Crunch time: from energy to metals

Energodigest | 10 June 2022

The energy crunch that started last year has continued into 2022 amid growing geopolitical unrest, with the climate agenda now seeming to take a U-turn. Coal consumption globally is on the rise, and so are prices: benchmark Australian thermal coal at the port of Newcastle has appreciated 162% year-to-date and 247% y-o-y. Decarbonization, however, has not been officially called off. What is more, it is widely viewed as a solution to the energy crisis.

For example, the US has declared an emergency due to a lack of sufficient electricity generation capacity, which was prompted not so much by geopolitical shocks as by a combination of above-normal heat and drought across some parts of the country.[1] In the face of the electricity shortage, the US Department of Commerce was lately given additional authority, including powers to allow solar modules and cells from Cambodia, Malaysia, Thailand and Vietnam to be imported free of certain duties for 24 months or as long as the emergency exists.[2]

Last month, the European Commission unveiled details of its REPowerEU plan to wean the EU off Russian fossil fuels. Among other measures, it is proposed to scale up investment in alternative energy and increase the headline 2030 target for renewables from 40% to 45% under the Fit for 55 package.[3] The bloc also seeks to bring online over 320 GW of solar photovoltaic energy by 2025 (more than double the current 159 GW)[4] and almost 600 GW by 2030 (see Fig. 1). Considering that capital expenditure per MW will decline gradually, this expansion may cost around €230 billion in total.[5] It’s yet to be seen what will happen on the wind front. But, given the EU’s intention to ramp up total RES generation capacity to 1,236 GW[6] by 2030, it can be assumed that nearly 450 GW of this figure will be added to the current 187 GW of wind generation capacity, with around €750 billion in new investment required.[7] To finance the entire REPowerEU plan, which is about more than renewables, the European Commission is now ready to provide only €245 billion, sourced largely from the Recovery and Resilience Facility.[8]

Though China hasn’t escaped this trend, it treads carefully to adapt to what happens on the global energy market. To fuel its economic growth, China plans to increase coal production capacity by 300 million tonnes in 2022, which is equal to 7% of last year’s output. A few days ago, it scaled back its 14th five-year plan for renewable energy, setting a target for renewable power generation to supply 50% of additional electricity consumption over 2021-25, down from the previous goal of 67%.[9] In the revised plan, China aims to ensure that its grids source about 33% of power from renewable sources by 2025 and to raise the share of non-fossil fuels in total energy use to 20% (up from last year’s targets of 28.8% and 15.4%, respectively).

With metals used in clean energy technologies also being hit now by supply chain disruptions (see Fig. 2), these ambitious plans may upset the supply and demand equilibrium in the mid term (see Fig. 3) and, hence, pose new challenges for the global economy, whose prospects have lately been persistently bleak. In June, for example, the World Bank[10] revised its outlook for global economic growth to 2.9% in 2022 and 3.0% in 2023, down 1.2 p.p. and 0.2 p.p, respectively, from the January forecast.

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