The pandemic, the war in Ukraine, and geopolitical tensions have highlighted the strategic importance of supply chains, the globalized supply and distribution chains on which our economy depends, especially strategic industries such as energy. It’s an issue that has become unavoidable for governments and large companies working on the energy transition. The shift to renewables-based electrification is not only critical to combating climate change, but also in order to avoid over-reliance on others; in this context, it is vital to create new distribution chains for the materials and technologies that underpin the production of batteries, photovoltaic panels, wind turbines and smart grids.
Global supply chains and the constantly evolving relationship between advanced economies and emerging markets are the focus of studies by Krishna G. Palepu, Indian-born U.S. economist and currently the Ross Graham Walker Professor of Business Administration at Harvard Business School. Co-author, with Harvard colleague Tarun Khanna, of the book Winning in Emerging Markets, Palepu is the author of dozens of research articles on economic globalization and business management, and has served on the boards of major companies.
On a visit to Italy, Palepu went to Enel's headquarters in Rome and met with the company's top management to study the 3Sun case up close. The Catania Gigafactory for the production of photovoltaic panels is a paradigm of how Europe is working to become independent in terms of clean energy technology.
From offshoring to reshoring
"The pandemic experience, and more generally the trade tensions between the United States and China, are forcing many companies to rethink their supply chains," the Harvard expert begins. "The emphasis has shifted from efficiency to resilience, and reshoring (bringing back parts of the supply chain that had been outsourced to other countries, ed.) is part of this strategy. For strategic industries such as microchips or energy, the phenomenon is more rapid than elsewhere." According to Palepu, some of the production related to renewables will be concentrated in Europe and the United States, while some will relocate to third countries other than China that have fewer geopolitical tensions – starting with India, "which is doing a lot to attract investment," Palepu notes. "It is itself a big market for renewables and is working to build up domestic production capacity, including in green hydrogen." There’s a similar situation in Australia, which is among the world's top producers of lithium, a key element in batteries.
Professor Palepu warns, however, that complete energy independence may be a chimera. "Energy independence is a kind of holy grail, because energy is by its nature a global market," he explains. "I don't think any country will ever have complete independence."
According to Palepu, it is still too early to tell whether the war in Ukraine will have the effect of boosting decarbonization, as the main path to energy independence, or instead slow it down. "The experience of the first few months has gone in the opposite direction, with signs of a return to coal and the construction of new liquefied natural gas terminals. But the main effect of this crisis has been to make everyone aware that depending on autocratic and unpredictable regimes for energy is too dangerous. This applies to Russia, but also to some countries in the Middle East. Renewables provide more security, and this creates a powerful incentive to invest in the energy conversion process. We’ve seen this with the Inflation Reduction Act in the United States and with European Union initiatives. Until now, governments had been much more reluctant to intervene in this area, but things change the moment it is recognized as a national security issue."
Palepu's assessments of the tensions affecting energy supply chains are in keeping with major industry reports, such as the International Energy Agency's (IEA) recent Securing Clean Energy Technology Supply Chains, according to which the combined effects of the pandemic and war "threaten to reverse a decades-long trend toward lower clean energy technology costs," with prices of critical minerals and metals soaring since 2020 (in 2021, prices of lithium, cobalt, and nickel were 25% to 40% higher than the previous year). Overall, the weight of raw materials in the overall cost of renewable energy is rising sharply, as is that of component transportation.
The importance of economies of scale
It is precisely in this context that a project like 3Sun, which began in 2010 but has recently taken a huge leap forward thanks to a substantial investment from the European Fund for Innovation, becomes strategic, enabling the creation of a true Gigafactory, the largest in Europe, with a production capacity that will reach 3 GW by July 2024.
"It’s a very ambitious initiative, and the volumes are right to make it economically credible," Palepu comments. "Economies of scale matter a lot for an industry like solar panels, and they are the reason China has come to dominate the market, producing so many that it can significantly bring down the cost. Likewise, if Europe wants to become self-sufficient, it cannot afford to be timid. It must produce comparable quantities, and this requires large investments and government support." This challenge cannot end with component production, however. "Self-sufficiency also requires the creation of a whole ecosystem around the panels, including the processing of raw materials and the training of specialized personnel," notes Professor Palepu.
The role of infrastructure
Another key element for energy independence, according to Palepu, will be the development of distribution infrastructure. "Solar generation by its very nature will be concentrated in areas of Europe or the United States where solar radiation is higher," and the same is true, of course, for wind with respect to wind exposure. "An infrastructure that can effectively distribute power across the continent will be crucial, and building it is a particularly complicated challenge."
In the U.S., Palepu reminds us, it is estimated that more investment in energy distribution networks will be needed in the coming decades than has been made in the past 100 years. "The West has partly lost the expertise it once had in large infrastructure projects," Palepu explains. "In China, infrastructure is built as easily as drinking a glass of water, while here we face too many obstacles, from patents to the NIMBY syndrome (an acronym for "Not In My Back Yard," i.e., opposition from local communities against the construction of various types of facilities, ed.). I think the creation of distribution infrastructure, from new electricity grids to hydrogen distribution networks, is the area where we will have to focus our efforts the most."
Five pillars for the supply chains of the future
The next decade will therefore be decisive in ensuring resilient and sustainable supply chains in the energy sector. With this in mind, the IEA indicates five pillars in its supply chains report on which action by governments and international institutions should focus. The first is diversification, to prevent supplies from becoming concentrated in single geographic areas or even production sites, fighting monopolies and keeping multiple technologies competing with each other as much as possible. The second is a strong acceleration of the energy transition to clean electrification so as to create a virtuous circle of incentives for further investment in production and infrastructure. Also crucial is investing in innovation and not just relying on existing technologies so as to reduce dependence on specific materials or components. The fourth pillar is to facilitate public-private collaboration, particularly with standard setting and trade tracking systems, to promote supply chain development and monitoring. And finally, warns the IEA, there is a need to increase overall investment in clean energy while helping those in the sector cope with the current scenario in which the cost of money continues to rise.