No easy commodity or infrastructure shortcuts on the net-zero journey

In just two years since its trough in the 2020 COVID-19 pandemic, the price of lithium has rocketed from approximately US$5,500 a tonne to US$80,000. That’s happened as demand for the mineral, especially for electric vehicles, has rocketed far ahead of current supply. We address the problems in the sustainable commodities and infrastructure markets and the solutions that must be applied to reach net-zero.

1. Blind spots and bottle necks in the commodities and infrastructure markets are making the transition to net-zero more complex than many commentators anticipated.
2. While infrastructure needs new financing tools, the metals and minerals vital for electrification are in short supply.
3. Energy efficiency is key to buying time and the quickest way to mitigate emissions.

There are abundant lithium reserves globally in countries like Australia, Bolivia, Chile, China and Argentina, but not enough current mining capacity. What’s more, three-quarters of the world’s processing facilities are based in China, which may be a cause supply chain issues.

Whether it’s in the construction of sustainable infrastructure or the provision of metals and minerals, there are blind spots and bottle necks that are making the transition from fossil fuels more complex than many commentators anticipate. That was the view of the experts taking part in a recent LSEG webinar. Ultimately, they believe, most of these difficulties can be overcome, but only with greater appreciation of the realities of the transition.

Entitled The Impact on Global Commodities & Infrastructure Markets, the webinar took place on 31 October 2022, a week before the UN COP27 climate conference. It gathered together leading LSEG experts on infrastructure, metals and natural gas. Between them they highlighted the dawning realities of replacing fossil fuels with renewable energy.

Taking sustainable infrastructure first, many projects are announced but fewer reach financial close due to a stifling mix of problems around installation, supply chains and geopolitics.

In Africa, renewable energy infrastructure could leapfrog fossil fuel power generation, but an additional difficulty is banks’ unwillingness to take the risk of financing independent power production in some countries.

According to Ibukun Adebayo, LSEG’s Head of Strategic Initiatives, Sustainable Finance and Investment, just US$60bn of the US$2.8trn in private capital raised for investing in energy infrastructure globally during the 20 years from 2000 to 2020 was for African projects. That’s about 2 percent of the total, while Africa accounts for about 6 percent of global energy emissions.

“What’s really needed now is a focus on the US$100bn annual gap in the amount of infrastructure finance that needs to go into Africa by 2030 to enable a just energy transition,” he said.

That means we need more tools like the blended finance or the London Stock Exchange’s Voluntary Carbon Market, to unlock private sector capital, he added.

Andy Bainbridge, Chair of the Private Infrastructure Development Group (PIDC), supported Ibukun’s observations via an interview with Jane Goodland at the Net-zero Delivery Summit, urging power developers to take advantage of PIDC’s GuarantCo credit enhancement offering.

But he also identified a shortage in the number of early-stage power projects.

He believes that that the growing attention given to climate change means that policymakers are at least aware of where the issues lie. “What’s pleasing as an outcome of COP26 is that the issues of early-stage project preparation and blended finance are at least being recognised now.”

In the commodity markets, supply chains and geopolitics are likely to hinder the energy transition.

Lithium’s volatility vividly illustrates the supply / demand imbalance, accentuated by China’s dominant market position in processing.

“It does not seem practical to have three-quarters of the processing capacity in China in a world that requires lithium to decarbonise,” said Bruce Alway, the LSEG’s Director of Metals. “To end this shortfall in supply, governments may feel the need to act.”

Supplying the huge amount of metals and minerals needed for electrification – through expanding the power grid and making batteries – is a blind spot of the energy transition.

“Simply put, we just do not have enough supply of metals and minerals to meet the insatiable and growing demand needed to achieve the transition targets specified by the Paris agreement,” said Alessandro Sanos, LSEG’s Global Director of Sales Strategy.

Alessandro has three specific concerns.

Firstly, there are insufficient reserves – on average it takes 50 years from discovery to development of a new copper mine, he explained.

Secondly, there are fewer high-quality ore deposits left.

Thirdly, geopolitics may hinder metals supply.

Nowhere is geopolitics more evident than in Europe, where war in Ukraine is leading to Europe’s most acute energy crisis ever, as natural gas pipelines from Russia shut down, noted Ed Gomersall, Director of Natural Gas, LNG and Coal at Refinitiv.

In the short term, that’s sidelining the drive for net-zero in some countries, as coal power stations are brought back to life and, in Germany, nuclear plants intended for closure have an eleventh hour reprieve.

In Alessandro’s opinion, the debate about how to reach net-zero is focusing too much on energy supply, rather than energy efficiency.

He said: “We need to look at energy demand as well. Energy efficiency is vital in buying us time. It is the quickest way to mitigate emissions.”

With the practicalities of the energy transition coming into sharp focus, greater energy efficiency will be one of the easiest ways to progress down the path towards net-zero. Achieving full decarbonisation, however, will inevitably involve rethinking some of today’s assumptions about where the supply of renewable energy will come from.

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