Numerous reports suggest that the era of cheap renewable energy is over, giving a new wave of uncertainty to global energy markets that have been hit by one supply crisis after another. The continuing decline in the production costs of wind energy, solar energy, and electric vehicle batteries has been described as the main driver of their increasing penetration and consequently their capture of the global electricity grid. Until two years ago, no other scenario was on the table, even though inflation was as much a reality then as it is now. Only now has it become more clearly visible.
At the recent Metals and Mining Conference in Riyadh, many attendees pointed out that the mining industry is no longer favourable to lenders as it is considered harmful to the environment. Now, it is becoming quite clear that without the mining industry, there can be no real energy transition. Solar panels, wind turbines, power transmission lines, and electric vehicles depend on minerals in varying amounts. However, these quantities are indeed problematic.
During the pandemic, supply chain disruptions, which seems to be one of the most common terms used during the pandemic period, caused havoc in all industries, resulting in massive shortages of raw materials, especially in metals and polysilicon. Usually, a lack of supply leads to higher prices, and that is exactly what happened here as well. As a result, the costs of solar panels, wind turbines, and electric car batteries began to rise, a development many renewable energy experts had not anticipated.
In this aspect, Bloomberg reported last month that solar panel prices had risen more than 50 per cent in the past 12 months alone. The agency’s report noted that wind turbine prices are up by 13 per cent, and battery prices are rising for the first time.
Since supply-chain delays caused by the pandemic are hitting everything from cars to electronic chips, soaring renewable energy prices come as no surprise. However, the disruptions in freight operations and the shortage of goods come at a sensitive moment, especially for wind and solar energy. Whereas after years of rapid advances in technology and manufacturing, there are now fewer opportunities to cut costs without sacrificing profits. Instead of permanently declining prices, they will ebb and flow based on raw material costs and other market forces. In addition, higher interest rates threaten to increase the costs of wind and solar projects as central banks are now seeking to adopt a tighter monetary policy to curb inflation.
As for energy markets that are struggling to cope with the push for energy transition- at a time when we are experiencing blackouts and extreme price volatility- clean energy price inflation is another major challenge.
Already, policymakers accused of a rapid push toward wind and solar power as electric grids become unstable are facing pressure to ensure the entire power system is more reliable, for example, by pairing solar power with batteries or keeping old nuclear plants running longer.
Of course, all of this can be considered a temporary upheaval due to supply chain disruptions; once these matters are dealt with, prices should return to normal. Unfortunately, this argument cannot hold because all expectations of demand for these minerals are always upward, especially the minerals that are considered critical, as the energy transition depends on them. In other words, the world will need massive amounts of copper, lithium, nickel, manganese, and cobalt, among others, to continue the energy transition – they cannot be supplied quickly to meet the increasing demand.
In recent years, the problem of lending to the mining industry, as well as the increasing supply in some sectors of the mineral market, has led to a decline in investments in new mining projects. This adds to an already existing problem of poor quality materials. For example, the mining industry now needs to extract more ore to find the same amount of copper as it did 20 years ago. This means that extracting a tonne of copper is becoming more expensive even without increasing demand.
With the increasing demand outlook, copper and other important metals have definitely a bullish outlook. However, a bullish outlook for copper means higher prices for windmills and solar farms, as well as for electric vehicles. That is not all, as there is also the problem with the new display. However, banks are now more interested in investing in the mining industry that is for important minerals and metals. Whereas shareholders and governments insist that mining of these minerals and metals are to be done responsibly, that’s, in compliance with certain environmental, social and governance standard requirements.
In this aspect, a recent report from Metal Bulletin indicates that automakers are putting their metal suppliers under scrutiny to ensure they have followed responsible mining operations, which leads to the accumulation of these additional costs too. In addition, that is not all, because the supply of new minerals and metals will be vital to the energy transition. A major feature of the mining industry is the long turnaround times that there is no way to overcome. Whereas, turning potential mineral deposits into a working mine takes about a decade, even with the latest technology. In short, the current trend of higher prices in renewable energy may be just the beginning of a broad-based rally that could continue for decades.