Building Resilient Mineral Supply Chains for Clean Energy Security

ISSUE BRIEF

Building Resilient Mineral Supply Chains for Energy Security

03 October, 2022 | Technology Futures

Arjun Dutt and Akanksha Tyagi

Suggested citation: Dutt, Arjun, and Akanksha Tyagi. 2022. Building Resilient Mineral Supply Chains for Energy Security. New Delhi: Council on Energy, Environment and Water.

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Overview

This issue brief outlines the contours of a sourcing strategy for India to secure access to critical non-fuel minerals for either sectoral or economy-wide requirements, using the case study of the indigenisation of battery energy storage manufacturing to illustrate various facets.

Amid a complicated global geopolitical landscape typified by conflict, dwindling multilateralism and rising trade barriers, building robust domestic clean energy supply chains has emerged as a key policy imperative. The indigenisation of these supply chains can help India advance two objectives. First, it can help further its energy transition and thereby reduce dependence on fossil fuel imports. Second, through a focus on domestic clean energy equipment manufacturing, India can also reduce its dependence on global supply chains and further its pursuit of atmanirbharta or self-reliance in both energy and manufacturing. Access to critical minerals, which are inputs in the manufacturing process, is fundamental to building a vibrant indigenous clean energy manufacturing industry.

Key Findings

A key prerequisite before undertaking sourcing is estimating the type and quantity of minerals required for the domestic industry. This, in turn, depends on several policy choices, including deployment targets, the desired level of indigenous production to support the targets, the underlying technology mix, and the planning horizon for the sourcing strategy. This issue brief proposes setting up a multi-stakeholder group that coordinates and facilitates making these policy choices for India’s storage requirements.
This issue brief recommends that Khanij Bidesh India Limited (KABIL), which was set up with the objective of ensuring a consistent supply of critical minerals to cater to the requirements of domestic industries, undertake the overall coordination of strategic sourcing for India’s domestic storage manufacturing industry. To effectively perform this role, the brief recommends how KABIL can bolster its existing capabilities in research, coordination, and developing partnerships.
The brief elaborates on salient facets of implementation of sourcing strategies. These include identifying conditions under which sourcing should be government-led versus those under which it should be private sector-led. The brief also examines in detail the trade-offs associated with various options for mineral procurement, before recommending a stepwise approach for government-led mineral procurement

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Arjun Dutt

Senior Programme Lead

[email protected]

"Amid an increasingly unpredictable geopolitical landscape typified by dwindling multilateralism, rising trade barriers and conflict, a concerted strategy for sourcing critical minerals should be a policy priority for ensuring national energy security."

Executive Summary

India’s clean energy ambitions envision the decarbonisation of the economy alongside realising improvements in energy security, enabled by the domestic manufacturing of clean energy equipment. The need for greater indigenisation of manufacturing to ensure India’s energy security is evident if one considers its import dependence for clean energy equipment. India imported 75 per cent of its installed solar photovoltaic (PV) modules over 2017-2022 (IEA 2022). Domestic lithium-ion battery manufacturing is largely limited to the assembly of battery packs, while the entire ecosystem for low-carbon hydrogen production in India, including domestic manufacturing of equipment, is still nascent. To become more self-reliant, the clean energy manufacturing sector in India will require access to a consistent supply of critical minerals, which are inputs in the manufacturing process. However, these minerals are often concentrated in geographies characterised by unfavourable commercial regimes or political instability; their production is often controlled by a few firms, often from countries that are geostrategic competitors; and future production is often tied up in supply contracts to cater to upcoming demand, restricting manufacturing companies’ ability to rapidly scale up production due to the limited supply of inputs not bound by prior contracts.

The ongoing supply chain crisis caused by the war in Ukraine and the COVID-19 pandemic highlights the challenges associated with sourcing critical non-fuel mineral resources. Thus, India requires a concerted strategy to secure these minerals to further its energy security. This issue brief outlines the contours of a sourcing strategy to secure minerals for indigenising the manufacturing of battery energy storage systems. We use the case study of energy storage manufacturing to illustrate the fundamental principles underpinning the sourcing of non-fuel minerals, either for sectoral or economy-wide requirements

Key findings and recommendations

a. Policy prerequisite

A key prerequisite before undertaking sourcing is estimating the type and quantity of minerals required for the domestic industry. This, in turn, depends on several policy choices, including deployment targets, the desired level of indigenous production to support the targets, the underlying technology mix, and the planning horizon for the sourcing strategy. This issue brief proposes setting up a multi-stakeholder group that coordinates and facilitates making these policy choices for India’s storage requirements (Table ES1).

Table ES1 Multi-stakeholder group for coordinating and facilitating mineral sourcing

Source: Authors’ analysis

b. Key capabilities necessary to undertake strategic sourcing

This issue brief recommends that Khanij Bidesh India Limited (KABIL), which was set up with the objective of ensuring a consistent supply of critical minerals to cater to the requirements of domestic industries, undertake the overall coordination of strategic sourcing for India’s domestic storage manufacturing industry. To effectively perform this role, KABIL needs to bolster its existing capabilities in research, coordination, and partnerships.

Research: KABIL could jointly develop market intelligence capabilities in coordination with industry, think tanks, and academia to monitor supply-side developments. Supply-side tracking should at least include the available and committed portions of existing and upcoming production capacities, trends in mineral prices, the environmental, social, and governance (ESG) performance of suppliers, and policy and regulatory developments in resource-rich countries. This is essential for assessing the relative merits of various sourcing options.
Coordination: KABIL should closely coordinate with the industry to identify contexts in which government-led interventions are necessary for securing access to raw materials and those in which sourcing should be private-sector led.
Partnerships: KABIL should leverage its position as a sovereign entity and, in coordination with the Ministry of Commerce and Industry and the Ministry of External Affairs, craft government-to-government partnerships to facilitate mineral sourcing.

c. Key considerations in the implementation of sourcing strategies

To successfully secure supplies of critical minerals, KABIL must consider the following aspects while designing sourcing strategies.

Conditions necessitating intervention: It is important to first determine whether private sector–led efforts are adequate or if government-led interventions are necessary. In case market tracking indicates that there is adequate supply in conducive geographies to meet India’s requirements, the private sector should be encouraged to secure its own raw materials. In case an adequate mineral supply does not exist, KABIL should intervene to secure it.
Type of intervention: A number of sourcing options exist for mineral procurement, spanning supply contracts, greenfield investments in mines – either by a single entity or through a joint venture, and acquisitions. While each sourcing option affords differing levels of control over supply chains, each one also entails varying levels of risk (Table ES2) – the report examines these trade-offs in detail. The appropriate mode of procurement is contextual and depends on the desired extent of de-risking in supply chains. This issue brief recommends that KABIL follow a stepwise approach to select the appropriate intervention.

Table ES2 Trade-offs associated with the various modes of mineral procurement

Source: Authors’ analysis
*Note 1: Permitting risk is higher relative to joint ventures, in which the risk is shared with and potentially reduced by the in-country expertise of the joint venture partner, and acquisitions, in which case ongoing operations have low permitting risk.
**Note 2: Relative to capital expenditure for operations of the same capacity through the acquisition or joint venture routes.
- i. Aggregator of supply contracts: KABIL should first consider pre-emptively signing supply contracts to secure available production capacities before they get tied up in contracts with international companies. KABIL would, in effect, act as an aggregator of supply contracts, procuring from sellers across the world and, in turn, supplying to domestic manufacturers. Securing industry buy-in is essential before making such interventions, to determine the domestic industry’s willingness to sign back-to-back sales agreements with KABIL. Such centralised procurement offers economies of scale and could potentially be secured on preferential terms.
- ii. Equity investments: If the supply contract route is inadequate for securing mineral supplies, KABIL could consider making equity investments in resource-rich geographies that the private sector deems too risky. To mitigate investment risks, KABIL should jointly invest with sovereign entities from geostrategic partners or private-sector entities with in-country expertise in the jurisdictions of interest.