Non-tradable resources and the global electricity transition

World electricity is undergoing a hectic transition from traditional centralized generation mainly based on fuel to much more decentralized generation, increasingly based on fire-free renewable resources such as wind energy and solar energy. How the electricity transition evolves will have a marked impact on resource trade worldwide.

Walt Patterson, 5 March 2018

Emerging resources

The value, and hence the commercial status, of a resource changes over time. The value depends on what a potential buyer wants to do and the other resource options with which to do it. Six decades ago asbestos was a valuable resource, but now its hazards far outweigh its usefulness. Conversely, some resources acquire value previously unrecognized. Before 1938, hardly anyone wanted uranium.

Today, the materials critical for low carbon technologies – such as lithium and cobalt for electric vehicle batteries and neodymium for wind turbines – are rising in geopolitical importance. Over the next few years lithium demand is expected to grow faster than almost any major commodity over the past century – doubling, or even tripling by 2030.1 Meanwhile, traditionally ‘high-value’ fossil fuel resources are facing growing pressure: plummeting oil prices in late 2014 wreaked havoc on the budgets of ‘rentier’ economies (states that are economically and/or politically dependent on oil export revenues), from Venezuela to Angola. Emerging producers, such as Tanzania, have struggled to secure investment amid fears of a future ‘glut’ in liquefied natural gas (LNG) supply and declining prices. These shifts are forcing producer countries to reassess the value of their fossil fuel resources and to start planning for a transition towards a ‘green’ economy.

Wind and sunlight as resources

A key use of natural resources all over the world is to generate electricity. Among the resource options available are coal, natural gas, petroleum and uranium. Fossil fuels in particular account for some of the largest trade flows shown on Competing with these, however, are other resource options, only recently recognized but now with rapidly increasing commercial value, that cannot be traded internationally. Among the most significant are wind and sunlight.

Both, of course, are specific to given locations. Unlike commodity fuels, metals, and other resource materials, which can be extracted in one place and transported for use somewhere else, wind and sunlight are immaterial - they have to be used in situ to generate electricity, which can then be transported over electricity grids. With installed wind power and solar power capacity rising rapidly and displacing other forms of electricity generation, the implications for international trade will be significant.

Like material resources, wind and solar resources are widely but unevenly distributed around the world. One striking feature of solar resources in particular is their availability in low-latitude regions, which include not only very wealthy countries such as Saudi Arabia but also very poor ones, notably in sub-Saharan Africa. In rural areas, decentralized local power generation, especially solar, may be the most practical and feasible option to make electricity services available to 1.1 billion people worldwide - over 600m in sub-Saharan Africa - still without them. Recognition and development of solar resources in poor countries, almost certainly requiring international support and involvement, could be a major contributor to raising the standard of living in these countries.

Location, location

For material resources, the first sets of data of interest are the location and quantity of the resource that can be accessed. The same applies to the non-material resources of wind energy and solar energy. In recent decades a number of organizations have compiled and published 'resource atlases' for wind energy and solar energy. The UN International Renewable Energy Agency IRENA offers an online Global Atlas for Renewable Energy with a broad array of specific categories of information prepared by a range of contributors.

These 'atlases' of wind and solar resources are no more than broadly indicative of the most promising places to utilize wind and sunlight. The atlases, which are now publically available, date back years, if not decades. The resolution of location data presented may be down to, at best perhaps, a 1km grid. Siting facilities for wind or solar electricity generation requires data both very detailed and granular, and as local and as up-to-date as possible. Such specific information has now acquired substantial commercial potential, and is no longer so readily accessible in open public references.

IRENA Global Atlas for Renewable Energy

Attributes of wind and sunlight

Wind power and solar power are both forms of what can be called 'infrastructure generation'. They entail a substantial initial input of materials and investment, after which the resulting physical infrastructure produces electricity, perhaps for decades, with minimal further cost. In the US, for instance, installing wind and solar generation infrastructure already creates far more jobs than coal or shale fuel production.2

A further advantage of non-tradeable resources such as wind and solar is that the supply cannot be cut-off for political or commercial reasons, unlike, for instance, internationally traded petroleum or natural gas, both of which have already undergone such supply disruptions. Relying on wind and solar resources thus confers a form of energy independence.

In many cases, however, wind or solar production facilities are owned and operated by foreign or international entities, potentially making energy access for the local populace less straightforward. Contracts and other agreements for access to sites to develop wind or solar electricity generation often involve international transactions. Some recent examples include:

Embedded materials

Installing clean electricity generation facilities and related infrastructure nevertheless depends on trade in the critical metals and materials required for manufacturing renewable energy componentry and dependent technologies, such as battery storage. These include copper, cobalt, cadmium, tellurium, and rare earth elements (REEs). Many major economies, including the EU, US, Japan and China, have strategies designed to ensure the security of supply of such inputs. In recent years, there have been a series of trade disputes over these technologies, particularly those related to solar power.

One reason for concern around these minerals is whether supplies can keep up with the rapid growth in demand. With the advent of mass market electric vehicles, demand for key battery inputs including lithium, cobalt and graphite looks set to increase rapidly from a very small production base, prompting speculation of a supply crunch,3 and in turn, a rush to invest in new production capacity. Where these materials come from also matters: Conflict-affected Democratic Republic of Congo (DRC) currently accounts for around half of global cobalt exports, another key element for batteries.

Countries with smaller manufacturing bases for renewable energy may have little need for significant imports of these raw materials, but they still depend on well-functioning global markets for both materials and technology. That’s because such countries import the components or final products needed for renewable energy installation – such as solar panel modules – which have these critical materials embedded within them.

The electricity transition

World electricity is undergoing a hectic transition from traditional centralized generation mainly based on fuel to much more decentralized generation, increasingly based on fire-free renewable resources such as wind energy and solar energy. The Paris Agreement on addressing climate change necessitates a continuing reduction in the global emission of carbon dioxide from fossil fuels. At the same time, the costs of accessing wind energy and solar energy for electricity generation are decreasing steadily, making them economically attractive alternatives to traditional forms of generation. In consequence, the importance of wind and solar resources for electricity worldwide is steadily increasing. Many commentators expect this trend to continue, and indeed to accelerate.4

Levelised cost of electricity of various generators

Source: Chatham House Analysis of Bloomberg New Energy Finance, “H1 2017 LCOE Update.”

The speed of this transition will depend not only on economic issues, but also on the local, national, and international political disagreements now raging in the US, China, India, Europe and elsewhere, between the traditionalists and the innovators. The election of Donald Trump in the US illustrates vividly this political dimension. President Trump and his supporters decry what they call a 'war on coal'. In reality, however, coal-based electricity can no longer compete on purely economic terms with increased efficiency, with shale gas, and in some places even with wind and solar generation.

The competition between different forms of generation is intensified by recent evidence that global use of electricity is not increasing as rapidly as hitherto anticipated. For example, official projections of UK electricity use anticipated a 12 per cent increase in the past decade, whereas in practice it has fallen 13 per cent - a 25 per cent overestimate over the decade.5

Today, the electricity transition is being driven by the dramatically improving economics of low-carbon energy, as well as increasing recognition of the need to address environmental challenges, especially local air pollution and global climate change. How this dramatic electricity transition evolves will have a marked impact on resource trade worldwide.