Out of the Frying Pan, and Into the Fire? The Energy Security Implications of the Green Transition
By Valentin Deleniv, Policy Brief Co-ordinator
While the EU’s immediate energy security concern in the aftermath of Russia’s invasion of Ukraine has been finding new supplies of natural gas and oil, another crucial component of this drive for diversification is clean energy. But what supply risks are associated with this transition, and will decarbonisation simply create a new set of dependencies that replace old ones?
A key cause for concern is that of “critical material” supply — namely, of rare earth elements, lithium, and cobalt (among others). Though renewable energy (RE) represents a unique opportunity to address the problems of climate change and energy dependence on Russia in one fell swoop, important segments of the RE industry (especially batteries and turbines) rely on critical materials as key inputs which are only mined, processed, and refined in a handful of countries.
To take one example, China currently controls some 87% of the global permanent magnet market. These are vital components in electric vehicle (EV) motors, defence systems, electronics, and wind turbines. Furthermore, in 2019, the Democratic Republic of Congo (DRC) and China were responsible for 70% and 60% of global production of cobalt and rare earth elements, respectively.
Such concentration poses a worrying economic and political risk, as demonstrated by supply shocks during the pandemic and Russia’s invasion. Turmoil in the DRC could hit supply across the rest of the world, and China could leverage its strategic position on critical material supply chains to extract political concessions. Beijing’s numerous trade spats with (among others) Norway, Australia, and Lithuania over political disagreements shows that such a scenario has its precedents.
This supply risk is made all the more concerning by the fact that demand for critical materials is set to increase over the next two decades. By a lot. According to an International Energy Agency report, demand for graphite, cobalt and nickel is set to increase by 20–25 times by 2040, and by over 40 times for lithium. This is not to mention that an increasingly large portion of final products’ cost is composed of raw materials, increasing from 40–50% of total battery costs five years ago, to 50–70% today. Raw material price increases could therefore offset any cost efficiency-gains from growing economies of scale associated with the green transition.
The same report, however, also states that the effects of critical material bottlenecks are not as immediate or severe as with fossil fuels. Combustion of petrol means that new supply is constantly needed, and an oil supply crisis will immediately hit transportation and downstream sectors. By contrast, a critical materials crisis will only impact new EVs and RE generation, so current consumers are not as vulnerable. In addition, with critical materials there is the potential for recycling and recovery.
Nonetheless, supply issues will remain, and governments have already begun to invest in diversifying suppliers, increasing domestic production, and supporting technological innovations that reduce material intensity. In June 2021, for instance, the Biden administration released a first-of-its-kind supply chain assessment, and in February this year it announced a multibillion-dollar investment drive in critical materials together with the private sector. Earlier, in September 2020, the European Commission launched the European Raw Materials Alliance, whose pipeline of projects — if successful — would ensure that EU-made rare earth magnets could supply over half of the EU’s new wind capacity.
This is good news, because while its precise forms are changing, potentially vulnerable (inter)dependence isn’t going anywhere. The trans-Atlantic community must draw its lessons from the supply shocks of COVID and the debacle of Germany’s foot-dragging on Russian energy sanctions so that it may be better prepared for the new geopolitics of energy.