Renewable energy projects take longer to commission than a decade ago

Renewable energy is now central to the decarbonization plans of almost every country. The strategy is simple: build new renewable energy projects to replace old, polluting fossil fuel assets. But building new projects takes time and therefore, decarbonization success within the targeted short span of time requires a) building quickly and b) building a lot at the same time.

We typically hear a lot about the latter – building a lot, either in the form of several project announcements or with the announcement of bigger and grander projects which eventually add a big chunk of capacity once they are commissioned. To this end, we also often track goals with cumulative capacity installed, in absolute terms, or as a fraction of total energy consumption. While these achievements are a must to track climate progress, they scarcely discuss a key element – how long these projects take to come online.

Why study project timelines

This scarcity of research investigating “how long” results in unintended policy consequences. First, we don’t know whether the current decarbonization plans devised using complex energy models are realistic about how fast we can install new projects. An underestimation of how fast projects can be practically developed results in highly optimistic models and therefore unrealistic policy goals. This also potentially underestimates the policy support that is required in the long-term. For example, Switzerland’s recent subsidy support for Alpine PV projects lasts until 2025 even though it is unlikely that projects will be submitted, let alone constructed, in that time period.

Second, we don’t know whether financial policy, such as subsidies, is adequate to plug the financial gap to make new energy projects attractive for investors. For simplicity, let’s take an example where a new project costs 10 million and generates an annual return of 1 million over 20 years once constructed. If the project is built within 1 year, the financial return (or internal rate of return, IRR) to the project is 7.75%, whereas if it takes 2 years (assuming cost is equally split over two years), the return drops to 7.3%. If it takes 3 years, the return drops to 6.9% (see the squares in Figure 1). So, imagine if a policy were trying to provide an investor with a subsidy to give a return of 10%, the subsidy itself would cost the government ~700K more if the project took 3 years instead of 1 year (bars in Figure 1). A corollary of the above, and the third consequence, is higher prices that will be passed on to the consumers, either as taxes if projects are subsidized, or as higher charges if not. Although true financial returns range between 5-10% in Europe and North America, and often higher in emerging economies, the above example conveys the financial burden that is added from longer timelines.