WEMO24-Compiled Report-Interactive compressed (002) 4154-7882-8116 v.1 - Flipbook - Page 52
Increased market competition, coupled with reduced government
support, rising capital costs, and inflation, is putting pressure on
renewable returns. The days of 'invest and forget' in the renewable
energy industry are over. Renewable executives are now looking for
ways to operate more efficiently and find new revenue sources.
Historically, industry management has focused primarily on growth
and investment, often overlooking cost control. The Levelized Cost
of Energy (LCOE) has declined significantly in the last decade. Utilityscale solar fell from $79 to as low as $29 per MWh by June 2024,
and onshore wind from $74 to $50 per MWh on average, according
to Lazard's latest report. The main factors behind this decline are
cheaper solar modules and wind turbines, larger turbine blades
capturing more power, and improved operational practices (e.g.,
better planning and execution of maintenance).
In parallel, as renewable companies have expanded, their level of
corporate complexity has grown exponentially. The increased number
of assets, geographic spread, and diverse technology partnerships
has made it more difficult to manage and track asset performance, as
well as to make informed decisions and operate efficiently.
Additionally, companies are more exposed to merchant risk as the
share of feed-in tariffs declines, and as cost pressures increase from
reverse auctions.
Cost reduction strategies
To cope with the challenges of the new environment and drive
their profitability, companies will need to focus on optimizing their
activities to reduce costs at each phase of a renewable asset lifetime.
This is especially true in early phases of a project, which represent 8090% of the CAPEX and OPEX.
Improving efficiency during the origination and
development phase
Project origination and development typically accounts for 40-45%
of the total financial value creation, including costs for site selection,
permitting, interconnection and securing financing. Developers
constantly scramble to identify new sites with increasing speed.
Standardizing their approach with the right toolbox for the team
in charge of origination, improving the monitoring of their pipeline
through commercial excellence programs, and increasing the
efficiency of the development processes are some of the levers that
can be activated.
Industrializing engineering and leveraging
technology and digitization in renewable energy
system design
Engineering and construction (E&C) represents about 40-45% of the
value creation. It involves the design of the renewable energy system
and its actual building and installation.
In engineering, for instance, operators will need to optimize plant
design to maximize wind yield and minimize costs. Advanced analytics
solutions can, for instance, help them optimize wind farm design to
increase the energy yield.
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Optimizing equipment choices is also important, as equipment typically
accounts for over half of the CAPEX in new renewable projects, with
costs rising as projects scale. Technological advancements, especially
in major machinery like larger turbines, cheaper solar modules,
and better software, have contributed to lowering LCOE. Taking
advantage of the most advanced technology with optimized set up
can also be a source of improved CAPEX efficiency.
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Boosting profitability across the
renewable value chain
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OUTLOOK
More experienced companies are leveraging industrialized
engineering to expand and standardize their wind and solar
engineering capabilities globally. By establishing their own
engineering centers, or outsourcing to engineering partners in lowcost regions, they can benefit from cost optimization, predictability,
and access to a specialized pool of engineers who can work according
to their standards and processes.
Efficient management of construction costs and
timelines
Construction delays and cost overruns can negatively impact
returns, with a negative cost deviation of 5-10%, potentially erasing
a developer fee. Efficiency during the execution phase is, therefore,
critical. Better contracting strategies (e.g., massifying procurement,
optimizing EPC prices), combined with improved work planning and
construction readiness (e.g., harmonizing KPIs for EPC performance,
standardizing construction organization, enforcing use of standard
project control tools, improving claims management) can reduce cost
uncertainty.
WEMO 2024
How to make money
from renewables
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