Electrification’s pivotal role in the energy transition: Addressing supply chain hurdles for a greener future

TL;DR

• The process of electrification will increase the demand for electricity two-to-threefold by 2050 and renewable energy capacity will need to scale up rapidly to meet this need.  

• The focus on electricity’s role in the energy transition has exposed issues with the existing supply chain including a lack of raw materials and shortage of skilled labour as well as a need for increased investment and process reform.  

• There are several solutions on the table that can help to mitigate these bottlenecks such as investing in innovation and emerging technologies, forming strategic partnerships, and changing the way project proposals are assessed and approved.  

• To keep the energy transition on track, interested parties must band together and work in collective to address these challenges. A concerted effort is required.

The detail

It’s undeniable that electrification will play a pivotal role in the energy transition. As the world moves away from fossil fuels, electricity-based alternatives are best placed to plug the gap. In fact, experts see electrification as key to reducing emissions, thanks to its unrivalled ability to generate low-carbon power. This process will take various forms, gas boilers could be replaced with heat pumps, battery-powered vehicles will take the place of petrol engines, and homes could be heated by geothermal energy rather than gas or oil.  

However, while there are myriad benefits to switching to electricity-based systems, the switch will also increase demand and put additional pressure on existing infrastructure and supply chains. In fact, due to electrification, urbanisation, and population growth, electricity demand is projected to increase two-to-threefold by 2050. 

It’s also fair to say that electricity generation isn’t an entirely green endeavour. Currently, over 40% of carbon dioxide emissions are caused by the burning of fossil fuels to generate electricity. That’s why it’s crucial that renewables are harnessed to ramp up electricity production in a considered way while also furthering the process of decarbonisation worldwide.   

Happily, there are wealth of renewable energy sources, some more developed than others, that can produce clean electricity. Solar PV and wind are leading the charge, but these still need to scale rapidly to meet future demand. Alternatives sources such as geothermal, hydropower, biofuels, and wave and tidal energy will need similar attention.  

Roadblocks in the race to net-zero 

This rapid scaling may be easier said than done. There are several hurdles to overcome, ranging from limitations in the supply chain and labour shortages to gaps in investment and regulatory issues.   

I’ve personally seen great progress has been made in resolving these challenges, but knowing that bottlenecks could potentially result in a lack of capacity is alarming. Policymakers, financiers and industry experts must work together to proactively address these roadblocks. McKinsey has released several extensive reports looking at transition blockers and their potential solutions – challenges that I’m keen to further highlight and discuss here.  

The availability of raw materials to feed the supply chain is one of the most pressing concerns. Every piece of the puzzle must be in place for renewable energy projects to move forward and missing just one essential item can bring an entire project to a halt. Materials that are in short supply include lithium required for electric vehicles, iridium for green hydrogen electrolysers, and elements like dysprosium and terbium, which are used in wind power generation.  

This scarcity of materials has also been compounded by price increases. Wind turbines, for example, owe between 40-50% of their construction to steel, copper, and aluminium, all of which have seen two and threefold price increases over the past few years. Energy prices have also increased, especially in the USA, UK, and Europe, which can cause problems when combined with the overall climate of economic uncertainty that has defined the post-pandemic era.  

It's worth noting that renewable energy projects aren’t evenly distributed globally, which can cause further problems. The dominance of one region can weaken the entire supply chain if issues arise. Polysilicon is a perfect example; 79% of the world’s capacity can be found in China, with 50% of that concentrated in the province of Xinjiang. In addition, the remote nature of renewable infrastructure can require remote control by centralised computer systems, which leave these facilities open to cyber-attacks 

An unpredictable industry 

It's not just materials that are facing shortages. Equally, there is also a lack of skilled labour to work in the renewable energy industry.  

Many projects are experiencing problems attracting and retaining talent with demand outpacing the availability of qualified workers throughout the supply chain. Indeed, it is believed that three to four times as many workers will be required by 2030 for the European Union to complete its wind and solar PV build-out. Further, the impact of labour shortages is already being seen in the US as the lack of talent has led to EPC contractors bidding selectively on fewer projects, which has impacted competition and increased prices for developers.  

Limited private and public investment is a persistent problem hindering rapid growth in the renewable energy sector. The sums required are substantial; approximately $3.2 trillion in investments will be required by 2040. However, this money could be used to solve some of these bottlenecks by funding technologies that don’t rely on critical materials and increase recycling rates, efficiencies and logistics.  

Unfortunately, price volatility in the market and the impact it has on future project pipelines can act as a deterrent, discouraging original equipment manufacturers (OEMs) and investors. On a more positive note, there is plenty of potential for a return on any investments made. Global OEM revenue for electrification hardware, for example, could multiply by 1.4 to 2.2 times by 2030 and heat pump revenue could increase by up to 16%. 

Navigating permit problems  

Arguably the most impactful bottleneck is the permit and regulation process. A lack of continuity in this area has made long-term capacity planning and large raw material orders challenging. The permit process, especially in Europe, is largely managed manually and under-resourced, resulting in instances where it can take up to 10 years to build a new wind farm. In fact, four times more wind capacity is currently stuck in permitting delays than is under construction – an issue coupled with delays in grid connections. The wait time for these connections has doubled in recent years with the number of requests rising from 40 a year to 400. 

These interlinked roadblocks prove that there is an immediate need for interested parties to band together and work collectively to address these challenges. A concerted effort is required on all fronts – these issues won’t simply be solved with increased investment or permit process adjustments alone.  

Finding a way forward 

Innovation is one potential solution. Emerging technologies could help to both ease the energy transition and provide opportunities for OEMs. Battery energy storage systems, large-scale heat pumps, and electrolysers are all projected to achieve double-digit revenue growth by 2030. There are also opportunities worth exploring such as land integration, which could expand rooftop solar and prioritise partnerships with food producers for agrivoltaics.  

Partnerships more generally could play an important role in working past persistent bottlenecks. Danish energy company Ørsted is leading the way having developed a strategic relationship with German steel producer Salzgitter AG. Ørsted supplies Salzgitter AG with hydrogen and zero-carbon electricity to facilitate the production of green steel, which Ørsted can then buy to build its wind turbines.  

The need to implement policy reform is already being addressed in Europe with the RePowerEu plan, which was launched in 2022 to conduct a wide-reaching permit review to simplify and standardise the process. Under the proposed reforms, renewable energy plants would be presumed to be of overriding public interest. If policy support, regulatory reforms and speedier infrastructure development were to put in place, average annual solar PV capacity could expand by 52 GW and increase the pace of solar and wind deployment across the EU by 30% by 2027.  

A similar framework is in place in India. The Environmental and Social Impact Assessment (ESIA) framework classifies solar and wind as ‘white’ category projects, which means they can circumvent the mandatory environmental clearance legally required by the Ministry of Environment, Forest, and Climate Change. Recently, this has been supplemented by the National Single Window System, a digital platform and advisory tool to aid approvals. Since its inception in September 2023, the platform has facilitated over 44,000 project approvals.  

From an investment perspective, more transparency around the sums required and the potential gains is essential. This could also be supported by an expansion of competitive auctions that reflect higher investment costs and ongoing supply chain challenges to improve the business case for new solar PV and wind developments.  

Ultimately, electrification – and the renewable energy that will enable it – is at risk due to these challenges, which are only being exacerbated by the sector’s steep growth trajectory. With the impact of climate change being felt worldwide, now is not the time to let roadblocks extend development and construction timelines, increase project costs, and hinder growth. It’ll require a team effort, leveraging private and public investment, innovation, policy change, and more, but these issues aren’t impossible to overcome.  

Now that the problems have been identified, it’s time to implement the solutions.  

— Lew 👋

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