Tight Squeeze – Green bottlenecks and how they are threatening the clean energy business

As the world looks to clean energy sources to be the saviour of the future, green bottlenecks could produce a severe bump in the road for a tangible, but overdue, reality.

Communication Breakdown

Over the past decade, green technology has played a vital role in assisting countries to meet their emission targets and have become cheap enough to deploy at scale, so what is now holding them back? The worldwide switch to clean energy is still only in its infancy. A shift in raw materials is causing stress and strain to the market and resulting in a scramble for new projects with regulatory approval. Some would argue that the supply chain problems can be specifically linked to metal scarcity and land constraints, and that these are slowing the necessary green energy boom. The calculated price of five key minerals (including copper, nickel, lithium) used in electric cars and power grids has soared 139% in the past year. In February, a British auction for seabed rights for an offshore wind farm brought in just over £8.5 billion. With reported timber mafias roaming Ecuadorian forests to find balsa wood, a material used in wind turbine blades, the price of these precious natural resources is getting higher, both economically and socially.

Zero is a Magic Number

Coupled with the supply chain issues, there is a wariness of governments making it worse by using climate policy as a tool for furthering other political objectives. It can be argued that governments should instead respond to these market signals to enable a huge private sector investment boom over the next decade, which would increase capacity. Although the zero-carbon promises made by governments are bold and indeed, essential, some would argue they appear to be empty. Startling statistics put these zero-emission pledges into a harsh light; to meet the needs of the net-zero 2050 target coal demand would need to fall by almost 60%, a level last seen in the 1970s. The power sector investment would need to almost triple from $760 billion in 2019 to $2200 billion in 2030, with more than one-third spent to expand, modernise and digitalise electricity networks. If governments drag their feet, they stand little chance of meeting their assurances to reach ‘net-zero’ emissions. The countries who have adopted the net-zero target by 2050 account for over 70% of world GDP and GHG emissions.

It is not only governments who need to change strategy; investors are starting to demand that firms also change, sparked by the realisation that clean technologies are more cost competitive. Investors demands coincide with the new CSRD proposal, formally NFRD, and its implementation is scheduled to begin 2022, at the earliest. The CSRD will increase the effectiveness and cohesiveness of sustainability reporting throughout the EU. Legislation requiring investors to channel funds into the green sector depicts the trend towards growth for more sustainable companies. Among the clean energy pioneers are companies like Orsted, a wind-farm organisation, which plans a rise in capital spending of 30% this year, alongside Tesla, the electric-car giant, also planning an increase of 62%. An eyebrow-raising $178bn flowed into green-tinged investment funds in the first quarter of 2021. There’s clearly money in this sector so where is it going wrong?

Getting Ahead of Ourselves

Some financiers fear that the supply shortages over coming years could eventually fuel higher inflation. Some of the technologies that countries are relying on to bring them to net zero do not yet exist, making them, unsurprisingly, unavailable for investment. The sector still needs a dramatic increase in research and development. An example of extraordinary, but not impossible, goals for net zero is that if we are to stay on track for net zero 2030 annual production of electric vehicles (EV) needs to be ten times higher than last year, with 31 times more roadside charging stations. Global mining firms will need to raise annual production of critical materials by 500% (the potential of these reserves not even existing makes this easier said than done). To put this into monetary value, $35 trillion will be needed for investment over the next decade, equivalent to over a third of the global fund management industry’s assets today. The system best equipped to deal with this is the network of cross-border supply chains and capital markets, although they are still underdelivering. Energy investment is running at half the level required and is mainly skewed towards a few rich countries. A core reason for investment shortfall is that it takes too long to get projects approved, and the risks and returns are still too opaque.

Where do we go from here?

The main priority should be to catalyse a bigger surge in private investment; this could be done in two ways. Firstly, an easing of planning rules. In July 2020, the government announced relaxation of planning laws to make it easier to construct large batteries for the storage of renewable energy. Previously, planning laws could add 18 months to a project’s development time frame, as well as increasing costs. Now large-scale battery developers will be able to apply for permission to build their energy storage projects using local planning rules, the progress for these projects should now only take between eight to sixteen weeks. This is an improvement but only for one type of renewable energy. Speed is required to centralise decision making and that would mean potentially disappointing local NIM-BYs and conservationists. The second priority is for governments to help companies and investors deal with risks. The government has authority to provide certainty in some areas and can guarantee minimum prices as it already does for power generation. Importantly, Western governments have a duty to provide cheap financing to lift investment in poorer countries. The introduction of a realistic carbon price – which would embed market signals into millions of everyday commercial decisions, and allow entrepreneurs and investors more visibility over the long-term – would help to solve this issue. Recently at the G7 Summit leading CEOs advocated for a global carbon price, showing that entrepreneurs, along with investors, are ready to face the challenge head on.

The introduction of a global carbon price, however, does not provide the developing world with enough motivation to decarbonise. For example, coal is one of the few natural resources that China and India possess in abundance, the cost to these countries to decarbonise would be huge. Boosting investment into developing countries through high concessional financing, along with sharing technical expertise and best practices, guided by a neutral party, would be a tangible incentive.

The move towards green energy needs to happen sooner rather than later. Some would argue that waiting until 2050 is too late to make the necessary changes to our energy resources to halt the impending climate crisis. Overall, the solution to this problem seems to be one which money can buy, but with governments still tip toeing around this sleeping giant, will technology ever be able to wake and fulfil its essential role in tackling net-zero.