Diverse Supply Chains Key To Unlocking The Power Of Renewables

Published on :

25 March 2024


Published By :

Forbes


Category :

Op-eds


The shift away from fossil fuels to clean energy will rest on the shoulders of another shift that is equally as urgent: enhanced capabilities for materials and components supply, that are well diversified across several nations. Scaling up of the production and supply capabilities is not an issue, the geographical diversification of these is. Let’s delve deeper into why is diversification an issue and how we can tackle it.


The current market situation is such that it is hard for suppliers of solar modules, cells, wafers, electrolysers (for green hydrogen), and battery components to attract finance, operate in the international market and grow. The dominant player in the market is China, with significant cost advantages. Companies based in China produce eight out of ten solar modules used worldwide, supplying these at a cost 20 to 40% lower than their competitors. This trend extends to other above-mentioned components as well.


The current Chinese producers are expanding capacities rapidly to cater to all of the global demand, leaving little room for new players to enter the market. Investment announcements, mostly by China-based producers, indicate that global solar PV manufacturing capacity is expected to reach 1,000 GW by 2024-25, whereas the demand is expected to reach only 650 GW per year, that too by the year 2030. For batteries, the planned capacities of the top 20 companies are triple the current global demand, a trend likely to continue until 2030. Electrolyser production, essential for green hydrogen, is also set to exceed demand, with 175 – 360 GW of capacity in the pipeline against a 2030 demand of 180 GW, half of which is in China. This points to significant over-capacities that are, and can be, leveraged to scuttle competition.


Catching up, therefore, will not be easy. But progress is being made. The US and India have developed a pipeline of almost 170 GW of solar modules manufacturing capacity through incentives like the Inflation Reduction Act and Production Linked Incentives. The European Commission, through the Net-Zero Industry Act, aims for the EU’s manufacturing capacity to supply at least 40% of its demand for net-zero technologies by 2030. Indonesia is working to achieve a domestic production capacity of 140 GWh of batteries by 2030, leveraging its significant nickel reserves.


So, what’s the path forward? Here’s a three-point plan for diversification.


Leveraging the power of domestic markets and co-ordinated trade strategies


Leveraging the power of domestic markets is crucial, given the current disadvantage on production costs. Regions including the US, EU, India, Brazil, Australia, and Japan are likely to deploy over 20 GW per year of solar power capacity each by 2030, sufficient to stimulate the manufacturing ecosystem and achieve economies of scale.


However, investments and economies of scale will only materialize with sufficient demand for locally produced components. Renewable energy targets provide the demand signals for solar, wind, and batteries supply chains. For instance, India's demand for renewable energy, to be supplied 24x7 or at times of peak demand, boosts demand for batteries paired with solar and wind. Similar mandates and government-led procurement are needed for green hydrogen and electric vehicles.


Trade policies too have an absolutely critical role in creating demand. Import duties and non-tariff barriers, like those implemented by the US and India are a good start. Countermeasures like the ones Brazil and Vietnam have initiated on anti-dumping are critical too, as we are witnessing instances of solar modules, cells, wind towers, and battery components being sold in international markets at artificially low prices. To mitigate the risk of over-protected inefficient industries, all of these should have clearly defined end-points, triggered by the market situation where there is clear evidence of fair pricing. I would also like to see more co-ordinated trade policies though, so that countries can focus on parts of the supply chain where they have competitive advantage, instead of competing with everyone else across all parts of the supply chain. This would help in avoiding the situation of artificially small and fragmented markets fostering smaller and inefficient entities that are unable to compete internationally over the medium term.


End-to-end ecosystem development for clean energy supply chains is essential, focusing on producing components across the entire value chain and reducing costs.


The bulk of investment has targeted final stages of the value chains, requiring overseas expertise, local manpower skilling, and high capital intensity. Developing capabilities in mid-value chain stages, like polysilicon, ingots, wafers for solar; cathodes and anodes for batteries; membranes for electrolysers, is where significant efficiencies and cost reductions can be achieved. This requires stronger collective action between governments and the private sector to de-risk investment and bridge the competitiveness gap, including reducing capital expenditures, enhancing labor productivity and reducing electricity costs.


In addition, upgrading and realigning existing industrial facilities within countries to supply components for clean energy is necessary. For instance, components like glass, ethylene vinyl acetate (EVA) for PV panels, back sheets, and junction boxes. Countries like India and the United States have industries that can be pivoted toward these needs.


Developing expertise early in emerging supply chains


The challenge of over-dependence extends beyond current technologies. Proactive steps are needed to avoid dominance in emerging sectors like green steel, carbon capture, green building materials and sustainable fuels. This involves replicating successful models and targeted government incentives.


To conclude, diversification is a medium-term prospect. But we need more substantial and better co-ordinated efforts within the next 2-3 years to meet the challenge in front of us.