Key trade route for solar modules affected by Red Sea shipping crisis

As a result, many merchant fleets are avoiding this key trade route, and ships are forced to go around Africa's Cape of Good Hope, adding 9,600 km to their voyage. This has amplified the cost of fuel and the time required to transport solar modules, with an additional two weeks of transit time added due to the rerouting.

"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 investment bank Raymond James, analyst.

Manufacturers in China make most of the world's solar photovoltaic modules, with Europe importing 84% of its installed solar photovoltaic modules in the last five years. As a result, Europe is heavily reliant on China for its solar modules. However, according to REC Silicon, a Norway-based polysilicon manufacturer, the Red Sea crisis has affected scheduling and freight costs in European routes. The company makes solar-grade polysilicon, a key ingredient for manufacturing solar panels in various markets. Solar tracker firm NEXTracker has also warned that some shipments are being rerouted due to the conflict, which impacts deliveries and costs.

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%.

The Chinese supplier said that slimmer margins have manufacturers concerned, especially if customers compel them to cover freight to project sites. The margins had already depleted due to historically low prices. Because the cost of modules has fallen significantly, the additional cost is being absorbed without any issues. Two weeks of additional transit time must be built into the supply chain and inventories.

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