Renewable developers and original equipment manufacturers (OEMs) must build partnerships for vertical integration and mitigate risks to better manage the increasing global electricity generation, according to McKinsey & Company.

The industry stakeholders will have to tackle several challenges to mitigate risk and build a more resilient supply chain, as the generation from solar and wind projects (excluding China) will more than triple from 125 GW to 459 GW between 2021 and 2030, the global management consulting firm said.

According to an article by McKinsey’s Electric Power & Natural Gas Practice, the European Commission’s REPowerEU proposal aims to increase the proportion of renewable energy in the continent’s electricity production to 45% by 2030, which is higher than the previous target of 40%.

In addition, the Inflation Reduction Act in the United States could provide a comprehensive set of financial incentives for renewable energy development, which could increase wind and solar capacity.

Source: McKinsey & Company

Some of the challenges that the consultancy firm expects are:

Securing Access to Raw Materials:

McKinsey said that the prices for the raw materials needed to create wind turbines and solar panels have also experienced significant volatility.

Over the past few years, prices of steel, copper, and aluminum have increased by two to three times due to the combination of growing global demand for wind energy and supply chain issues related to the pandemic. Earlier this year, the problem was further compounded by disruptions caused by the Ukraine crisis.

As global decarbonization efforts drive up demand, the wind, and solar industries will face an even more severe commodity squeeze. For instance , according to McKinsey, neodymium and praseodymium, rare earth metals necessary for high-power magnets in wind turbine generators and electric vehicles, will experience a 50-60% shortage by 2030’s estimates.

Scaling Manufacturing Capacity

The rising demand for renewables has increased utilization rates in its factories. However, supply chains can become more susceptible to unexpected incidents without additional capacity. For example, lockdowns due to Covid-19, factory mishaps, and floods have impacted polysilicon manufacturing and contributed to utilization rates of 100-110% since 2020, resulting in supply shortages and price hikes.

Renewable energy supply chains are also vulnerable due to the dominance of a single region and a limited number of suppliers.

Source: McKinsey & Company

Developing Logistics and Installation Capacities

Developers require considerable talent and machinery to install new wind and solar capacity. However, shortages of both often plague the industry. As a result, EPC contractors have been bidding selectively on fewer projects, which has reduced competition and caused developers to face increased prices due to their inability to recruit enough talent.

There is a shortage of offshore wind turbine installation vessels. While the turbines for large offshore projects have become larger, the number of vessels capable of transporting and installing them remains limited.

To accomplish ambitious expansion goals and create robust supply chains, sourcing must become a strategic priority. While various strategies and solutions exist, McKinsey identified three primary areas for success.

Vertical Integration

McKinsey noted that establishing long-term partnerships, targeted acquisitions, and shareholder agreements can be essential in securing raw materials and reducing the price volatility of critical components.

Partnering With Suppliers to Boost Manufacturing Capacity

Renewable developers could potentially mitigate the vulnerability of global supply chains by collaborating with their suppliers to augment manufacturing capacity. This may involve measures such as bringing in-house the production of essential components, enlarging existing manufacturing plants, or constructing new facilities.

Promoting Risk Management

Renewable energy OEMs can effectively manage the effects of sharp price increases through tools such as price hedging and long-term agreements that secure the cost of raw materials such as steel. However, the recent price increase caught wind and solar suppliers off guard, indicating that their risk management capabilities were not sufficiently developed. As such, developers must partner with suppliers to jointly invest in upskilling employees in risk identification and price hedging for raw-material purchases.

Proactive risk identification should also become a crucial part of evaluating and managing suppliers for developers. To address these challenges, early development of creative strategic measures is critical, such as vertical integration, strategic diversification, and proactive risk management.