Sovereignty and energy independence being intimately linked, the transition towards decarbonized energy will necessarily be accompanied by a redistribution of geopolitical cards.
Since the beginning of the industrial era, fossil fuels have been the engine of economic development, creating such a strong dependence that we sometimes speak of „addiction“ to fossil fuels at a time when we will have to give them up, as if to better illustrate the magnitude of the task.
Another link, less frequently mentioned, is that of energy and geopolitics[1]. Access to fossil fuels has shaped the foreign policies of the major powers for more than a century and remains at the heart of a complex game of alliances. An emblematic example: the agreement linking the world’s leading power (the United States) to the country with the largest hydrocarbon reserves (Saudi Arabia), signed between Roosevelt and the Saud family in 1945, still holds.
What geopolitical developments can we anticipate with the switch to renewable energies?
Industrial policies strongly tinged with protectionism
Long unofficial, the US Climate and Energy Act (Inflation Reduction Act, or IRA, passed in August 2022) has officially tipped the renewable energy industry into an era of competition for technological leadership and domestic production.
Whether the ambition is to secure the supply of these new technologies, to turn them into a soft power tool, or to refuse a dependence on China that has become too cumbersome, the result is the same: the United States, the European Union, the United Kingdom, India and Japan now all have a strategy to support the industrial players of the energy transition. Generous subsidies and the establishment of a favourable regulatory framework are planned in these regions to facilitate the emergence of local ecosystems in solar, hydrogen, batteries…
These policies are sometimes criticized for having protectionist overtones (notably the IRA) and for violating international trade rules. These criticisms are unlikely to make lawmakers back down: the fight against global warming and the banning of China, among others, because of its treatment of the Uighurs, provide an effective political platform to justify a nationalist shift.
In this respect, the sectors linked to the energy transition accentuate the trend towards what is now called de-globalization.
New energy = new key countries
The last three years, marked first by the Covid crisis and then by the conflict in Ukraine, have demonstrated the vulnerability of the supply chains of many industries after several decades of offshoring.
As the energy transition is a key issue of sovereignty, the major powers are now aware of the need to secure their main supply chains.
Following the adage „a chain is only as strong as its weakest link“, the challenge of the transition will therefore be to strengthen capacities without omitting any stage of the value chain, from upstream to downstream. This is a particularly complex and delicate task.
Let’s take the example of electric vehicles. It is relatively simple and quick to build new battery factories to support the ongoing electrification of the fleet. However, it is much more difficult to secure the supply of critical minerals (lithium, nickel, etc.) used in the production of batteries. It could take decades to revive mining production, which has been virtually abandoned for more than 30 years in Western countries.
While waiting for a hypothetical mining revival in Europe, and to a lesser extent in the United States, minerals will be the main bottleneck in the value chains linked to the transition.
This imbalance has been perfectly identified by the countries that produce these minerals. Thanks to the balance of power now in their favour, these countries will be able to advance their pawns on the geopolitical chessboard.
Conclusion: is lithium the new oil?
Geopolitics is one of the many „dimensions“ that investors take into account when assessing risks. In an economy based on fossil fuels, the nerve centre of geopolitics was in the Middle East and Central Asia, and OPEC blew hot and cold on the whole planet.
Gradually, the eyes of the world will turn to the Democratic Republic of Congo, Australia, Chile and Indonesia[2]. These are the countries on which the production of cobalt, copper, lithium or nickel, essential for the transition, depends. We will therefore be in a situation of dependence on these countries, which will be key to decarbonizing the economy and regaining our energy sovereignty.
In practice
The energy transition opens a period of major geopolitical transition. We see this as a source of significant opportunities for investors.
Growing tensions between the Western bloc and China are a significant risk factor, but they also improve the prospects of companies with assets in Western countries, especially if they operate in value chains dominated by Chinese players. This is for example the case for Lynas (Australian producer of rare earths), Wacker (German producer of silicon), and First Solar (US leader in solar panels)… These companies will benefit both from the massive subsidy plans currently being implemented in Europe and the United States and from the „scarcity“ effect at a time when everyone is looking to develop local and/or out-of-China supply chains.
Our renewable energy (Quaero Capital Funds (Lux) – Accessible Clean Energy) and energy transition (Quaero Capital Funds (Lux) – Net Zero Emission) thematic funds are heavily exposed to this type of player, which is ahead of the ongoing relocation phenomenon. Beyond their economic value and their sustainable growth prospects, the strategic value of their assets does not seem to be assimilated by the markets.
[1] Remarkably documented in Or Noir : la grande histoire du pétrole (Matthieu Auzanneau)
[2] In addition to China, which will remain the dominant country in the battery, critical minerals and solar value chains for many years to come.