By Jim Thomson and Marlene Motyka, Deloitte
A wide array of pandemic-driven global supply chain challenges could slow grid modernization and decarbonization in the electric power industry — at least temporarily. Industry and government leaders across the globe are working on solutions, but it may take time. Recent disruptions often compound longer-term, pre-pandemic pain points. Global supply chain kinks are impacting supplies of batteries, smart grid components, solar and wind power systems, electric vehicles, and other products and materials critical to the clean energy transition.
Key raw materials in short supply range from semiconductors to steel. And bottlenecks in freight, port, rail, and trucking capacity, largely driven by labor shortages, are backlogging shipments and raising costs. Current costs to reserve shipping containers are up to ten times pre-pandemic levels. In the US trucking industry, one trade association calculated a shortage of 60,000 drivers before the pandemic, rising as high as 100,000 by 2023. This is due to longstanding challenges recruiting new drivers, backfilling for retirees, and training during COVID.
One of the key shortages impacting the clean energy transition is batteries, which are critical to the growth of both grid-level and behind-the-meter energy storage, as well as electric vehicles (EVs). Shortages are largely due to soaring demand from automakers, utilities, and stationary storage providers to homes and businesses. The global dearth of semiconductors and logistics challenges have also tightened supplies. According to Canary Media, grid battery cells from top-tier manufacturers are sold out for the remainder of 2021, and 2022 supplies are selling out fast. Grid storage developers are at a disadvantage in securing batteries, since their orders are typically smaller volumes than those of automakers.
In the residential battery storage market, some companies have reported not being able to meet projected demand for home batteries largely due to the chip shortage. Shipping constraints are also impacting battery and component deliveries. And this is in a supply chain already considered vulnerable pre-pandemic, due in part to the geographic concentration of key materials suppliers. China manufactures an estimated 42% to 65% of global supplies of battery components such as cathodes, anodes, and electrolyte solution, with much of the remainder sourced from Japan and Korea.
The semiconductor, or chip, shortage is hindering growth in multiple industries across the globe. In the power sector, it has delayed deliveries of digital equipment such as smart meters, and sensors, as well as solar and wind components, in addition to batteries. Once again, these challenges come on top of pre-pandemic supply chain vulnerabilities due to reliance on manufacturers in a small number of countries, as well as trade tensions that may have spurred stockpiling.
The pandemic temporarily shut down several chip factories across Asia, while lockdowns simultaneously spiked demand for chip-intensive consumer electronics. In 2020, for example, global demand for laptop computers rose 13% over the prior year and US spending on gaming consoles rose 35%. Once economies began to re-open, auto industry demand for semiconductors soared and chip shortages mushroomed. Some suppliers of smart meters, sensors, and other devices have reported customer orders backlogged across the United States, Europe, and Asia due to component shortages, especially semiconductors. As a result, some customer projects planned by utilities, including those supporting grid resiliency and reliability, have been delayed.
EVs are another key piece of the energy transition, as sales gradually begin to replace sales of fossil-fueled vehicles. The pace of EV adoption is accelerating and could potentially boost power sector revenue. But the automotive chip shortage spurred EV production cuts around the world, and if it continues, some countries may risk meeting their EV penetration targets. Some automakers delayed production of popular EVs, such as Ford’s Mach-E Mustang, which they attributed to global chip shortages. Shortages extended beyond chips as well. In an October 2021 annual shareholder meeting, Tesla CEO Elon Musk said the company had not begun Cybertruck production this year because “this year has been just a constant struggle with parts supply,” adding that “we’re just basically limited by multiple supply chain shortages, so many supply chains of so many types, not just chips.”He added that the Cybertruck needs “a lot of chips.”
The renewable energy sector has also faced strong supply chain headwinds, from a shortage of chips for system controls and sensors, to rising costs of raw materials and shipping, to shortages of key components and labor. Add this to pre-pandemic supply chain vulnerability due to geographic concentration of component and critical minerals mining and manufacturing.
Wind and solar plants are largely constructed from steel and aluminum, and steel prices hit record highs in 2021, though they’re expected to ease as supplies rebound. Aluminum prices rose 48% in the first nine months of 2021 due to soaring demand, shipping bottlenecks, and production cuts in China, with tightness expected to continue. Despite all of these challenges, robust renewable energy demand still drove a 45% annual increase in global renewable energy capacity in 2020, and the International Energy Agency (IEA) predicts similar gains in 2021 and 2022. But they warn that the pace must accelerate even further to meet climate targets.
The IEA has also cautioned that there isn’t enough copper, lithium, and other critical minerals to meet global clean energy targets. Lithium-ion battery production requires lithium, nickel, cobalt, manganese, and graphite, while wind turbines and EV motors require rare earth elements such as neodymium, praseodymium, and dysprosium for permanent magnets, and solar PV requires polysilicon and silver. In addition, electricity networks overall need significant amounts of both copper and aluminum.
Governments, end-user industries, and individual companies are working to address many of these supply chain issues. Solutions include developing more domestic manufacturing of components, boosting mining and production of critical minerals and materials, cooperating among allies and trade partners to secure additional supplies, committing to future demand to incentivize global investment, improving inventory planning, developing stronger vendor relationships, recycling materials, and changing designs to limit use of scarce resources.
Some economists have noted that global supply chains were built largely based on cost considerations, rather than resiliency. Others remind us that supply chain disruptions of this magnitude can be expected during and after massive global crises such as pandemics and world wars. They can take time to resolve and disruptions will likely continue to impact a shifting constellation of industries in the future — including the electric power industry and its transition to cleaner energy sources.
About the Authors
Marlene Motyka is Deloitte’s US and Global Renewable Energy leader and a principal in Deloitte Transactions and Business Analytics LLP. She consults on matters related to valuation, tax, M&A, financing, business strategy, and financial modeling for the renewable energy and power and utilities sectors. Marlene has been at Deloitte for more than 22 years and holds a Master of Business Administration in finance from Rutgers University and a Bachelor of Science in mechanical engineering from Lehigh University.
Jim Thomson serves as the vice chair, US Power, Utilities & Renewables leader, as well as a lead client service partner for Deloitte Consulting LLP. A consulting principal based in Tampa, Jim has more than 30 years of consulting experience working with global power, utility, and renewable energy clients. He is focused on delivering solutions to complex and critical challenges within the industry and brings a strong passion for making a difference with some of our largest power, utility, and renewable energy businesses and their customers.