Shifting Supply Chains for Batteries and Solar

the highly globalized supply chains that underpinned these technologies. The COVID nineteen pandemic has exposed just how complex and at times vulnerable these supply chains can be, and some governments have started trying to address this by localizing their supply chains for clean energy. Recently, the United States passed the Inflation Reduction Act or i ra A, which includes near infinite manufacturing credits for what could spur huge investments in wind,

batteries and solar photovoltaic. For its part, the EU has also started to accelerate its spending on battery and electrolyzer making in order to try and localize production of the clean energy infrastructure it will so desperately need to meet its climate goals, and questions still remain though, what is driving the shift and how might we go about this and at what price? Tag Also, what is this going to mean for the energy transition and net zero targets.

To explore this topic, be NFF has recently started focusing more on trade and supply chains and this newly formed team has published an inaugural research note titled localizing Clean Energy Supply Chains at a Cost. I'll be speaking with the author of this note today. He's the head of Trade and Supply Chains at BENF and his name is Antoine Wagner Jones. All of our reports can be found at benof go on the Bloomberg terminal, on banf dot com,

or via our mobile app. And as a reminder, b and EF does not provide investment or strategy advice, and we have a full disclaimer at the end of the show. But now let's speak with Antoine about clean energy supply chains. Nine. Thank you for joining us today. Thanks for having me Dana. So we are here to talk about global supply chains today. And as we delve into that, can you outline specifically within the clean energy supply chain, what industries are we

talking about. We're talking about renewables and we're talking about storage and what that means is looking at technologies like solar, but also looking at everything you need to make a little mind battery, So that's going all the way upstream to the processing and refining of battery metals, all the way downstream to the finished sort of battery pack. And then in the piece of research that we've published, we've also looked at some parts of the wind value chain.

We've also looked at some parts of the hydrogen value chain, focusing on electoralizers. But what we're generally looking at is technologies that will represent the vast bulk of investment that's needed to decarbonizing power, decarbonizing transport, and also to some extent industry for if we're to get to net zero.

And I know we can't talk about every single part of the clean energy supply chains, so batteries and wind and various equipment manufacturing, but from a percentage standpoint, so you mentioned that over and sent currently in the photovoltaic space is manufactured in China. Is it roughly the same for batteries and wind or is it just or what's the range? The range it does vary quite a bit.

There's not that larger share of the world's battery grade nickel is produced in China, but China, as I said above, eleven eleven different bits of those different value chains being above is free substantial and when you look at that average, it's over half overall and far higher than that for many sectors like ingots and wafers for solo, for example, which are above. So I think what's maybe useful is to take solo for example, and to walk through it.

So he starts out and you've got polysilicon, which is you basically take sand and you make it into a very refined form of silica, and then you end up with these what are basically rocks, which then are then melted and made into ingots in a different facility, which are then sliced and made into waivers, often in an integrated facility with the in goot production. And then you then combine those and seal them into cells which are

then strung together and assembled into modules. Broadly speaking, those different steps are done three different factories and different facilities, and when we think about supply chains, this is going to be something that's very relevant in this discussion is that they're very different in terms of the amount of

economic value they produce. For polysilicon, for example, margins are far higher than module manufacturers, and in terms of job creation, you've got very different pictures for those different bits of

the supply chains. So polysylican, for example, a new facility might only create fifty two hundred jobs, very automated low in terms of labor intensity, But then a module manufacturing facility might involved it's seven hundred jobs per gigawat, and that was per giggle watch for the polysylicon side of things too, So you've got this vastly front sort of picture in terms of economic value add of having a certain bit of the value chain located in your country

if your government, as well as job creation, and those two things might not always run in parallel, but then so for example, so there's only a few factories making poly cynic in the world, most of them are located in China, many of them are located in specific parts of China and the West in a couple of provinces, And the picture from module manufacturing on the other end, on the downstream of the solar sector is far more dispersed, and there's a lot more of that happening in places

like Southeast Asia, and some of it also happening in the global West, for example in India is something where we're seeing things picking up. In order to understand where we're going, it was useful to figure out how we got here. And solar manufacturing is definitely seen very steep declines and costs year on year, and I think that seems to be changing a bit at the current moment.

But a lot of the story of what has happened within the solar industry has been that the finished modules have been getting cheaper and cheaper over time, and a lot of that has been due to manufacturing in China and some of these centralized places where they can really take advantage of, let's say, economies of scale and efficiencies in the manufacturing process. But how did that end up happening, How did it end up becoming that it was largely

centered in this part of the world. So it's a story that's very different from each of those difference and there's general misunderstanding around China's position today and how it got there. Generally speaking, a lot of people highlight, for example, the fact that vast subsidies were provided to manufacturers. Now that was true for many different industries where investment was attracted, where foreign direct investment was something that China was trying

to or the Chinese government was mindful of attracting. So that involved the provision of pretty cheap finance, that involved land at a low cost, that involved benefiting from a relatively cheap labor force at the time, if we're looking at over a decade ago, also the provision of low cost power. Those things all played a role on the economic side of things, and we also saw vast subsidies or indirectly or more direct forms of subsidization occurring, and

that's something that happened. For example, for for the battery industry in the early days, there's it's pretty well recorded how low cost loans were afforded and given to manufacturers to attract them to set up shop in China. Now there's a lack of data as to how much that exactly entails in terms of overall funding. There's been various efforts made by the Department of Energy in the US looking at how much exactly was spent to get here.

But one thing that's also worth mentioning is the fact that some of this was due to supply side subsidies and policies too, So there was a feed entire program that was brought in over a decade ago in China, which then led to an incredible boom in PV demand, which led, given that you've got a huge domestic market to those enabling those economies of scale that have become so important to having these huge integrated facilities and lowering costs.

The same happened for batteries, for example, other very quick growth musicipalities, local governments seeking to build out their electric bus fleets for example, and that's something that again was a massive source of demand and lead to manufacturings being able to scale and make future investments and knowing that would pay off in the future. So this huge up

to on and demand is very important. And the end picture what we have now is some of the most competitive companies in the world such as c A t L for example, is the world's largest battery manufacturer, that are actually very integrated and they have for activities or stakes or investments or direct operations sort of looking at

across the value chain. So PV manufacturers, producers of for example, modules and cells might also operate in gotten way for factories, and the same holds true for producers of battery cathodes.

They might also operate facilities making anodes or separators, and that can't be overstated as to how important that is today in terms of China's competitive is is less about low wages, for example, those have doubled over the last decade in China, and it's more about having these incredibly technologically sophisticated, integrated value chains that are very often focused on industrial hubs and provinces where you have this ecosystem of engineers know how an investment built up over a

decade in many cases in one place, and that really was at the heart of China's competitiveness today. So why do you have reason to believe that supply chains are changing, that there is interest in other countries to bring this on board. Number of things have changed, and one of the big shifts that we've seen over the last couple of years is as there's been discussion localizing supply chains as a result of the COVID crisis, or at least

diversifying things to make them more resilient. Generally speaking, what we've talked about here is that many of these different bits of clean energy manufacturing are incredibly concentrated in one part of the world, and regardless of your various inclinations you might have in the political spectrum or geopolitical concerns,

that concentration is a vulnerability. So generally speaking, if, for example, as is the case today, one in seven Chinese solo panels are produced within one factory, then if that factory shuts down, that has some pretty dramatic repercussions. And there have been some issues around gas rationing at least previously, and then that causing some slowdown manufacturing at certain facilities

which have elongated delivery timelines. Or also I believe that there was a good move of shipping being disrupted by the global movement of PPE, which then changed delivery timelines for a lot of different goods as well. Did this also affect the clean energy pipeline? Yes, of course, the increase in freight rates, the longer lead times, the build ups and pork congestion this will had a massive effect,

as did other things. Are just very recently the last few months we've seen in the middle of this year, it was the summer of fire in Shinjiang Province in ch Know, which is a big pository of a lot of polysilicon production, which led to a factory being shut down that increased pressure on prices, and we also saw later in the year in August, poly cilicon prices reach on the spot market eleven year highs as a result of the drought that we saw in Stetran Province which

led to extricity generations shortages. It's been something that's been really evident recently is that even outside of the sort of recurring concerns around lockdowns in Shanghai or various other COVID related or even war related supply chain issues, we've seen evidence of this gaping vulnerability at the heart of the world's keenergy supply chain recur and wear its head again and again. Now for a very short break, stay with us. So which country seemed to be making I

guess the biggest steps towards bringing manufacturing more local. I've just talked about how the concentration of supply chains is of vulnerability, and that resiance is something that's being thought about by policymakers. There's another factor as well, which is the creation of jobs, and that's equally relevant when we look at a part of the world that's acting quite fast and quite decisively in terms of trying to reshore or at least onshore and localize that clean energy manufacturing.

And that's the US. So the United States. In August, Joe Biden signed in the Inflation Reduction Acts, which is this massive historic bill that includes provisions on healthcare but also is the US is most significant piece of climate legislation ever to date. Pretty huge deal. And as part of that, what it includes is a sweeping array of tax credits which are the main sort of vector to which all of this subsidy spending is happening, which targets

the deployment of a lot of that clean energy. But what it also includes is measures that are specifically intended to see the development of clean energy manufacturing in the US or at least a greater sort of diversification of

manufacturing and among the US is perceived allies. So, for example, if an electric vehicle is being supported by these tax credits, are given, share of the battery materials and components that are in that electric vehicle have to be produced within North America, for example, or depending on what's being covered in countries with which United States has a free trade agreement for that electric vehicle to be subsidized, So access

to those subsidies is depending on these local content provisions, and we're also seeing pretty generous and meaningful tax credits that are then on an output basis subsidizing manufacturing. So a manufacture of polysydic and can get I think it's

ten thousand dollars per mega work of production. That rises to fifty thousand if you're producing wafers, for example, and that's a reasonably large chunk of the prices of those components that we've seen today, So they make a big difference, I think, really big deal as well is the fact that this is not only backed by pretty aggressive local content provisions, is that these subsidies aren't only to last over the next decade so through two is a sort

of phase outdates for all of them across the board. Is that not only are they also spread out across sectors, whether it's different parts of the wind value chain, whether it's for factories in the battery value chain, whether or not is for critical minerals or the solar value chain. There's this incredible fact which is that the overall subsidy

budget is infinite. So actually depending on how demand scales, if manufacturers are convinced that demand is going to grow in the US that it's worth setting up shop and building a factory in breaking ground and developing production lines.

Then that the subsidy volume could be extremely substantial, and that's already sort of estimated by the US government reckons it's going to spend around billion on clean energy as a result of the i RA through two roughly, but that figure could swell and could be far higher depending on whether or not on the extent to which manufacturing

takes off. So it's no exaggeration to say that this is a historic turning point, and we are already seeing investments made into building out manufacturing capacity across solo, across batteries.

So given that the potential is you mentioned, to some extent limitless for certain parts of the industry, do you have a general idea on how much of the supply chain you think might shift between now and let's say right now, we're tracking investments and we're looking at what's happening in the battery space, for example, and it's quite substantial.

We see announced investment in battery cell manufacturing capacity that's of the order of above eight hundred gigawa hours by twenty thirty and exceeds demands locally in the US by that date by over two hundred gigawa hours, So it's really substantial as a pipeline, and that involves roughly sort of eight billion dollars of funding investment to build out

those manufacturing facilities. Things are moving pretty quickly on the and the what we've done to gauge the extent of which that finance and those subseas are meaningful is we've roughly estimated to how much it would cost to do everything locally to build up that factory capacity across the board. So how much will it cost to build all the factories you need to meet demand for solar, for batteries, for battery metals, for even electrolyzers you need to make

low carbon hydrogen. So we estimated for the U S that would be about a hundred and thirteen billion by twenty thirty dollars, and then for the EU that would be a hundred billion dollars. So the sums involves are substantial, But actually when you compare that to the cost of deploying those technologies, what we see is that there's actually only a small fraction of the overall cost of the energy transition. So essentially it'll add cast, but then there

are cost savings elsewhere. So generally, what are we going to see to the cost of the finished products and the people are actually procuring these finished modules or batteries. So it's not just about the upfund investment for factories like I mentioned, and that's a really useful bell weather sort of asure the extent to which the funding that

we're seeing announces significant. It's also about a number of other things and the success of this transition and the success of this politicized sort of desire to build out local manufacturing in the US, for example, but it's something that's very much present in the U that's very much present in India, for example, is the fact that is

whether or not production can be competitive. In the US, we've seen these local content rules which will fall to an extent basically artificially create a competitive environment for local production, but production is still more expensive in the US than elsewhere, and that really depends on sector. So you see pretty dramatic differences in the cost of producing electoralizers in China

versus Europe or North America. So Chinese electoralizers are about five times cheaper because of low operational expenses, low running costs, also the provision of cheap equipment and equipment providers that are already where's already far more capacity in that area built out in China today and even more established sectors like there are significant volumes of policylicon being produced in Europe today, but the cost of that policylic and is

far above the average costs that we're seeing globally, and especially in China's it's significantly lower. So those running costs are going to be higher if you're producing in the Global West generally speaking, or even in places like India as the sector scales, and you don't have those same integrated value chains, and that in of itself is a challenge. Another challenge is also the fact that there are significant

labor needs for those different industries right now. If a South Korean sort of LG can, for example, a battery manufacturers building out facility in the US, they'll very often rely on South Korean engineers to come over and assist because of the lack of know how, a lack of

skilled workers in the United States. Those kind of labor shortages is something that's being considered very seriously by an industry that's scaling up quickly and important things is also that generally speaking, the ecosystem of of associated sort of raw material supplies and producers and providers isn't as press and so if you're producing PV, if you're producing modules in the US, you'll need to deal with the fact that right now there isn't an awful loss of those

materials that you need to build those modules, whether it's backsheets or whether it's encapsulent sort of material used to as basically glue for some of those cells. So this is all a challenge, and this is something that needs to be built out, and a lot of those bottlenecks and hurdles are only going to become evident if production

does scale. There's also another question, and that really is around the fact that a lot of the bleeding edge of technological proficiency and knowledge today for a lot of those different sexes resides in China. We're not just seeing things being produced on the cheap. We're actually seeing a lot of those companies really and the forefront of technological

innovation and knowledge. Now. Usually when you see a region try and build up it's manufacturing base for different technology, what they try and do is attract manufacturers from countries which are leading and for many of those sexes, that's China. And the extent to which China these manufacturers are going to be able to freely operate or are going to be successful in terms of building out capacity in place like the US is a bit of an open question

right now. So that's another thing is policymakers also need to be mindful of the fact that transfer of knowledge might be made more difficult if some of the decoupling

that we're seeing today begins to pick up pace. And we're already seeing some pretty worrying signals from that perspective, where for example, the United States has locked the export of some of the most advanced the conductors to China over the last month, and that's generally perceived as a direction of travel today now for a very short break

stay with US. So presumably these incumbent players are not keen on the idea that they will be losing market share, and so it's this technology exchange that's really at the heart of trying to protect market share. There is a fear on the part of Chinese manufacturers as the result of these policies they might lose global market share, and

what we're seeing is those companies reacting pretty decisively. For example, I've mentioned with the IRA, there are various provisions that are put in place that favor battery components are within countries that have a free trade agreement with the US. So we're seeing, for example, some Chinese companies set up shop and build out their manufacturing capacity in South Korea, a country that has a free trade agreement with the US. But it's not just about the IRA and its provisions.

We're also seeing a significant pipeline of projects of battery self factories in Europe, for example, and that comes with its own set of policies to see through and develop that sector. Now, the EU isn't as joined up in terms of having the same kind of manufacturing incentives that the US has. Has got a patch work of sort of grants and loans and various sort of government sort of members state subsidy programs that do encourage the localization of a lot of those factories in different parts of

the value chain, but generally speaking it's less coordinated. However, we are seeing several policies come in place that could be quite decisive. One of them is the launch in the coming years of what's referred to as a battery passports are for every battery retail lifting mind, battery retailed within the EU, you'll have a QR code which gives you information about recycled content about from a life cycle basis of the batteries carbon footprint, and then that will

then be linked to mandatory product requirements. So if you had a battery that was produced in a very coal heavy grid, a coal heavy part of the world, then by when a lot of these requirements are to be scaled up after being brought in a few years before, then you could see them failing to meet those requirements and that could then be a bit of a barrier

to importing batteries from elsewhere. So already we're seeing action from Chinese battery manufacturers to reduce the carbon intensity of their production to favor hydro heavy so regions with an availability a high availability of hydro ectric power, to generally lower there the carbon footprint associated with the batteries they're making. That's a shift that we're also seeing as companies adapt.

And then another point I'd make is also that we are seeing pretty substantial investments across the board, whether it's in Europe, whether it's in the US, and we're also seeing a pretty significant upsurgeon investment for PV manufacturing in India, but we're still seeing massive investments in developing capacity in

China too. So right now today we might be in a situation where nearly of battery cells are made in China, but when we look at the sector that's going to grow by over seven times by twenty thirty, we're only going to see that China share dropped to around so Europe, the US, they're going to take a larger share of the pie, but that's a growing pie, and the overall share that China occupies is only going to drop by

a little bit. So there's a massive opportunity here to make jobs, to render supply chains less concentrated, potentially more robust as they're diverse, defied by these initiatives. But overall, this isn't a shift that's going to happen overnight, and China's dominance isn't something that's going to disappear from one day to the next. So it seems like we're on the precipice of a fairly large shift and we'll see

what the future really does hold. And in the process of researching all of this, presumably there are additional questions that have come up in your mind. So what are the things that you know you're thinking about that you want to investigate further that you don't yet know the answers to that you think are going to really have a big impact on what happens to global supply chains for clean energy. One of the big questions is if we localize manufacturing, that can bring a host of cod

benefits that we just mentioned. But alongside those associated upsides, there's also a very simple fact, and that is, if you're building a way for facility in the US, for example, that we estimate is going to be about three times more expensive than building it in China today, that costs will drop with time, But what won't necessarily catch up with China will be the cost of running that facility.

So you're gonna end up with facilities and factories that are producing clean energy technologies, generally speaking, at a higher cost. When we've got all this talk of decoupling, of re shuffling, reorganizing supply chains, of reshoring or friend shoring or on shoring or localizing or whatever you want to call it, what we're seeing is a move away from a global economic order that's based on efficiency to one that's guided

by a set of very different principles. So what we are seeing today in the US is protectionism or industrial strategy, whatever you want to call it, and that's something that again is going to be incredibly important to making supply chains more robust. But on the flip side, it also means that the energy transition globally is going to be more expensive. So what we've seen over the last decade plus is a drop of the cost of PV of

the order. We can measure this. We can refer to learning rates for example, so I've reach doubling of global capacity for energy storage or for solar power, you see a learning rates at cost productions of around a seen to and that's really substantial. Those cost de clients have been huge, and they've largely been enabled by these very efficient,

technologically advanced value chains that we've seen in China. If we're moving to producing in the US, then the big question is how much is that going to cost overall? Does that mean that the energy transition becomes more expensive? And the big question is government in its forecast, in its estimates, ready to move away from that least cost economic way of figuring out what the energy transitions price tag is going to be and facing up to the

real challenges involved in making that shift. Antoine, thank you very much for talking to us about supply chains today. I think there's a lot to evaluate in the future. So hopefully you will come back and dig in on some of the individual industries and things as they start to emerge and changes start to happen. That sounds wonderful. Thanks having. Today's episode of Switched On was edited by

Rex Warner of gray Stoke Media. Bloomberg an f A is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or recommendation as to an investment or other strategy. Bloomberg an e F should not be considered as information sufficient upon which to base an

investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability of this recording is expressly disclaimed