The global energy value chain system is transforming very fast. New strategies adopted by major economies to secure their energy interests are already having a considerable impact on the flow and direction of trade in intermediate goods utilized in renewable energy products and technologies, which will be accentuated further in the near future. Such transformation and transition is likely to benefit technologically advanced countries more than the technologically dependent ones. But, a more important point is that if due attention is not given to newer evolving dimensions in the global value chains (GVCs) system in the energy sector at this point in time, it may adversely impact the entrepreneurs and economies who tend to be complacent within their existing positions.
Therefore, taking due note and having an unambiguous understanding of the dynamics of the global energy value chain system is critically imperative for devising long-term energy security strategy and, thus, capturing trade and business opportunities as entrepreneurs to contribute to sustainable economic growth and development.
In the last five years, trade face-off between US-China, the shock waves of the COVID-19 pandemic, RussiaUkraine and Israel-Hamas armed conflicts, and ever-mounting pressure of adopting carbon-neutral green technologies for moving away from fossil fuels to meet the net-zero emission target by countries have catapulted deep churning and repositioning in the global energy value chain system. As a result of this development, a very nuanced transformation is happening in the global energy sector trade, especially in green metals and decarbonizing technologies.
The first noticeable trend in the trading pattern of major economies is that of moving away from nearshoring (sourcing trade and supply chain from neighboring countries considering good economics of cost-effectiveness and logistical advantages irrespective of geo-political strings) and resorting to friend-shoring (redirecting trade and supply chain towards like-minded and geo-politically important countries) while disregarding the practicality and good-economics of comparative advantage in international trade. Once, the great mathematician Stanislaw Ulam asked Nobel Laureate economist Paul A. Samuelson to ‘name one proposition (principle) in all of the social sciences which is both universally true and non-trivial.’ Paul A. Samuelson answered after much thinking – ‘the principle of comparative advantage.’ This principle seems to be overruled by geoeconomics, domestic socio-eco-political concerns and geo-conflicts in many parts of the world economy.
Here, the case in point is that of excessively high-cost shipments of LNG imported by European countries from the US. According to energy expert Laurent Segalen (as quoted in WTO’s Report-2023), the EU purchased a ship filled with LNG from the United States in 2022’ at as high price as 275 million dollars ‘compared to the original price of $60 million’ which is 4.6 times higher. Well, the question is, how long can Europeans do so?
The answer is not for a very long time. To substantiate the answer, it is worth noting that to accelerate the transition from fossil fuels to renewable energy, to meet the energy security challenges emanating from the Ukraine-Russia war, and to reduce energy dependence on Russia and ensure energy security, EU adopted and implemented a revised Renewable Energy Development Directive in November 2023. This makes it binding for EU countries to achieve the renewable energy target of 42.5% by 2030 while aiming to achieve the target of 45%. Therefore, the EU is set to achieve the net zero emission target sooner than later. This is likely to put pressure on other countries to accelerate the transition from ‘dirty fuel’ to cleaner and green energy options.
As the EU is accelerating the pace of transition towards renewable energy to meet its energy requirement, the demand for green metals (term used for metals used in the application of clean energy technologies) like copper, nickel, cobalt, lithium, graphite, manganese, zinc, neodymium and molybdenum is going to go up sharply which will redraw the global value chain system. All these metals are utilized in various technologies for solar, hydro, wind, geothermal, and nuclear energy generation and EV batteries. Now take the example of manufacturing of semiconductor chips which is one of the key future industries. Some conspicuous developments are occurring in the global semiconductor chip value chain system. These are crucial components in various innovative technological applications, including AI, advanced electronics, automobiles, aerospace technologies, and precision defense equipment. To counter Chinese dominance and to boost the US’s competitiveness, innovation, and national security, on 9 August 2022, USA passed a new law called the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). Under this legislation, the US government will invest $53 billion over five years to strengthen supply chains in the USA’s semiconductor industry and enhance domestic R&D capabilities. According to the US Chambers of Commerce, post-CHIPS enactment, the private sector has announced more than $ 166 billion in semiconductor-related investments in the USA. This could be a game-changer in how the current global value chain system of semiconductor chips is organised.
Similarly, following the footsteps of the USA, the EU parliament approved the €43 billion European Chips Act on 18 April 2023, which intends to increase the share of semiconductors manufactured in Europe from 10% to 20% by 2030. In this way, the EU aims to achieve the maximum possible independence from American and East Asian countries to fulfill its semiconductor requirements. This step of the EU is in consonance with its target of achieving a renewable energy target of 42.5% at least by 2030.
On the other hand, China aims to achieve self-sufficiency in semiconductor production by 70% by 2025.
These developments indicate that global trade, particularly involving global energy value-chain systems, is inclined to transform sooner rather than later. Therefore, a massive push of investment in R&D in green technologies and state-of-the-art semiconductor development centers will be colossally valuable with umpteen forward and backward economic linkages. Secondly, leaving aside the advantage of early beginners, in the current scenario of the global energy value chain system, those countries will tend to have an edge and are not only inclined to be faster but also consistent in the process of transition towards greener technologies, and those who decide to invest comprehensively in home-grown semiconductor and AI technologies.
Views expressed are absolutely personal: Rajinder Kumar, IES, Economic Adviser, Ministry of Petroleum & Natural Gas, Government of India.