How green bottlenecks threaten the clean energy sector
ATHE WORLD the economy is waking up, shortages and price spikes are affecting everything from the supply of Taiwanese crisps to the cost of a French breakfast. As we explain this week, one type of bottleneck deserves special attention: supply issues, such as scarcity of metals and land constraints, which threaten to slow the green energy boom. Far from being transitory, these bottlenecks risk becoming a recurring feature of the global economy for years to come as the shift to a cleaner energy system is still in its infancy. Governments must respond to these market signals, facilitating a huge boom in private sector investment over the next decade, which increases capacity. If they don’t, they are unlikely to deliver on their promises to achieve “net zero” emissions.
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Scientists and activists have worried about climate change for decades. Recently, politicians have shown signs of more engagement: countries representing more than 70% of the GDP and greenhouse gases now have net zero emission targets, usually by 2050. And there has been a dramatic shift in the attitude of business. Investors are demanding that companies change course, spurred on by the new reality that clean technologies are more cost competitive. Fossil fuel-age giants such as Volkswagen and ExxonMobil must change their investment plans, while clean energy pioneers are rapidly increasing their capital spending. Orsted, champion of wind farms, forecasts a 30% increase this year; Tesla, an electric car maker, jumped 62%. Meanwhile, $ 178 billion was poured into green-tinted investment funds in the first quarter of 2021.
This sudden change in the way resources are allocated causes strains and strains as demand for raw materials increases and a rush occurs for the few projects with regulatory approval. We calculate that the price of a basket of five minerals used in electric cars and power grids has climbed 139% in the past year. Timber mafias scour Ecuadorian forests in search of balsa wood used in wind turbine blades. In February, a UK auction of seabed rights to offshore wind farms fetched as much as $ 12 billion as energy companies rushed to expose themselves at all costs. The shortages extend to finance: As a slew of money chases a few renewable energy companies, valuations have been stretched into bubbling territory. Although the weight of the renewable energy industry in consumer price indexes is still low, some financiers fear that supply shortages over the years could eventually fuel higher inflation.
What makes these signs of overvoltage so striking is that they materialize even as the energy transition is less than 10% complete (measured by the share of cumulative energy investments needed by 2050 that has already taken place). ). It is true that some of the technologies that will be needed hardly exist and therefore are not available for investment. This is why so much research and development is needed. But in other areas, much of the brain work has been done – so the 2020s must be the decade of muscles, of the rise of established technologies with massive capital expenditures.
The numbers for the coming decade are concentrated. To stay on track to achieve net zero, by 2030, the annual production of electric vehicles must be ten times that of last year and the number of roadside charging stations 31 times more. . The installed base of renewable energy production must triple. Global mining companies may need to increase annual production of essential minerals by 500%. Maybe 2% of American land will need to be covered with turbines and solar panels.
All of this will require huge investments: some $ 35 billion over the next decade, or the equivalent of a third of the assets of the global fund management industry today. The system best equipped to achieve this is the network of cross-border supply chains and capital markets that has revolutionized the world since the 1990s. Yet even this system is underperforming, with energy investments accounting for about half. of the required level, and biased in favor of a few rich countries and China. Despite skyrocketing metal prices, for example, mining companies are reluctant to increase supply.
The main reason for the investment gap is that it takes too long to get projects approved and their expected risks and returns are still too opaque. Governments make matters worse by using climate policy as a vehicle for other policy goals. The European Union aspires to strategic autonomy in the batteries and its green agenda directs part of its budget towards disadvantaged areas. China plans to cap domestic commodity prices in its next five-year plan. Likewise, President Joe Biden’s fledgling green plan prioritizes union jobs and local manufacturers. This mix of fuzzy goals and soft protectionism hampers the necessary investment.
Governments must be more stubborn. An activist state has a crucial role to play in supporting the construction of key infrastructure, such as transmission lines, and in research and development. But the top priority must be to catalyze a larger increase in private investment, in two ways.
First, by relaxing the planning rules. The average global mining project takes 16 years to get approval; the typical wind project in America over a decade to get lease approvals and permits, which is one of the reasons its offshore wind capacity is less than 1% of that of Europe. Speed requires centralized decision making and will often result in local disappointments NIMBYs and environmentalists.
Perfect is the enemy of good
Second, governments can help businesses and investors manage risk. They can provide certainty in certain areas: for example, by guaranteeing minimum prices for electricity production. Western governments also have a duty to provide cheap finance to stimulate investment in poorer countries. But the key is the introduction of carbon prices that integrate market signals into millions of daily business decisions and give entrepreneurs and investors more visibility over a long-term horizon. Today, only 22% of global greenhouse gas emissions are covered by pricing systems, and these systems are not integrated. Green bottlenecks are a sign that decarbonization is finally moving from a theoretical idea to a reality. A mighty push is now needed to help make the revolution happen.■
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This article appeared in the Leaders section of the print edition under the title “Bunged up”