Global energy supply chains shifting from fuels to tech

April 2022 | EXPERT BRIEFING | SECTOR ANALYSIS

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For the past 200 years, energy has been all about supply chains. From whale oil to coal to natural gas, high energy density hydrocarbons powered both the industrial and digital revolutions, providing heat, light, power and raw materials. Hydrocarbon-based energy resources are unequally distributed, so extracting, processing and moving fuels via ship, rail, pipeline and power line has resulted in a massive industry in itself, with its own technical, geopolitical and environmental risks to investors.

Post COP26, we have seen increasing national and corporate commitments to decarbonisation and environmental sustainability, especially on energy use for operations and supply chains. This global movement is accelerating investment in renewable energy technologies, energy storage and other assets to enable a decarbonised power system as a core backbone of low carbon energy economies worldwide. Significant investments – $1 trillion per year – in renewable energy and efficiency, along with concomitant investment in advanced operations and forecasting, transmission and consumer solutions, means that global supply chains are also undergoing a massive transformation.

In addition to environmental and climate concerns, national governments and multinational companies are also reassessing their geopolitical security, especially related to energy supplies. The creation and maintenance of robust, resilient and economically productive supply chains is poised to offer heretofore unprecedented opportunities for new investment. The energy supply chains that have been developed and operate for oil, gas and coal depend on the continuous provision of fuels from a relatively limited number of countries with rich resources.

While the energy density of these fuels make them ideal for shipping and piping, their non-renewable consumption results in the potential for geopolitical and economic demand disruptions (booms and busts), exemplified by the oil embargo of the 1970s and the more recent pandemic demand erosion and subsequent rebound. In contrast, the main players and risks for many clean energy supply chains will be fundamentally different, requiring new approaches to investment and policy by industry and government decision makers.

Clean energy supply chains depend on technology not fuel

The ‘fuel’ for renewable energy is local and free, difficult if not impossible to disrupt. So, the primary consideration for most clean energy supply chains focuses on the upfront technology manufacturing. This includes the mining, processing and production of many types of materials, such as silicon, aluminum, silver, glass and other materials for solar photovoltaics. Cobalt, nickel, lithium and other minerals for batteries and electric drive trains for electric vehicles and energy storage. And fiberglass, steel and rare earth elements for wind turbines, among many other materials and subcomponents. Listing these few elements does an injustice to the complexities of the processing and production facilities for clean energy technologies, the manufacturing of which is comparable to global high tech, computing and chip supply chains.

The biggest risk of the complex global supply chains for manufacturing renewable energy conversion technologies is the links that are reliant upon a single country or concentrated in a few countries for critical components and processes. For example, about 60 percent of cobalt is mined in central Africa and 70 percent is refined in China, before being shipped for battery manufacturing for automotive and storage applications – a highly constrained supply chain for an electric vehicle market that grew over 100 percent in 2021.

The investment in battery gigafactories by major automotive companies addresses part of this constraint but only new mines or new battery chemistries can fully address the risk. Similarly, China controls more than 95 percent of the production of silicon ingots and wafers used to manufacture silicon solar photovoltaics. Investment cost in renewable energy power facilities is capital intensive but operating costs are low and highly predictable without the volatility in the cost of sun, wind and other renewable ‘fuel’. Thus, capital cost reduction is of paramount focus and has been achieved through manufacturing at scale. Yet, robust and resilient supply also drives the capital economics, and the need to diversify material and manufacturing sources represents an investment opportunity.

Sustainable supply chains are essential for sustainable energy

Investors increasingly require corporate commitments and action on the global sustainable development goals (SDGs) and to meet environmental, social and governance (ESG) principles. ‘Clean’ energy technologies are often held to higher environmental and social standards due to the climate problems they address and modern corporate ESG requirements.

We have identified significant economic opportunities to accelerate research and investment in areas such as: (i) mining practices that reduce environmental and social impact; (ii) physical and digital ledger technology to track and certify sourcing and performance of upstream materials; (iii) modularisation and localisation of resource extraction and processing to diversify sources, including innovative remining of tailings and other waste products; (iv) advanced manufacturing technologies and automation, such as additive manufacturing that enables supply chain flexibility and resilience during rapid market changes (such as during COVID-19 and political conflicts); and (v) circular economy technologies and incentives, such as product responsibility to recover materials from modular energy technologies at end of life (which also addresses supply chain risk).

Additionally, given the energy repercussions of geopolitical dynamics impacting Europe and global oil and gas markets, there is increased attention on national providence, security and supply chain risks that are driving new alliances and strategic reconsideration of national postures. For example, the US Department of Energy recently released an assessment of national supply chains for renewable, nuclear, carbon capture and other energy technologies in which it outlines key strategies to support the clean energy transition and secure manufacturing supply chains. European and other nations around the world have embarked on similar assessments.

New clean energy tech requires innovative ecosystems and partnerships

Each of these investment areas requires detailed evaluation of technology, country and commercial risks and opportunities. Both incumbent and new entrants are vying for market share, with notable multinationals announcing transformational shifts in their capital planning and market positioning, and specialised entrants able to bring new manufacturing processes and products to market. Consider the development of modern electric vehicles from incumbent General Motors EV1 in 1996 to the relatively new manufacturer Tesla’s bestselling Models 3/Y in 2020, built on advancements in batteries and electronics in the digital revolution, accelerated by public policy to spur uptake by drivers.

The rapid growth of electric vehicles now requires investment in batteries and their raw materials, as well as the manufacturing of charging stations, solar photovoltaic systems, and an ecosystem of new supply chains that are capital intensive but moving away from continuous combustion of fuel. Electric vehicles exemplify a classic case study in the importance of investment in research and manufacturing, as well as public-private partnerships, for the success of new investments. Other examples include wind turbine development by incumbents such as GE Renewable Energy and dedicated producers like Vestas.

Supply chain dynamics: managing transitional dynamics

Implications for investors are far reaching. Current supply chains are critical to economic prosperity. Simultaneously, new clean, economically attractive, geopolitically robust supply chains must continue to be developed and expanded at robust pace. As with traditional energy supply chains, both horizontal scale and vertically integrated companies will likely emerge, both new startups and incumbents pivoting to new technologies.

These dynamics are already apparent in the latter steps of the supply chain in which some technology companies have shifted to project development, ownership and operation, while others remain focused on more narrow value propositions. We anticipate a dynamic investment environment in clean energy manufacturing to persist for the coming decades as trillions in investment are deployed globally to support the clean energy transition.

Building and expanding clean energy while simultaneously addressing current energy supply chains in order to maintain and grow economies incorporates a complex set of dynamics. Clearly, modern energy is essential for quality of life and will remain a strong focus both for governments and for private investors. Energy in all its forms will continue to play a key role in geopolitics, although it will shift to new materials, different supply chain limits and new leading players, as it moves from being fuel-focused to technology-focused. Navigating the complexities and tensions of world geopolitics of energy calls for deep understanding of shifting market dynamics and critical forward-looking assessment of investment opportunities.

Jill Engel-Cox is research adviser for energy systems integration and Doug Arent is executive director for strategic public-private partnerships at NREL. Dr Engel-Cox can be contacted on +1 (303) 275 3761 or by email: jill.engelcox@nrel.gov. Mr Arent can be contacted on +1 (303) 384 7502 or by email: doug.arent@nrel.gov.

Jill Engel-Cox and Doug Arent

NREL