Raw materials and their role in the energy transition
Raw materials play a fundamental role in the energy transition
The global adoption of renewables is accelerating faster than ever. In 2021, a record level of 290 gigawatts of renewable electricity was added to the global energy mix, a 50% increase from the 193 gigawatts added in 2019 (1). Similarly, as an enabling technology for renewable electricity expansion, the cumulative capacity of grid-scale battery storage grew by >60% in 2021, as more than 6 gigawatts of storage capacity were added (2).
The continuation of such positive developments is currently facing significant challenges, however. This is because the accelerated adoption of renewables in recent years drove demand growth for raw materials to all-time highs. Renewables require significantly more raw materials, such as lithium, nickel, and cobalt, than conventional energy sources. For example, solar PV requires up to three times more minerals per megawatt energy generation capacity than coal (3). Raw materials are thus critical in the energy transition as fundamental inputs into renewable energy technologies.
Although most critical materials are not necessarily physically scarce, the industry is challenged by a looming supply crunch. This is due to a mismatch between global supply and the speed of the energy transition, intensified by supply chain vulnerabilities exposed by recent geopolitical events. These inelastic supply conditions are reflected in skyrocketing material prices in recent years, reaching record highs in 2022. Actively considering the impact of these challenges in business operations and project planning is therefore becoming a critical success factor for players in the renewable energy space.
Production costs for renewables declined significantly over the last decade as the industry matures
Over the last decade, the global renewable energy industry witnessed tremendous expansion: the simultaneous growth in demand and decline in capital requirements paved the path for the energy transition. Renewable energy production costs hit an all-time low in 2020, enabled by significant progress in R&D and scaling of production capacities (4). For example, the average costs for producing cells for conventional utility-scale battery storage declined at about ~17% CAGR from 2015 to 2020, from ~$240-260/KWh to ~$100/KWh. Critical raw materials contributed a comparatively small percentage share to these average costs due to high total production costs and relatively low, albeit volatile, raw material prices.
Accelerated adoption of renewables may reverse past cost declines due to high raw material prices
The accelerated adoption of renewables in recent years is driving strong demand growth for critical raw materials, especially those used in the most deployed battery technologies. From 2020 to 2030, demand for lithium is expected to increase by 7x, graphite by 4x, and cobalt by more than 2x.
Inelastic supply conditions are encountering recent demand growth
The speed of demand growth for raw materials outweighs the short and medium-term available supply. Whilst differing in exact projections, industry experts expect a supply crunch to last until at least 2030. Despite resources not being necessarily physically scarce, new raw material supply is limited. High upfront capital intensity, long setup times for new mines, and uncertain regulations render mining a risky business. Low raw material prices, and thus return prospects, disincentivized investments to expand mining and provide new sources over the last decade. Copper, the principal material for wiring and cabling in renewables, exemplifies this. Mainly mined in Chile and Peru, uncertainty around regulation amid popular pressures for industry nationalization has triggered mine closures and investment postponements. For example, the US-based mining company Newmont Corp recently delayed its planned $2 billion investment decision for a copper mine in Peru to 2024, limiting new supply availability (5).
Scaling up supply from existing resources is also challenging: mine exhaustion has decreased deposits and lowered ore grades, heightening the cost and complexity of material processing. Higher raw material prices in this decade may render mining investments more lucrative, but supply shortages will likely last. For example, approximately 70 mines would be needed to meet the projected 2035 demand for lithium – the key ingredient of Li-ion batteries (6). However, with setup times of up to 25 years due to high regulatory barriers, meeting the demand is improbable.
Geopolitical risk exposure is intensifying supply constraints
In addition to an insufficient supply of resources, recent geopolitical pressures, like the Covid-19 pandemic and Russia’s invasion of Ukraine, revealed significant supply chain vulnerabilities. Apart from general supply chain disruptions across industries, raw materials are particularly at risk due to their high geographical concentration: for mining, China, Australia, Russia, and the Democratic Republic of Congo are the single largest materials suppliers. The picture is even more drastic for refining, where China dominates all critical raw materials. This strong supply dependence on a few countries renders raw materials particularly vulnerable to supply shocks and price volatility.
Record-high material prices drove 2022 renewable energy technology costs up
As a result of strong demand growth, geopolitical pressures, and market turmoil, raw material prices skyrocketed over the last two years. Whilst silicon prices are expected to decline amid increasing availability, industry experts predict prices of most raw materials such as lithium, nickel, and cobalt to ease only slightly remaining at high levels. At the same time, price volatilities will likely last in the future, given the underlying dynamics and geographical supply dependencies. As outlined in figure 2, the difference between the highest and lowest prices from 2019 to 2022 reached ~1110% for lithium, ~200% for cobalt, and ~200% for nickel.
Extraordinarily high raw material prices may now reverse past cost declines for renewables: for the first time since their commercialization, capital costs for renewables are increasing. For example, costs of critical raw materials in utility-scale batteries grew by ~30% from 2020 to 2022, reflected in a ~20% increase in total battery costs. Similarly, price increases for aluminium, copper, and steel alone drove raw material costs for solar PV up by ~30% since 2020. Without reducing other capital costs through further efficiency gains, increasing raw material costs could counteract the cost-savings of the last decade (at least to some extent).
Major players are scaling up efforts to reduce their dependence on external supply
To shield against a lasting supply crunch, players with significant demand for raw materials, such as renewables producers, seek to integrate and localize supply chains vertically. For example, battery consumers like BMW and major solar producers like Adani Group are investing in refining facilities to hedge against supply constraints. The US supports localization at a political level: the recent Inflation Reduction Act (IRA) provides lucrative tax incentives for producing renewables with locally sourced raw materials (either from the US or partnering countries). Similarly, localization takes place in Europe, where refining expansion is planned in relation to the increasing construction of mega-factories. Technological change also plays a role: major battery storage producers like Tesla are increasingly adopting nickel- and cobalt-free lithium-iron-phosphate (LFP) battery cathodes. This is mainly to reduce supply-side dependence on the Democratic Republic of Congo against the background of escalating human rights violations in Cobalt mining. The development of alternative mining technologies, such as direct lithium extraction (DLE) for lithium, is also underway, promising efficiency gains. Simultaneously, DLE technology can reduce the environmental footprint of lithium mining (12). Dominant extraction methods, such as surface mining or evaporative extraction, can contaminate and deplete ground and surface water aquifers (13). Scaling more environmentally-friendly and efficient battery and mining technologies will thus be crucial to reduce the negative impact across ESG dimensions. Yet, the effect and feasibility of such alternative mining and battery technologies remain complex to predict and are to be observed over the following years.
Renewable energy developers should adopt tailored measures to mitigate supply risks
Raw material prices and supply shortages can collectively present substantial risks for renewable energy developers. Figure 4 outlines the three most significant risks these developments pose from our perspective.
Given the criticality of raw materials for renewable energy development, relevant players should actively consider the topic in their day-to-day business operations.
1. Identifying business exposure to raw materials as a critical first step in analyzing potential supply risks.
Create transparency on demand volumes across relevant raw materials such as lithium, nickel and cobalt and identify critical dependencies (e.g., due to limited alternatives or large required quantities).
2. Adapting supply chain design to mitigate supply risks by diversifying sources and building strong supplier relationships.
Diversify supplier base by adding additional equipment suppliers with different geographic sourcing strategies and aim for preferential customer status to ensure long-term supply stability.
3. Dampening exposure to price volatility through adequate financial planning and contracting.
Develop business plans with increased financial buffers for potential price jumps and create stability by negotiating contracts with fixed prices, avoiding index-related components.