Securing a clean energy future
Efforts to realign supply chains out of China are likely to result in Beijing exercising strategic and geopolitical leverage through commercial domains they dominate. Global initiatives to grow solar and battery capacity can face a combination of headwinds as countries become increasingly exposed to this heightened risk. Meanwhile, nations and firms will adjust to structurally higher interest rates and a bifurcated global commodity market. As the neoliberal system frays, commercial decisions will no longer be divorced from strategic ones. Across the world, a new wave of government measures – from India’s Production Linked Incentive (PLI) scheme to the US’ Inflation Reduction Act – are expected to shore up industrial strengths and protect critical sectors. Some major powers will seek to diversify their foreign exchange reserves away from traditional US dollar-denominated financial assets into real assets and commodities. Alongside, competition will heat up to secure minerals required for the green energy transition. India’s push for self-reliance in clean energy must be part of a larger plan to capture a major share in global upstream and midstream. This can mitigate risks associated with the weaponization of trade, reduce dependency on imports from foreign firms, help stabilize the Rupee, guarantee supply to industries, and improve manufacturing scale and export capacity. Together, this can lend the country significant economic and geopolitical maneuverability and support steady, compounded renewables expansion over the coming decade.
"Across the world, a new wave of government measures – from India’s Production Linked Incentive (PLI) scheme to the US’ Inflation Reduction Act – are expected to shore up industrial strengths and protect critical sectors."
Of the global capacities for polysilicon, wafer, cell, and module production, China holds 79%, 97%, 85% and 75% respectively. The International Energy Agency (IEA) expects that global manufacturing capacity must at least double by 2030 to meet its Net Zero trajectory. This will demand major investment in the mining sector given that according to IEA estimates, 11% of global silver, 6% of metallurgical-grade silicon, 2% of copper and 40% of tellurium production is consumed by the photovoltaic (PV) industry. Without mining expansion, these numbers could grow to 36%, 22%, 7%, and 140% respectively. Growth is expected, but with over a decade in lead times for new mining projects, the knock-on effects of supply squeezes on other industries that use these minerals can be materially disruptive and inflationary on a broad level. Given the resource scarcity, aggressive moves by China to expand PV manufacturing in the last three years has resulted in prices of products like polysilicon to triple. Market distorting subsidies helped China scale up its operations, even if firms continued to run into steep losses. Losses have been absorbed willingly so that sectoral dominance could be achieved, expanded and leveraged. In a move that has raised concerns, a report from late January, 2022 points to Beijing’s growing intent to ban the export of advanced wafer technologies.
As India grows its solar capacity from around 68 GW to 333.5 GW by 2032, indigenization of manufacturing must get backed by access to Indian-owned resources. Stiff customs duties cut the solar import bill from north of $4 billion in 2021 by nearly 60% year-on-year in the two quarters after the revised tariffs were imposed. Meanwhile, exports of cells and modules, mostly to the US, grew over sixfold year-on-year to $157 million as supply chain reorientation away from China accelerated. Industry trade flows may be turning a corner, but policymakers must be mindful of the fact that scale in the Indian PV industry relies on Foreign Direct Investment (FDI) and domestic credit. Both are sensitive to project risks which will increasingly get linked to back-end supply chain resilience. Investment can get stymied when elevated risk is baked into a project’s cost of capital in a high interest rate environment. The Q3-2022 year-on-year slump of 45% to $2 billion in PV investments has more to do with indigenous manufacturing not ramping up to offset prohibitive import tariffs than back-end supply chain risk, but the latter casts a looming shadow over future growth. Even while FDI flows in the sector remain strong, the Parliamentary Standing Committee on Energy revised up the required annual investment figure in the renewables sector through 2030 from around $10 billion to over $26 billion. Attracting capital at an exponential pace to meet this target against the backdrop of a globally tight metals market will require a comprehensive relook at supply chain integration.
India’s annual li-ion battery demand is currently 3 GWh, a figure that is set to grow to anywhere between 70 GWh and 116 GWh by 2030 according to industry estimates. Greater domestic renewables generation will demand grid-stabilizing batteries while the electric vehicle push will raise demand for li-ion cells. Currently, 70% of the country’s requirements are met by China. India must ensure that its path to becoming a major producer and exporter of batteries is insulated from external supply shocks.
"The clean energy space may experience a cascading and substantive impact of great power competition, weaponized trade, raw materials supply shortages and price volatility. India can take several measures to manage these risks. India would be well placed to allocate a portion of its foreign reserves to a sovereign wealth fund that acquires stakes in mining firms and commodity trading companies."
China currently hosts around 900 GWh of manufacturing capacity and an 80% share of global cell production. According to Bloomberg New Energy Finance, battery prices rose in 2022, for the first time ever, up 7% in large part due to a fivefold price rise in lithium and a threefold price rise in cobalt. North America and Europe currently pay 24% and 33% respectively more than China for li-ion batteries. As with most of China’s clean energy industries, the battery business has been built out through vertical integration. While the lithium processing and cell production and segments have scaled up, domestic lithium mining accounts for just 14% of the global total. The story is similar in cobalt where processing capacity stands at 80% but most sourcing is done abroad where state-owned enterprises hold majority stakes in mines. A hegemonic midstream has ensured that raw material volumes can be pulled in as and when directed. Meanwhile, China enjoys near total dominance in rare earths. 63% of all rare earths are mined locally and this fits neatly into an 85% share in global processing. Japan was one of the first countries to face a Chinese export embargo on rare earths as early as 2010. Worryingly, China controls 92% of rare earth magnet and 100% of spherical graphite production. More than half of the world’s graphite mining is done domestically and this has led to the government imposing tariff and non-tariff barriers to conserve reserves. The international market has since been subject to high price volatility and supply risk as Chinese firms took a majority share of foreign offtakes.
The clean energy space may experience a cascading and substantive impact of great power competition, weaponized trade, raw materials supply shortages and price volatility. India can take several measures to manage these risks. India would be well placed to allocate a portion of its foreign reserves to a sovereign wealth fund that acquires stakes in mining firms and commodity trading companies. This serves four purposes. First, it diversifies reserves into real assets, the offtakes from which can feed into broader vertical integration and by extension, comprehensive national economic power. Second, since the value of pure-play mining firms is highly correlated with the price of the underlying commodities produced, such holdings act as hedges against price rises. Imports of raw materials for India’s green energy transition may reach over $30-50 billion per year by the end of the decade, adding to the country’s deficit and impacting the value of the Rupee. Third, trading firms typically benefit from price volatility and successful merchants can deliver profit when businesses struggle to adapt to frequently changing prices. Ownership in such firms opens opportunities for cross-subsidization by the government within the sector, a move which can preserve business confidence in low-risk, aggressive mid and upstream capacity expansion. Fourth, equity stakes will take forward the Reserve Bank of India’s idea of holding physical gold as part of its portfolio, deeper into the commodities complex. Integrating strategic stockpiles of critical metals and rare earths will complement this effort to ensure security of supply. This fits the recommendation made in the Indian government’s Economic Survey for 2023.
Critical to India’s indigenization plans are initiatives by the public sector like KABIL and the Deep Ocean Mission’s seabed mining program. KABIL’s investments in Australian and Latin American upstream projects can effectively mirror the successful operations run in the energy sector by the likes of ONGC Videsh Ltd. Seabed mining has not taken off internationally to the same extent as land-based mining but the resource potential in India’s Exclusive Economic Zones is enormous and might be the key to self-sufficiency in critical metals and rare earths. The recent find of 5.9 million tons of inferred lithium reserves in Jammu & Kashmir will also alleviate import dependence to a large degree in the long run. Given this, India can increasingly work with countries in the US-led Minerals Security Partnership group. By building and offering security of supply of domestic and internationally sourced raw materials, India can benefit from subsidies under the US government’s Inflation Reduction Act. This will help build an integral, cost-competitive presence in the global battery supply chain. Lastly, investments in battery recycling and battery technology R&D can cut imports in the long run. Joint ventures with American, European and Japanese firms can raise India’s technological capabilities with an eye on the decade beyond 2030.
(Exclusive to NatStrat)