine its present value. The higher the interest rate, the more you have to Discount the value of the electricity.

For each percentage Point increase in the interest rate, the discounted cost per megawatt hour increases by 8% We used Offshore Wind for this example, but you would find similar results for onshore wind and solar. The majority of the cost is The Upfront construction as opposed to the ongoing maintenance. The cost of a natural gas project will also increase with interest rates, but the majority of the cost is the fuel which is purchased over time, so the interest rate sensitivity is far less. As of the late 2010s, New York and New Jersey appeared to be some of the best places in the US to develop offshore wind energy due to their Northerly latitude and frequent rain.

Solar power doesn't make sense, but because they are situated near the ocean and rarely experience hurricanes, offshore wind generation is technically viable. In 2019, both New York and New Jersey signed multi-billion dollar deals with windpower companies to build massive offshore wind farms to power hundreds of thousands of homes. Wind energy companies competed for power purchase agreements or Ppas. The PPA requires the company to sell a fixed amount of electricity at a fixed price.

Ppas can have durations as long as 20 or even 30 years. The rationale for a PPA is that electricity prices can be very volatile based on the price of natural gas. If electricity prices decrease shortly after you finish the wind farm, you may never be able to recover your construction cost. The fixed price ppas give certainty to the developer.

The New York and New Jersey ppas were awarded after a competitive bidding process. Each interested developer made an estimate for how much it will cost to build and maintain the wind farm and submitted a bid which covers their costs and leaves them with an acceptable profit. The utility commissions of New York and New Jersey then choose the low bid. The New Jersey contract was won by a Danish company called Orad.

The New York contract was won by a joint venture between the Norwegian Energy, Giant Equinor and the British Energy Giant. BP. Both Equinor and BP are primarily oil companies, but have Diversified into renewable energy in recent years. At the time, they made their cost calculations and determined that they could make a profit as they agreed upon PPA prices.

Constructing an offshore Wind Farm is an extremely complex process. It can take years to receive the necessary permits, Instead, set up all of your suppliers before construction can even begin. Importantly, during this planning process, Oret and Equinor had not yet secured financing or locked in contracts with their suppliers. The planning and approval process takes so long that by 2023, construction had not even begun.

Wind turbines are massive, requiring massive amounts of concrete, steel, copper, and aluminum. The raw material requirements for offshore wind farms are even greater because they need dozens of miles of underwater transmission lines. Demand for almost all of these materials have surged over the past couple years due to Pandemic era stimulus as well as President Biden's infrastructure. Bill These win projects require thousands of skilled construction workers, which are also in high demand due to the infrastructure bill.

This has resulted in significant wage inflation, and perhaps the biggest source of cost increases has been interest rates. When these deals were signed in 2019, the yield on the 10-year treasury bond was about 2% Today, this is increased to about 4.5% Remember that a 1% increase in the interest rates causes the discounted cost per megawatt to increase by 8% So, the 2 and 1/2% increase in interest rates translates to a 20% cost increase for the wind farm. The wind developers were planning to wait until they actually began construction to secure financing. They thought that they could minimize the interest expense by holding this off as long as possible.

This strategy massively backfired and they would now have to borrow billions of dollars at far higher rates. Equinor and BP recalculated the project economics Based on the higher material, labor and interest cost. They would need to increase the price of electricity by 54% for the project to remain viable. They went to the New York Utility Commission asking for a price increase.

The commission estimated that this would add $12 billion of cost over the lifetime of the project. To pay for this electricity, tariffs would have to increase by 7% for households and more than 10% for industrial consumers across the state. This was a price they were not willing to pay and the project was cancelled. While Equinor and BP had not yet begun the actual construction, they had already expended significant resources over the past few years related to permitting, design, architecture, signing contracts with suppliers Etc All of this has now been wasted, forcing the two companies to recognize $840 million of impairment charges.

The situation at Orad is even worse. They similarly canel their New Jersey Wind Farm leading to massive impairments. They have other projects which are already under construction and are too late to cancel. Completion of These projects will now cost far more than originally expected.

In total, they've recognized $5.6 billion of impairment charges this year, which represents more than a quarter of their market capitalization. While we've mostly looked at wind power in this video, the situation for the solar industry is suffering very similar problems. High Interest rates have made many projects unviable. This has caused demand to collapse.

The massive, surging renewable energy during the 2010s has been largely driven by near zero interest rates. Now that money has a significant cost, these 25 and 30-year projects are far more difficult to justify. So long as the financing environment remains tight, the energy transition will take a lot longer than many had previously hoped. All right guys, that wraps it up for this video.

What do you think about renewable energy? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.