Hardly anything has been more emboldening in the ongoing “clean energy transition” than the solid learning curves of batteries and main renewable energy technologies over the past decade or so, as well as the upbeat forecasts of their continued expansion.
The prices of lithium-ion batteries have come down about 14% per year since 2007, as indicated in a 2015 paper in Nature, with a 6% to 9% price reduction for every doubling of production volume. According to a 2015 study by the Fraunhofer Institute for Solar Energy Systems, the short-term learning rate for photovoltaic (PV) systems is 10% until a global PV capacity of 5,000 GW is reached, and is projected to increase to 19-23% on the long term (2050). For wind turbines, a 2017 study by Agora Energiewende quotes IRENA for a projected LCOE (levelized cost of electricity) reduction of 26% by 2025, while the 2014 assessment by KIC InnoEnergy is a more sobering 5,5% by 2025 for this technology.
Other studies have produced slightly different such numbers. Yet they all show exponential growths of clean energy technologies in the future. In so doing, such analyses typically focus on two main favorable cost drivers: regulations (including support schemes for renewable energy sources, RES, and electric vehicles, EVs) and finances (including cost of capital and local cost structure).
Wind turbines, PV panels and hi-power batteries are pillars of the transition to clean electricity generation and low-emission transports. Confidence in their future costs reductions is paramount for both investors and policy makers. But while such investments are expected to grow massively in the coming years, constraints of a different kind will have to be kept in mind.
Critical technology metals
After several years of stability, the spot price for lithium carbonate started to grow in 2015 and has more than doubled since then; it increased steeply from under $6,000/ton in 2015 to more than $13,000/ton in 2016 and spiked to no less than $17,000/ton in April 2017. In China, spot lithium carbonate prices exceeded briefly $20,000/ton on account of a shortage of spodumene (a pyroxene mineral that is one of the two major sources of lithium) imported from Australia. This has raised concerns about the near-term liquidity of China’s sport market.
Similarly, the price of cobalt increased from a relatively stable $25,000/ton in 2015 to about $60,000/ton in July 2017. Nickel, on the other hand, has seen decreasing prices from $20,000/ton in April 2014 to $9,200/ton in July 2017.
Lithium, cobalt, nickel and indium are widely used in batteries and renewable energy technologies. Likewise, rare earth elements, such as cerium, dysprosium, gadolinium, lanthanum, neodymium, praseodymium, samarium, scandium, and yttrium, are used in superconductors, special glasses, magnets, catalysts and separators, phosphors etc., which in turn are vital components of electric motors, batteries, thin films, lasers, NMR and X-ray machines, fuel cells, solid state and fluorescent lighting, PV cells, stainless steel, catalytic cracking in oil refineries and many others.
Basically, the entire modern world of electronic devices used in science, industry, medicine, military, as well as households rely essentially on the availability of rare earths and other so-called technology metals. These metals are vital for our technical capacity to efficiently generate, transmit, store, and consume energy. Rare earths elements along with indium, lithium, gallium, and tellurium, as well as precious metals such as platinum and silver, but also more common ones such as magnesium, nickel, molybdenum, cobalt, and tungsten constitute an indispensable material base of today’s global energy economy.
In a 2011 report, Caltech’s Resnik Institute advanced a useful definition of technology metals’ criticality, along two dimensions: that such metals have properties essential for the application’s performance, and that their supply faces a certain degree of risk. Usefully, the report plotted a “criticality matrix” for several technology metals, underscoring the criticality of a few elements that stand out with respect to both technological importance and supply risks: dysprosium, yttrium, neodymium, terbium, europium, indium.
Most rare earths are not actually rare in terms of their geological availability, yet minable concentrations are much less common than for other ores. The United States Geological Survey (USGS) estimates total reserves worldwide at 130 million metric tons (mt), concentrated mostly in China (55mt), Russia (40mt), Brazil (22mt), Australia (3.2mt) and India (3.1mt). They are found in dilute concentrations and are often difficult to separate, making mining and processing laborious and capital intensive.
Some of the marketplace instability for rare earths results from the fact that most of them are mainly produced as byproducts from mining other metals: for example, indium is recovered in processing zinc ores, and most tellurium is recovered by processing copper ores. Unfortunately, for most coproduced technology metals, an increase in demand will hardly provide a strong enough economic incentive to increase the production of the base metal they are extracted with.
There are plenty of measures that can be taken along the value chain to increase security of supply. Reduction of waste, improved manufacturing efficiency, and recycling of end-of-life products can have a significant impact on increasing the supply of critical materials. Japan and the EU are frontrunners in developing recycling systems for technology metals, at significant capital costs.
To increase the cost efficiency of recycling, research and development (R&D) can contribute through optimized design of technology products to facilitate their recycling, as well as by advancing material substitutions, to reduce dependence on particularly critical metals. For example, platinum nanoparticles in fuel cells or catalytic converters can be substituted by nanoparticles of other platinum-coated elements, with sizeable reduction of platinum use in such applications. However, material substitutes tend to be less effective in most applications, so that a cost/performance trade-off is usually called.
Finally, in quite a few cases full-system substitution is doable, with significant reduction of critical materials demand. As pointed out by the Resnick Institute report, the substitution of light emitting diodes (LEDs) for fluorescent lights leads to substantial reduction of phosphor use. In another example, the shift from nickel-metal-hybrid (NiMH) to lithium-ion batteries results in diminished nickel demand, while increasing lithium use.
Cartel opportunities and geopolitical leverage
Today almost all mining, production and processing of rare earths takes place in China. Natural resources combined with lower labor costs and less strict environmental regulations have enabled the country to be the world’s predominant supplier of rare earths, accounting for about 95% of the currently supply. Besides, rare earths mined elsewhere are generally exported to China for processing and then reimported. As demand for RES continues to increase, countries are likely to hold rare earths in reserve for and compete for access to such resources.
As noted in a June 2017 joint report by Harvard’s Belfer Center, Columbia’s Center on Global Energy Policy and the Norwegian Institute of International Affairs, The Geopolitics of Renewable Energy, “As the transition to renewable energy accelerates, cartels could develop around materials critical to renewable energy technologies. Even if these cartels are unable to achieve the kind of impact that OPEC did in the 1970s oil market, they might be able to exert influence over consumers of these materials.”
For those who find this far-fetched, it is instructive to recall the rare earths trade dispute that started in 2010 between China and Japan, in the context of tensions surrounding the territorial conflict over the Senkaku/Diaoyu Islands, which then grew into a trade dispute with the U.S. and the EU. Beijing reduced its export quotas by 40%, sending the rare earths prices in the markets outside China soaring. The Chinese position was that the limitations were needed to protect the environment. In 2012, the American administration filed a case with the Dispute Settlement Body of the WTO, which in 2014 ruled against Beijing. The export quotas were dropped in 2015.
To counter such market dominance, rare earths importers will also have to support geological exploration and development of new sources in new geographical locations, thus creating more diversified international markets.
In effect, each technology metal in part has its own geological distribution, economics and market dynamics. Yet to epitomizes the challenges of technology metals in the era of clean energy expansion, let us take a closer at the case of lithium.
The international lithium markets
According to USGS, at the global level 35% of lithium is used in the production of ceramics and glass, 31% for batteries, 8% for lubricating greases, 6% for continuous casting mold flux powders, 6% for air treatment, 5% for polymer production, 1% for primary aluminum production, and 9% for other purposes.
Out of these sectors, batteries’ production is by far the most important growth segment. Tesla has launched its mass-market Model 3 electric car in July 2017, and plans to produce 500,000 cars per year by 2020. Volvo Cars has announced in July as well that by 2019 its entire production will be electric cars. Besides, the Chinese government offers public support for lithium-ion based EVs, especially buses. According to a recent UBS report, the battery capacity required by 2025 will be 12 times as big as presently.
Tesla is also planning to greatly expand its production of Powerwall batteries, as well as the grid support battery systems – such as the recently announced plan for the world’s largest lithium-ion battery in South Australia, a 100MW/129MWh Powerpack system for summertime peak load management. As noted by FT, at least three other companies stated they could deliver similar storage systems.
All in all, as calculated by Tam Hunt for Greentech Media in 2015, Tesla’s lithium demand by 2020 is expected to be at least 8,000 metric tons. According to USGS, worldwide lithium production capacity was 49,400 tons in 2015, with a production capacity utilization of 71% in 2016. Global lithium consumption in 2016 was 37,800 tons, up from 33,300 tons in 2015. Total estimated reserves in 2016 were about 14 million tons (mt).
Thus, at the current consumption level, the worldwide lithium reserves would suffice for 370 years. But a scenario of 50 million electric cars produced per year by 2040 (i.e. about half of the estimated total yearly car production) would take 100 Tesla Gigafactory-size plants, which would also add up to 200 times as much grid support batteries worldwide as presently. This, in a rough calculation, would require about 1 mt of lithium a year by 2040. At such a rate of demand, the current lithium reserves would cover merely 14 years of production. Other estimates are higher: quoted by FT, David Deak, chief technical officer at Lithium Americas, sees a global lithium demand of 3.1mt in 20 years’ time to fully electrify the world’s fleet of vehicles. Either way, the estimated demand increase is enormous.
Global production of lithium is concentrated in a small number of companies: Albemarle Corporation (U.S.), Sociedad Química y Minera de Chile (SQM), and Chinese companies Tianqi Lithium and Ganfeng Lithium.
Some analysts indicate the possibility of a “lithium supercycle,” similarly to the evolution in the iron ore market at the turn of the 21st century, when Chinese demand drove prices to record levels. Although lithium is relatively abundant, its criticality has to do rather with bottlenecks in mining and refining capacity. Besides, lithium extraction is costly and painstaking, so that rising prices may not immediately prompt an increase of supply.
There are two ways of production for lithium carbonate: (i) from subsurface brines, and (ii) from mining hard-rock ores (spodumene). The former became the main source of raw material for lithium carbonate in the 1990s. However, due to drastically increased demand in recent years, the spodumene-based lithium industry has kept growing and is likely to equal brine-based production by 2020.
The main brine operations are based in South America (Chile, Bolivia, and Argentina), while the main spodumene mines are in Australia, Canada, China and Finland.
The carbon footprint of spodumene mining and processing is about double as big as brine processing, in which lithium is extracted through water evaporation using sun energy. Besides, as observed by RobecoSAMs’ Francis Condon cited by FT, “We’re starting to see new sources being found and smaller mining companies and also non-mining companies getting involved. Some of these opportunities are arising where environmental codes are not as strong and social settings not as protective or inclusive. It’s a combination of risks.”
The entire value chain of batteries production must become less polluting in order to offset the environmental impact of lithium mining. In particular, the EVs industry must prepare to fully recycle its spent battery packs. A recent estimate by Canadian Li-Cycler, a recycler of companies, states that 11mt of spent lithium-ion batteries will be discarded until 2030. One challenge in this regard is to put in place sufficient recycling infrastructure before the first wave of EV batteries reaches its end of life. Absent sufficiently high utilization rates, such facilities are not likely to be economical without some form of public support.
Despite spectacular growth in recent years, RES currently represent under 4% of the global energy mix, while EVs account for less than 1% of the car market share worldwide. As the clean energy transition will get in full swing (i.e. these numbers will each exceed 10%), the extraction and processing of technology metals will have to be scaled-up massively. This adjustment process will constrain the overall speed of the clean energy transition. Growth there will be, and probably a robust one, but very likely less than exponential.
The market concentration and production bottlenecks in the upstream segment of technology metals has already opened opportunities for control and cartelization by a few multinational companies and nation states. Although improbable to replicate the influence that OPEC once had, the effectiveness of such cartels will also depend on the overall efficiency of multilateral organizations and initiatives for free trade and nondiscriminatory access to critical materials. The norms and rules of such institutions must also regulate international transfers of technology and capital for the green energy industries. Unfortunately, WTO does not deal with the energy sector as a whole, and the current trend of erosion of international cooperation is not conducive to an expansion of the organization’s scope.
It is, however, premature to carve out more precisely the outcome of such a complex interplay of market forces, geopolitical and cartel interests, and climate change policies.
On the one hand, assertive energy and climate policies by countries and municipalities to promote e-mobility, RES and grid-support battery systems etc., as well as policies to discourage or even forbid the use of fossil fuels, will certainly be a driver of the clean energy transition. At the same time, publicly supported R&D for the improvement of the entire value chain of the clean energy technologies – from more efficient extraction and nonpolluting processing of critical materials to development of substitutes for critical technology metals and to optimized product design and recycling systems – will enhance supply security.
On the other hand, there is a distinct possibility of slower than anticipated progress of some clean technologies. For example, dragging improvements of batteries’ energy density, charging times and durability would result in lower than expected commercial competitiveness of EVs, which could lead, among other things, to stranded assets.
In any event, it is doubtful that the global economy and the planet can withstand a process of one-on-one replacement of hundreds of millions of internal combustion cars with hundreds of millions of EVs, against the background of increasing demographics and dramatically rising purchasing power in the emerging countries. On the long-run, the world must also develop sustainable alternatives to the notion of personal passenger car.