Prices of solar modules shipped from Asia to Europe have jumped as much as 20% as trade disruptions in the Red Sea, which carries 12% of the world’s seaborne trade, have spiked freight costs.

Since mid-November, heightened hostilities from Houthi militia targeting vessels passing through the Red Sea have resulted in swaths of merchant fleet avoiding the key trade route. The Red Sea connects to the Suez Canal—the shortest sea route between Asia and Europe.

“The logistics premium pertaining to the Houthi attacks on Red Sea shipping is $0.01 to $0.02 per watt. For context, the global benchmark price for crystalline modules is $0.10 per watt. So, we are looking at an extra 10% to 20% surge in module price,” said Pavel Molchanov, an analyst at investment bank Raymond James.

With solar photovoltaic manufacturing primarily concentrated in China, Europe’s heavy reliance on the country is evident as the European Union has imported 84% of its installed solar photovoltaic modules in the last five years, according to the Paris-based International Energy Agency. At the same time, Europe imported about 6 GW of solar modules from India in 2023, according to Mercom India Research.

With ships forced to go around Africa’s Cape of Good Hope, an additional 9,600 kilometers are tacked onto their voyage, amplifying both the cost of fuel and time required to transport solar modules. Approximately two weeks of additional transit time is being added due to the rerouting.

REC Silicon, a Norway-based polysilicon manufacturer, recently said during a post-earnings call that the Red Sea Crisis has affected its scheduling and freight costs in European routes. The company makes solar-grade polysilicon, a key ingredient used to manufacture solar panels in various markets.

Solar tracker firm NEXTracker, too, warned that some shipments are being rerouted due to the conflict, which has an impact on deliveries and costs.

As of now, manufacturers have passed along this logistics surcharge to their customers, adjusting module prices upward by €0.01 (~$0.0107) to €0.02 (~$0.0215) per watt depending on negotiations, said Amy Fang, senior analyst at renewables research firm InfoLink Consulting.

“Prices will be adjusted under terms and conditions, and the shipping costs will be amortized by both sides,” said Fang, adding that a short-term mismatch of supply and demand could also become a cause for concern.

A China-based solar module supplier Mercom spoke to also said that shipping expenses have risen, at under $0.01 per watt, and warned that they could rise further if disruptions in the Red Sea persist.

But downstream consumers in Europe seem unfazed by the pricing uptick and longer lead times considering modules prices have dropped by about 50% in 2023, the market is oversupplied with panels, and inventory levels are still pretty high.

Last year, the European Parliament voted to increase the share of renewable energy to 42.5% by 2030, driving demand for solar modules.

However, the increase in the cost of modules is not affecting the capital expenditure of building a solar project just yet. As a percentage of the all-in, fully installed system cost, the jump in prices of solar modules represents only about 1% to 2%, said Molchanov.

Demand for modules also remains robust as prices are at all-time lows, driving fierce market competition. The recent module price drops have been a boon for buyers, so slightly higher freight fees are palatable right now.

The Chinese supplier, however, said that slimmer margins have manufacturers concerned, especially if customers compel them to cover freight all the way to project sites. The margins had already depleted due to historically low prices.

Because the cost of modules has fallen so significantly, the additional cost is being absorbed without any issues. Two weeks of additional transit time will have to be built into the supply chain and inventories.

Hopefully, this is a short-term situation that will be resolved. If not, suppliers said they will have to explore the long-term viability of alternative routes and a comparative increase in shipping prices.