Global supply chains have encountered significant disruptions and the prospect of further disruption is firmly on the radar of governments and companies. Within this context, the vulnerability of wind power supply chains has become an acute concern due to forecasts of supply shortages and bottlenecks for key components.
While many companies are already seeking innovative solutions to promote resilience in response to supply chain risks, many obstacles could threaten the continued development of the sector. In particular, the concentration of manufacturing capacity within a handful of states – with China accounting for 60% in the wind power sector – has resulted in a high level of vulnerability to external geopolitical shocks. Meanwhile, concerns over a lack of transparency in supply chains have led to questions regarding the socio-environmental credentials of the renewable energy sector.
Both challenges – geopolitical and socio-environmental – have the potential to cause severe disruptions to a functioning wind power supply chain.
Extend due diligence and traceability
Establishing robust due diligence processes for supply chains is critical for resilience. With many risks stemming from further back in the supply chain, it is critical that companies do not limit due diligence to their tier 1 and 2 suppliers, especially be the case where it extends into jurisdictions where transparency is limited, and environmental and social standards are less stringent. Innovations in supply chain management – such as blockchain technology – can also support the mitigation of risk, especially if inputs come from jurisdictions with question marks over their socio-environmental standards.
Localise supply chains
The localisation or regionalisation of supply chains will help mitigate disruptions from trade disputes and geopolitical shocks. Minimising the geographic spread of value chains through supporting the development of local manufacturing capacity is already a key priority of policymakers in Europe and North America.
While incentives and tax credits provided under the US Inflation Reduction Act and European Green Deal will support the process, developing domestic capacity and reconfiguring supply chains will take time and require tactical acumen. Imports will be necessary to meet development goals for some time, given China’s dominance, and the Global Wind Energy Council has warned against overreliance on localised procurement in the short-term while domestic capacity remains low.
Where possible companies should look to support the development of local capacity, through setting targets on regional or local supplies. Larger companies should also consider supporting research or, investing in innovative local technologies that reduce reliance on third countries.
Innovative relationships with suppliers
Working with suppliers on mutually beneficial solutions will help to boost global manufacturing capacity, easing demand constraints, and can help to raise human rights and environmental standards across the supply chain. Some companies have already experienced the benefits of closer collaboration. In January, Ørsted signed an agreement with Salzgitter to supply offshore wind energy in return for using Salzgitter’s low-carbon steel in the construction of wind farms. These types of agreements can help develop strong relationships with suppliers and support companies secure access to supplies.
Vertical integration of the renewable energy supply chain - in which a company controls its entire value chain from raw materials, to manufacturing, to energy production - is another approach. While it has not yet materialised on a significant scale in the renewables industry; vertical integration could solve many of the uncertainties associated with its supply chains.
Companies should work closely with governments to develop policies which facilitate trade but also boost human rights and the environmental credentials of the countries producing the goods. The low-carbon transition is a major theme in the international trade community and renewable companies can shape the discussion around ensuring that stable and reliable supply chain networks exist.
A geopolitical analysis, to understand where key vulnerabilities lie, and mapping how a company’s business development goals around the expansion of renewable energy operations align with the goals of home and host governments will be crucial. This will ensure companies can support the development of policies that are mutually beneficial to the aims of governments as well as the expansion of the renewable energy industry.
Taken together, these approaches can help to alleviate supply chain vulnerabilities, while addressing some of the negative social and environmental impacts along the supply chain and companies need to think strategically about the approach that will best position them against these fast-evolving trends and dynamics.
Heather Daniel and Christopher Hope are managing consultants in ERM's political advisory team