The renewable energy sector has reportedly been booming in recent years, which comes as no surprise due to increased Government incentives and private sector demands towards energy transition. Consequently, new projects in the sector are materialising at a fast pace.
However, as with more traditional energy projects, a number of initiatives in the renewable energy sector are being stalled by supply chain issues. For example, the increasing costs of materials and labour shortages can not only delay implementation but can also lead to disputes between contracting parties.
What supply chain risks are most likely to arise on renewable energy projects?
Certain features of renewable energy projects make supply chain disruption more likely. For example:
- The concentration of raw materials – Renewable energy projects often involve specific raw materials which are only available in certain countries or are only produced by a small amount of entities, meaning they can be challenging to source. Also, because a lot of the raw materials are overseas, they are susceptible to border restrictions, tariffs and geopolitical instability.
- Not enough players – With the rise in demand for parts and equipment, new entrants have found it difficult to achieve full-scale operation fast enough to compete with the larger manufacturers.
- New technology – Fast-paced technological advances are driving energy-efficient manufacturing processes, as the sector’s emphasis shifts in line with Industry 4.0. That, of course, has its pitfalls as new processes can see teething problems and delays caused by a need to train workers on new practices. Technical issues and downtime can cause costly delays.
- Environmental, Social, and Governance (ESG) – Although renewable energy projects should have a positive impact on the environment, they often rely on the mining of raw materials and the availability of land to construct new project infrastructure. Sourcing materials from or operating in countries with under-developed environmental regulation, employment and human rights will have ESG implications for supply chains. For example, there may need to be careful consideration for the potential of bribery and corruption, child labour, worker health and safety risks, pollution, etc. The risk has increased with the introduction of modern slavery and supply chain due diligence legislation in a number of jurisdictions including the UK France, and Germany; with other jurisdictions, such as Norway and the EU, soon expected to follow. Therefore, as a result of these laws, contractors and developers will have to ensure their supply chains are free from human rights, environmental abuses, or they post to risk significant fines or even legal issues. The inevitable result of that will be added costs for producers and suppliers.
How can these risks be mitigated?
Firstly, it is important parties carefully consider which raw materials are required and the best place they can source them from. They will also need to factor in price changes or shortages when considering overall contract price.
Stakeholders need to also communicate regularly with suppliers and develop a contingency plan regarding the suppliers in case of changes that can arise. It seems clear that supply chain disruption will persist for the short to medium term.
Considering circular economy solutions to minimise the risk of raw materials depletion and shortage of resources is something stakeholders should consider. This can be done by refurbishing, remanufacturing, and recycling materials. It’s also important that supply chains adhere to ESG policies and procedures to avoid any legal complications. Stakeholders should understand the landscape in which they are operating and ensure their supply chains are free from human rights and environmental abuses.
How can we help?
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