ENERGY TRANSITION: The complex path to net zero

Technology entrepreneur Elon Musk once described the ongoing use of fossil fuels and their generation of a vast carbon footprint as “the dumbest experiment in human history.”

Not everyone will agree with his assessment of the petroleum, gas and coal sectors, which have powered the world’s growth for decades. Nonetheless, the twin goals of supply chain security and sustainability are now driving a transformational shift in the global energy mix and instilling a sense in governments, consumers and corporates that inaction is not an option.

Musk’s point, made during a podcast interview with US host and commentator Joe Rogan, was that the world needs to switch to clean energy technologies in order to limit global warming and avoid climate catastrophe.

The chief executive of electric vehicle (EV) company Tesla does, of course, have an enormous financial stake in the future of clean energy. But he’s also right about the vast shift required if Paris Agreement commitments to restrict global warming to less than 2 degrees Celsius above pre-industrial levels are to be achieved.

That’s going to require a dramatic increase in the supply of metals and minerals used in batteries and charging stations for EVs, renewable energy such as wind, solar and hydrogen, and infrastructure including bridges, roads and electricity grids. It is also going to require emissions-heavy industries such as steel to decarbonize through the development of new technologies and find a pathway to net-zero steelmaking.

According to the International Energy Agency, mineral demand for use in EV and battery storage will grow at least 30 times to 2040 if climate goals are to be met. Similarly, the rise of low-carbon power generation to meet climate goals means a tripling of mineral demand from this sector by 2040.

The problem is that those raw materials - including cobalt, lithium, nickel, manganese, graphite, copper and rare earths - neither exist in the quantities necessary for the mammoth task nor are produced in most countries around the world.

The IEA forecasts that, to meet climate goals, clean energy technologies’ share of total demand will rise significantly over the next two decades - to more than 40% for copper and rare earth elements, 60-70% for nickel and cobalt, and almost 90% for lithium.

The implications for prices and supply chains are clear as additional demand needs are exacerbated.

Costs for copper and aluminium are estimated to represent around 20% of total grid investment, which means that higher prices could have a major impact on the adequacy of that investment.

Critical minerals
This is not new to many governments around the world, including the United States, the world’s largest economy.

The US’ supply of critical minerals has been a concern for decades, with the country recognizing it as a source of potential strategic vulnerability for economic and national security interests. In 1939, it passed the Strategic and Critical Minerals Stockpiling Act, which was amended multiple times over the next 40 years, then stayed unchanged for as many years again.

For sure, the US could not have foreseen the rapid increase in the types of materials being used in advanced technologies, nor geopolitical events surrounding the supply of rare earth elements, among other developments, that have taken place since.

The US Critical Minerals list was updated in 2018, although it does not include nickel or copper. A year later, the US Department of the Interior committed to improve the geophysical, geologic and topographic mapping of the US, support private mineral exploration of critical minerals, and make recommendations to streamline permitting and review processes.

But much more needs to be done if the country is to meet its energy transition needs.

Last year, the Department of the Interior’s science agency, the US Geological Survey, identified 23 mineral commodities, including some cobalt, tantalum, tungsten, platinum group metals and some rare earth elements, as posing the greatest supply risk for the US manufacturing sector. These commodities are vital for mobile devices, renewable energy, aerospace and defense applications, among others.

A confluence of climate goals, trade tensions and disruptions during the Covid-19 pandemic means that the critical minerals issue has achieved a high level of visibility within the US government, which will in June hear the findings of a 100-day review of global supply chains.

It’s the result of an executive order by President Joe Biden, made in an effort to boost domestic production and avoid shortages in critical goods, such as the semiconductor problem roiling original equipment manufacturers (OEMs).

The review aligns closely with the proposed American Jobs Plan, which aims to invest about one percentage point of the country’s gross domestic product per year over eight years to upgrade the nation’s infrastructure, revitalize manufacturing, invest in research and science, and shore up supply chains.

There’s an acute awareness, however, that cooperating with allies and partners to identify alternative supply chains is going to play a key role.

The importance of critical minerals and the need to expand and diversify supply chains has been similarly endorsed by Australia, Canada, the European Union and the United Kingdom.

By comparison, China, which has astutely been building its own supply chains through decades-long investment in mining, processing and manufacturing capacity domestically and around the world, now produces the majority of the world’s aluminium, bismuth, gallium, germanium, magnesium, rare earth elements, scandium, tin, tungsten and vanadium - all of which are considered critical minerals by the US.

And as the US looks to shore up its own strategic position - helping nudge LG Chem and SK Innovation to settle accusations of trade theft that had threatened the development of battery manufacturing in the US state of Georgia - Chinese OEMs and battery makers continue to make news every day with their acquisitions and partnerships across the global supply chain.

Private sector
While federal government strategies remain embryonic, the race to clean energy is well underway in the private sector. Automakers are busy signing deals to secure batteries, while battery makers are scrambling to source the raw materials that they need to produce them.

But it still will not be enough for the energy transition to proceed as proposed.

Mining companies don’t have the pipeline of projects required, which can take a decade or more to develop even when green-lighted.

Producers of critical materials have their own carbon targets too, and they will need to exit their own coal production, move away from energy powered by fossil fuels and work on technologies to green their manufacturing processes, including carbon capture, utilization and storage (CCUS).

The payment of dividends to shareholders over the past decade has calmed concerns of growth for growth’s sake. Now miners will have to convince their investors that growth is required for them to compete, and it will mean diverting cash away from dividends and into projects.

It’s a quandary for shareholders, who support environmental, social and governance issues but want a return on their capital investment now, not in 10-20 years’ time.

Technology

The private sector is also playing a major role in expanding research and development into new technologies.

The goal is to find ways to extract minerals from waste, to engineer certain supply-constrained materials out of the process where possible, and to remove emissions, like CCUS in steel and Elysis zero-carbon technology in aluminium.

Steel companies are also looking to green hydrogen as a method of eliminating carbon emissions from the manufacturing process.

Universities and a multitude of government agencies around the world are part of this broader technology effort, with projects to mine tailings that contain rare earths in the Adirondack Mountains of upstate New York, or to insert nickel and iron into cement and create buildings that store energy like a giant battery.

Blockchain is already getting a boost for its use in tracking and tracing the supply chain, allowing companies to prove their green credentials as the energy transition proceeds.

This connects back to the drive to the circular economy, which is focused on recycling what already exists rather than mining more.

Making better use of existing resources also extends to the extraction of byproduct minerals contained in waste, or used products, that were previously ignored.

Finance
All of this, of course, requires money.

Like investors, banks have been stepping up pressure on corporates to meet higher ESG standards or risk the loss of financing; others are offering significantly better rates to companies further along the energy transition path.

Several financial instruments have been developed, including green bonds and carbon market products aligned with investors’ growing appetite for ESG-aligned financial products. New financial institutions have been created, such as sustainable banks and green funds.

Regulating carbon offsets could also bring new investors - previously deterred by criticism over the system’s effectiveness - into the market.

Transition bonds are meanwhile starting to gain traction as a method for companies to raise finance while reducing their carbon emissions.

Private equity and venture capital firms are also present in the sector, like Paulson & Co’s investment in an antimony project in Idaho and Blackstone’s creation of Onyx Renewable Partners. There are of course long-standing investments by companies including Orion Resource Partners, Appian Capital, Red Kite Mine Finance, Resource Capital Funds and Taurus Funds Management.

Governments are also funding research projects or investing directly in mining projects, such as Canada’s investment in First Cobalt’s refinery in Ontario, Canada and the US’ investment in TechMet Ltd, which has stakes in various projects including Brazilian Nickel, Li-Cycle Corp and US Vanadium.

Subsidies and tax credits are likely to be required more widely to encourage EV adoption and growth, as have been successfully used in China and the EU. Provisions are built into the American Jobs Plan, while the UK has announced plans for EV subsidies.

But the debate over allocation of funds - and who ultimately pays to develop a green economy - has yet to be had.

There is clearly plenty of work to be done, and it is going to require policy makers and business leaders to collaboratively navigate the changing global energy landscape. The green industrial revolution is underway.

Andrea Hotter

ahotter@fastmarkets.com

Published

Andrea Hotter

June 01, 2021

21:08 GMT

New York