We expect to see spending in low-carbon energy to rise at an average 10% per year between 2022 and 2030, meaning the capital expenditure in the low-carbon sectors is on track to overtake that of fossil fuels by 2025. But this growth comes with several challenges for the supply chain.

The energy supply chain has had many ups and downs in recent years as companies seek to navigate rising costs, disrupted supply chains and missed deadlines, at a time when the energy industry is changing and competition is becoming tougher. The first six months of 2023 showed that the various low-carbon energy supply chains also face their own set of challenges that need to be overcome for suppliers and their profit margins to thrive.

For solar suppliers, spot prices of polysilicon have dropped from the peaks of 2022, resulting in improved margins. At the same time, governments around the world are actively seeking to reduce their dependence on China, the dominant player in the solar manufacturing sector. Policy shifts aimed at encouraging more regional and domestic production are adding complexity for original equipment manufacturers as they work to develop new, local supply chains.

Most wind suppliers have been less fortunate financially as they struggle to revive strained profits caused by soaring costs. Understocked inventories and high shipping costs and raw material prices have highlighted the many weak links of the supply chain. Although companies expect inflation levels to ease, the continued strain on the supply chain will affect both costs and project execution this year. In addition to turbulent markets, contractors also need higher turbine capacities to meet customer demand for bigger units – which in turn is causing vessel companies to scramble commission new vessels capable of handling and installing large turbines.

The CCUS sector continues to expand with crucial project development and public funding allocation to projects. However, development barriers, mainly economic and regulatory ones, have brought some delays.

Hydrogen electrolyzer suppliers have reported high revenue and order intake in recent quarters – but they have also noted consistently low EBITDA margins due to reduced profitability for electrolyzer projects signed in 2020 and 2021, as well as higher personnel expenses required to execute their backlogs. In addition to low margins, manufacturers have flooded the market with expensive electrolyzer factories that will not have enough work as market demand lags the growth in manufacturing capacity. More than 60% of the production capacity could be idle this decade –an indication that suppliers may need to tighten their capital discipline and make some very careful assessments of their growth opportunities and financial situation to make sure they come out on top when demand picks up.

Despite these challenges, the overall energy industry has good long-term demand visibility and clarity on market conditions, which are crucial drivers for investment. These factors are particularly important for the capital-intensive low-carbon sector, which we currently expect to see spending rise at an average 10% per year between 2022 and 2030. This means that capital expenditure in the low-carbon sectors is on track to overtake that of fossil fuels by 2025. The low-carbon supply chain segments likely to benefit the most from this growth are equipment, engineering & construction, and maintenance, modifications and operations (MMO).

Rystad Energy estimates that global demand for low carbon energy equipment & materials will climb to almost $520 billion in 2026. In well-established sectors like wind and solar, the strongest growth in percentage terms will come in opex-related segments like operations & maintenance and logistics & vessels. In less mature sectors, nearly all segments will see notable growth, however small it may be in absolute dollar terms.

Additionally, our base case scenario for low-carbon inflation shows that supplier can look forward to some relief starting already this year, thanks to commodity deflation, efficiency gains, and improved economies of scale in low-carbon industries. Even so, we expect inflation levels to settle between 5% and 15% above pre-Covid-19 pandemic levels, depending on the energy source.