Chairman’s Message

Tatsuya Terazawa

Tatsuya Terazawa
Chairman and CEO
The Institute of Energy Economics, Japan

Chairman’s Message
“Demand Side Approaches to Critical Minerals”

Message for December 2023

As the world pursues its energy transition towards carbon neutrality, we cannot avoid discussing and sufficiently stressing the importance of critical minerals. Concerns are rapidly rising over the sufficiency of their supply and concentration of suppliers. So far, measures to tackle these concerns have largely been addressing the supply side. Why are we not looking into measures to adjust the demand side as well?

<Main Points>

  • Energy transition will lead to a massive increase in demand for critical minerals.
  • Supply could be substantially insufficient, and concentration of suppliers could be detrimental.
  • Measures have largely been addressing the supply side.
  • Limits in supply side measures should lead us to explore demand side measures.
  • Efficient use of critical minerals is essential.
  • Rationalization of use of critical minerals through technology mix is important.
  • Optimal mix of technologies to deal with the intermittency of renewable energies is necessary.
  • Various types of vehicles (power train), depending on usage, are important.

  • 1. Massive increase in demand for critical minerals leads to challenges

    In our energy transition pursuit, demand for critical minerals is bound to expand dramatically. According to my institute’s analysis (IEEJ), a shift towards electric vehicles (EVs) and batteries for energy storage could require four times more Nickel and eighteen times more Lithium by 2050. Demand for Nickel and for Lithium could surpass their supply by around 2035 and as early as 2030, respectively. While this analysis does not incorporate further technology improvements, such as enhanced materials efficiency, larger scale recycling or alternative materials, the prospects of a dramatically expanding demand should lead us to consider necessary measures.
    We are already facing a supply concentration of critical minerals that are controlled by a limited number of players. A dramatic increase in demand would worsen our dependence because, at the minimum, the leverage of the dominant suppliers will grow which could tempt them to use their leverage to support their interests, and, in the worst case, weaponize them.

    2.Measures have largely been from the supply side

    Countries concerned by these prospects and challenges have been active in introducing measures affecting the supply side.
    The first approach has been to develop alternative sources of critical minerals, including the development of alternative mines and onshoring of the processing. But, as developing new mines requires time, we are yet to see substantial changes in the supply structure. As processing is energy intensive and could put stress on the surrounding environment, innovative policies must be developed to secure new locations for processing and to ensure cost competitiveness in a sustainable manner. The current dominant player in the processing enjoys substantial cost advantages, benefiting from long learning curves, economies of scale, and less stringent sustainability regulations. Subsidies alone cannot ensure a sustainable competitiveness over long periods of time.
    The second approach is recycling, and we should certainly do more of it despite its challenges. Recycling is never 100%. For example, the recycling ratio in Japan for aluminum and copper is about 40% and 35% respectively. The recycling of critical minerals is difficult as they tend to be used in relatively small quantities, such as rare earths in magnets. Recycling is commercially challenging if the price of critical minerals is not so expensive. In the case of platinum, for example, its high market price enables high recycling ratios. Another issue is that recycling cannot increase supply in the short term because the minerals to be recycled are not yet available. (Batteries on electric vehicles could be in use for 8 years before being recycled). And finally, labor intensive recycling processes are hard to introduce in advanced economies.
    The third approach is to develop alternative materials. We should certainly support innovation for this even though, in many cases, alternatives are simply alternatives, never fully replacing the original materials/minerals and requiring compromising in performances. While we have high hopes for innovation to succeed, the results are never guaranteed, and we should be prepared for results falling short of the objectives. In addition, innovation could be a double-edged sword as the possibility of alternative materials could discourage expanding the production capacity of the currently used minerals.
    The last approach could be the strategic stockpiling of critical minerals. This approach should also be considered as a supply side measure to enhance emergency preparedness. Japan has been engaged in stockpiling, but it is not necessarily replicated by other countries.

    3. We need demand side measures as well.

    Considering the potential dramatic expansion in the demand for critical minerals and the constraints of supply side measures, I strongly believe we need to consider adding demand side measures to our tool kit.
    Companies have already been enhancing the efficient use of critical minerals to reduce their consumption. This is a very effective approach. For example, Japan has succeeded in developing magnets that reduce its rare earths consumption substantially after the export embargo by China in 2010 through enhanced efficiency and development of alternative materials. With the energy transition, demand for critical minerals is expected to expand much more rapidly than in the past ten years. Enhancing efficiency can lessen the demand increase but would not be sufficient to offset the demand expansion.
    The question is: “Are there any other demand side measures possible?”. I believe that the answer to this question can be found in the development of an optimized technology mix that would rationalize the use of critical minerals.

    4. Technology mix to deal with the intermittency of renewable energies.

    As we expand the use of renewable energies such as solar power and wind power, the need to deal properly with their intermittency will be crucial. To stabilize the grid, any intermittency arising from variable renewable energies must be offset to avoid power supply surplus and shortage.
    Many people consider batteries to be the solution for this. But batteries are expensive and generally good for short but not for longer duration power storage. Additionally, to deal with the intermittency of the very extensive global deployment of renewable energies, the demand for critical minerals required to produce batteries would skyrocket.
    We must develop other complementary means to deal with the intermittency. Pumped hydro provides a meaningful option, but it takes long time to develop, and availability of suitable locations is limited in most countries.
    Low carbon hydrogen/ammonia used as fuel for thermal power generation could provide a valuable way to supply dispatchable power. Those fuels can be stored for an extended period of time and used to complement batteries. Hydrogen and ammonia can be produced (and stored) using any surplus of power generated by renewable energies. The remaining major challenge is its cost, especially the cost of electrolysis, which must be pushed down much further.

    5. Technology mix for vehicles.

    There is a growing momentum towards Battery Electric Vehicles (BEVs). To realize longer driving distances, larger batteries are placed on board vehicles. Those batteries weigh about 600 kg each (more than 1300 pounds, equivalent to 8 to 10 additional passengers). One executive of an international auto company described this situation as “always carrying a cow weighing 600 kg”. Given the dramatic increase in the number of BEVs globally, if such large batteries are used for every vehicle worldwide, it is clear that the demand for critical materials through BEVs will explode.
    IEEJ’s recent study compares the amount of critical minerals required for different types of vehicles. The results show that a typical BEV will require three times more critical minerals than a plug-in hybrid vehicle (PHEV) and six times more than a typical internal combustion engine vehicle (ICEV). On a “well to wheel” basis, the GHG emissions per kilometer driven and emitted by ICEVs are nearly twice as much as those for BEVs. What is interesting is that the emissions from PHEVs are almost the same as those for BEVs (assuming the current global power mix).

    Critical minerals required

    GHG emissions per kilometer (WtW basis)

    From these findings, it can be argued that PHEVs would provide a better solution simultaneously lowering GHG emissions and the requirement for critical minerals.
    To be sure, this analysis is based on the current global power mix. In countries with a much more decarbonized power mix, the emissions are lower for BEVs. The same will be true as the decarbonization of the global power mix happens in the future.
    As the world strives for further decarbonization of the power mix, carbon-neutral fuels such as biofuels and e-fuels, can play a meaningful role in reducing the GHG emissions from ICEVs and PHEVs. Again, the challenge is the cost. The estimated current cost for e-fuels of $5/liter makes it prohibitive for use in ICEVs. Its current use in PHEVs makes it slightly more expensive than running a BEV as fuel consumption by PHEVs is substantially lower than ICEVs.

    Estimation of annual costs for the use of passenger cars in case of synthetic fuel price 5$/L

    From a cost perspective, there are two pathways that could justify the use of PHEVs over BEVs. If the cost of e-fuels can be brought down to $2/liter, the cost of using PHEVs will be comparable to the cost of using BEVs, while achieving both, a reduction in GHG emissions and a lower requirement (1/3) for critical minerals. The other pathway is when the PHEVs are mostly limited to daily short trips used in a manner ensuring PHEVs run with an EV mode around 90%. In this case, even when the cost of e-fuels is as high as $5/liter and even with occasional long-distance driving, the cost of the use of PHEVs can be comparable to BEVs.

    Estimation of annual costs for the use of passenger cars in case of synthetic fuel price 2$/L

    Estimated annual cost of using a passenger car (assuming low driving range) in case of synthetic fuel price 5$/L

    From these analyses, a rationalization of the technology mix for vehicles can contribute to reducing the consumption of critical minerals. In countries with an electricity power mix similar to the current global power mix, PHEVs provide a better solution than BEVs in terms of critical minerals consumption and GHG emissions. Even when the power mix becomes substantially more decarbonized, in the future, PHEVs (with e-fuels) will still be providing a better solution from an environmental perspective taking into account of the impact on critical minerals.
    The current cost challenge of using e-fuels in PHEVs can be alleviated in two ways. The first one is obviously to significantly reduce by more than 50% the cost of e-fuels (2$/L). The second way is to reduce the consumption of high-cost e-fuels by using PHEVs on mostly short driving range with batteries and to consume e-fuels only during occasional long-distance driving. This way, the high cost of e-fuels can be mitigated while the consumption of critical minerals can also be rationalized.
    There is another possibility. If the driving range of the BEVs was exclusively limited to short distance driving, the size of the required batteries could be reduced. In this case, if you do not always carry a “600kg cow”, the overall cost would be lower and the consumption of critical minerals substantially reduced.
    As vehicles are one of the major sources of GHG emissions and the major demand sector for critical minerals, rationalization of the technology mix for vehicles, reflecting the usage, deserves much more attention.