The pandemic demonstrated the ripple effects that disruptions in supply chains can have on the world economy. The war in Ukraine has further exposed the vulnerabilities that arise when strategic inputs like energy, minerals and food are over-dependent on a few countries.
Europe’s need to rapidly replace the fossil fuels imported from Russia is accelerating the transition towards alternative energy. The stepped-up energy transition has a cost and has generated high volatility, but it also creates new opportunities, with periods of high fossil fuel prices offering strong incentives for innovation and investment in alternative energy. The road is long, but the increased investment we see is paving the way for a clean-energy economy.
Fossil fuel’s decline
A peak or a plateau in global demand for each fossil fuel (coal, gas and oil) is in sight for the first time. The International Energy Agency’s STEPS1 scenario, which takes into account current international climate policy, foresees global coal use declining within the next few years and natural gas demand reaching a plateau by the end of the decade while rising sales of electric vehicles (EV) could mean that oil demand stabilises in the mid2030s before easing slightly by 2050.
For decades, the share of fossil fuels in the global energy mix has been around 80%. But according to the STEPS scenario, this could fall below 75% by 2030 and to just above 60% by 2050 (chart 1).
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The rise of other commodities
The search for other resources increases rapidly as the energy transition gathers pace. The demand for critical minerals needed in clean-energy technologies is set to rise sharply, doubling from today’s level by 2030 in the IEA’s APS1 scenario. An EV contains more than 200kg of minerals — 65kg of graphite, 52kg of copper, 40kg of nickel, 24kg of manganese, 13kg of cobalt and 8kg of lithium — whereas a conventional car contains only 34kg, essentially copper and manganese.
An offshore wind power generator needs 15 times the amount of minerals a natural gas generator requires. The wind-power generator needs over eight tonnes of copper and over five tonnes of manganese per megawatt generated. The transition to clean energy means a shift from a fuel-intensive to a material-intensive economy.
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The biggest increase in absolute volumes will be in copper, with the IEA seeing demand rising from five million tonnes (mT) in 2021 to nine mT by 2030 under its STEPS scenario and almost 16mT under its NZE1 scenario (chart 2). Other critical minerals are expected to experience much faster rates of demand growth, notably silicon and silver for solar photovoltaics, rare earth elements for wind-turbine motors and lithium for batteries.
Investment needs
This historical change in resource needs implies huge investments to extract these commodities and a massive reorganisation of supply chains. Clean-energy investments have increased recently but are still well below the required levels. Overall, global energy investment is estimated to have reached US$2.4 trillion in 2022, while investment in clean energy accounted for US$1.3 trillion. This is still well short of what is required to meet the rising demand for energy services in a climate-sustainable way.
Under the STEPS scenario, clean energy investment is expected to rise above US$2 trillion by 2030, but this figure would have to be above US$4 trillion by that date to stabilise global temperatures set out in the NZE scenario.
More government initiatives to spearhead the transition
Many governments are adopting longterm policies to accelerate structural changes in favour of alternative energy. Thanks largely to the Inflation Reduction Act, passed into law in 2022, the US’s solar and wind capacity is set to accelerate to an annual rate two-and-a-half times faster than before by 2030, while EV sales are set to increase sevenfold.
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In China, coal and oil consumption is expected to peak before the end of this decade. Likewise, accelerated deployment of renewables and efficiency improvements will likely decrease the EU’s demand for natural gas and oil by 20% this decade and coal demand by 50%. Japan’s ‘Green Transformation’ programme should provide a major funding boost for various technologies, including nuclear and low-emission hydrogen and ammonia fuels.
Elsewhere in Asia, South Korea is also looking to increase the share of nuclear and renewables in its energy mix, while India is targeting an extra 500 gigawatts of domestic renewable capacity by 2030 when renewables could meet nearly two-thirds of the country’s rapidly rising demand for electricity.
The increase in renewable electricity generation could outpace growth in total electricity generation, thus driving down fossil fuels’ share.
Goodbye globalisation, hello economic nationalism
The current production of many of the minerals at the centre of the energy transition is more geographically concentrated than is the case for oil and natural gas. The top three oil-producing countries (US, Saudi Arabia and Russia) account for 42% of global oil production and the top three gas-producing countries for 47% of global natural gas (US, Russia and Iran).
By comparison, the top three producing nations control over three-quarters of the global output of lithium, cobalt and rare earth elements. The Democratic Republic of Congo, for example, produces 69% of the world’s cobalt, while China produces 63% of graphite and 60% of rare earths.
The degree of concentration is similar when it comes to processing. China processes 40% of global copper, 58% of lithium, 65% of cobalt and 87% of rare earth elements. High reliance on individual countries such as China for critical mineral supplies and many clean technology supply chains is a risk hanging over the energy transition, especially as diversifying sources of supply can be long and costly. It takes, on average, over 16 years to move mining projects from discovery to first production.
Moreover, ore quality has been declining across a range of commodities. For example, the average ore grade of Chilean copper has declined by 30% over the past 15 years. Extracting metal from lower-grade ores requires more energy, exerting upward pressure on production costs while increasing greenhouse gas emissions and the volume of waste.
Given all the technological and diplomatic complexities involved, the transition to a clean energy economy will likely shake up the current geopolitical order. Old alliances give way to new ones, and support for globalisation plays second fiddle to the need to secure proper energy supplies. These developments could result in a more fragmented world and ever-fiercer competition for control of resources.
Jean-Pierre Durante is head of applied research at Pictet Wealth Management
