For years, capital investments in oil and gas have oustripped their renewable counterparts. Returns on renewable energy projects (solar PV and wind) have been unspectacular, primarily relying on subsidies to get projects over the line.

Recent cost pressures due to commodity and supply chain issues should also have made matters worse, reversing years of rapid unit cost improvements in the sector.

A change in the wind

However things have been looking up.

According to research from Rystad Energy, high spot electricity prices, particularly in Europe, are changing the utility wind and solar investment narrative as potential payback periods of under a year could start a race to develop renewable assets purely based on project economics.

Capital investments in renewables have also increased significantly and are set to reach $494 billion in 2022, outstripping upstream oil and gas at $446 billion for the year, according to Rystad Energy research. This is the first time that investment in renewables is set to be higher than for oil and gas.

“Capital investments in renewables are set to outstrip oil and gas for the first time this year as countries scramble to source secure and affordable energy. Investments into renewables are likely to increase further moving forward as renewable project payback times shorten to less than a year in some cases,“ says Michael Sarich, senior vice president, Rystad Energy.

Benefits for renewable developers may vary

Considering the average monthly spot prices for August in the countries mentioned were all well over €400/ MWh, the economics for utility scale renewables appear to be compelling. The relatively low operating costs of renewables strengthens their case as the returns would remain robust even if the long-term power prices were to drop significantly.

Historically, projects have required certainty of cash flows to secure funding, often via feed in tariffs and/or power purchase agreements (PPAs). Although these mechanisms protect the project from downside price risk, it does mean limited or no exposure to high spot market prices.

More capital is also being pumped into renewables than upstream oil and gas (including brownfield and greenfield but excluding exploration) for the first time. If high prices are indeed here to stay and developers bring new capacity online quickly, the compelling economics might even hasten Europe’s renewable sector growth.

Good time to get new projects up and running

In June, the International Energy Agency forecast that global energy investment was on track to increase 8% this year to $2.4 trillion USD, with investment in clean energy responsible for most of the rise.

The rise in clean energy spending is occurring primarily in advanced economies and China, while in some markets, energy security concerns and high prices are prompting higher investment in fossil fuel supplies, most notably on coal, according to the IEA.

For now, Rystad says most European solar and wind projects are not benefitting from the current high prices, but that is changing quickly.

“Developers and financiers alike should be trying to get projects up and running as quickly as possible and with maximum exposure to wholesale prices — as once the up-front costs are recouped, returns will be very attractive even if prices drop back close to historical levels,” the report says.