New Energy Supply Chains

Concerns range from cyber security through to security of energy supply and economic security. The disruption to energy supply chains caused by Russia’s invasion of Ukraine was felt mainly in terms of the physical supply of gas to Europe and the impact this had on the global market. In this context, this paper considers the implications of threats to the physical supply of some of the critical materials and products that the UK requires for its energy transition.

China has benefited from being an early mover in the processing of many minerals used in net zero technologies, as well as in the production of intermediate goods and, more recently, final goods. In some elements of the supply chain China has a near monopoly (80–100% market share): the rare earths used to manufacture the permanent magnets used in wind turbines and electric vehicles (EVs) are just one example; other examples are connected to the production of battery anodes, high-quality spherical graphite, and the processing of manganese (also used in batteries). In the production of solar photovoltaic modules, meanwhile, China has a near monopoly on the production of polysilicon, silicon wafers and silicon cells. Added to this are very high concentrations (60–80% market share) in many other elements of these supply chains.

In light of this dominance, this paper considers what risks China’s position in these supply chains poses to the physical supply of materials, components and final goods in the battery and EV, solar, wind and electricity grid supply chains, and whether China could deliberately leverage its position to impose costs on the UK. These risks are assessed according to whether they could affect the UK solely, a group of countries, or the entire market. The paper argues that risks to the UK specifically are currently limited by low levels of manufacturing of these technologies in the UK: because the UK typically imports final goods – where Chinese dominance is less pronounced – its direct dependence on Chinese suppliers is limited. However, the UK might still be an attractive target for largely symbolic measures intended to send political messages.

The targeting of country groupings (such as NATO or the EU) by sanctions and counter-sanctions amid geopolitical tensions is potentially more dangerous for the UK. Market concentration in China is likely to persist for the foreseeable future, and alternative supply chains are unlikely to be sufficient to meet the demands of multiple countries. At the same time, protectionist industrial policies in the EU and the US may complicate future access to supply chains (which could become less dependent on China), while markets currently lack transparency and, in some cases, scale.

The biggest risk for the UK is shortages of critical minerals. Shortages are widely forecast, and China’s control of mineral processing and refining means it would play a central role in the allocation of scarce goods. Leveraging supply chains for political ends has historically been more effective in tight markets – the 1970s oil embargoes came during periods of tight supply – but China is more likely to allocate available supplies according to its own national economic interest. During the Covid-19 pandemic, high-volume contracts with Chinese companies were more likely to be honoured, and if this pattern were to be replicated it could mean that decisions about allocation were passed to companies, which would decide which of their domestic and international operations received scarce materials. However, China’s ban on Australian coal shows that where a security threat is perceived, Beijing will take action, even if it will cause damage to the Chinese economy.

There are also risks in terms of defence and international relations. Access to technology for the military is likely to be similar to that for the civilian economy for the time being, with net zero technologies currently most likely to be used for military logistics or for housing/bases. The most immediate risks relate to the secure operation of technologies, but these tend to be associated with cyber risks, which are not covered in this paper. The increased importance of critical minerals as commodities may change geopolitical dynamics and in some cases result in domestic and regional instability, influencing where the military is deployed. In the longer term, there are questions about whether China’s industrial power and growing technological advantage in net zero will be leveraged to create advantages for its own military capability.

Finally, China’s role as the paramount – and in some cases only – investor in and purchaser of mineral ores will clearly be significant for its global influence. China’s role in producer countries, as well as its trading practices, will be important in shaping the character of the global market, with long-term implications for the UK’s defence and security policies.

Introduction

China is central to the new energy supply chains required for the decarbonisation of the global economy. It is a large investor in the mining of numerous critical materials and metals both domestically and abroad and, more significantly, the manufacture of critical energy-related components is heavily concentrated in China, meaning that many of the mined ores are sent there for processing. As a result, China is central to the production of wind turbines, solar photovoltaics (PV), permanent magnets, batteries and electric vehicles. As the energy transition unfolds and electrification gathers pace, demand for these materials and end products is set to increase. The International Energy Agency (IEA) estimates that a concerted effort to reach the Paris Agreement goals (climate stabilisation at “well below 2°C global temperature rise”) would mean a quadrupling of mineral requirements for clean energy technologies by 2040. An even faster transition, to hit net zero globally by 2050, would require six times more critical mineral inputs in 2040 than in 2020. However, investment so far is falling short of what the world is forecast to need.

The UK’s own net zero plans imply large increases in domestic demand for critical minerals and end products, as well as greater reliance on complex supply chains. Rapid growth requires stable markets and resilient supply chains, but events over the past few years have highlighted that stability is not guaranteed. The lack of investment in minerals globally suggests that shortages will occur and that costs will rise. In the past, increased pressure on mineral supplies has led to increased investment but, given the time lag for bringing on new supplies, price volatility has also ensued. Similar challenges related to the supply of new materials could delay the energy transition and raise the associated costs. Although cost increases and delays also spur technological innovations, net zero targets are approaching rapidly, meaning that new infrastructure and equipment need to be sourced and deployed. In this context, the UK government must balance the need to move quickly with decarbonisation against the cost and availability of materials and potential security risks from immature and concentrated supply chains.

Concerns about the availability of minerals and metals are compounded by China’s central role in both mining and processing. The Covid-19 pandemic and the Russian invasion of Ukraine have highlighted the risks associated with market concentration and “just-in-time” supply chain strategies. Supply chain disruptions during the pandemic led to longer lead times and higher costs for supplies of manufactured goods from China. Lockdowns, combined with factory accidents and floods in China, reduced the availability of polysilicon, the starting material for wafers in solar cells, and as China produced 80% of the world’s supplies in 2020, prices rose by 350%. Some residential solar developers reported that, for the first time, their growth was constrained by the availability of equipment, rather than by sales.

Meanwhile, following Russia’s invasion of Ukraine and gas supply disruptions, energy security has become a top policy priority for many governments. Russia’s dominance in European gas supplies emphasised the risk of reliance on a single large supplier, creating alarm about China’s dominance in the provision of key materials and components for the energy transition. And, in the context of worsening US–China relations, many Western governments and companies are looking to de-risk their China exposure.

Government policies aimed at diversifying supply sources and processing facilities are critical, given the need for more materials and end products. But it is important to recognise that, even as China’s share of these processes falls, it will remain central to many energy supply chains. It is important that the UK, which currently has limited production capacity, understands the complexity of new energy supply chains, the risks associated with China’s dominance, and the various implications of diversifying, decoupling or de-risking them. Excluding China completely from the UK’s new energy supply chains is unrealistic and would be counterproductive for the UK’s net zero targets.

Every strategy to diversify new energy supply chains needs to be seen in the context of the broader UK–China bilateral economic relationship, which topped £100 billion in the 12 months to the end of Q1 2023. New energy supply chains are only a small part of this relationship, which raises the question of whether there are risks specific to these supply chains that warrant targeted treatment, what these are, and how mitigation strategies fit into this much larger economic relationship.

Numerous studies have analysed different demand scenarios for critical materials and minerals, as well as the supply gap, and have described China’s dominance. But they do not assess how this dominance impacts the UK. This paper aims to fill that gap and asks: how has China become the dominant actor in new energy supply chains; and can China use its dominance in net zero energy supply chains to penalise the UK because of its policy choices? The paper argues that it will be very difficult for China to target the UK directly, given the complexity of the relevant supply chains. Any export controls or embargoes that China imposed on the UK would impact many other consumer countries equally. Similarly, the UK would not be insulated from any bottlenecks or breakdowns in these supply chains, impacting its ability to meet its net zero targets.

That said, China’s centrality across the entire value chain raises questions for the UK’s foreign and defence policies, as well as for its industrial and economic policy. These challenges need to be understood and assessed rationally. While this paper argues that it would be very difficult for China to target the UK specifically using new energy supply chains, it also seeks to highlight the different risks associated with market concentration in China.

This paper is by no means a comprehensive assessment of all these risks and their various international ramifications. Further research and discussion are needed to advance the conversation, but a fact-based foundation is the important first step, and that is what this paper seeks to offer. Similarly, the paper does not assess cyber threats or environmental, social and governance concerns, which represent different categories of risk best covered in separate discussions.

The paper is based on publicly available sources in the English and Chinese languages. Quantitative data is drawn principally from a combination of official publications of national governments and international organisations, and industry and consultancy reports. A key challenge was the lack of consistency in the data between different sources, which is why the quantitative data on China’s share of global supply chain is presented as percentage bands rather than as precise percentages. Sources for qualitative information include policy documents and analyses produced by national governments and international organisations, consultancy and think tank reports, academic papers and online press articles. Finally, this paper is also informed by a closed research event hosted by RUSI, which involved officials from UK government departments, industry figures and think tank representatives.

Structure

The paper is organised as follows: the first chapter briefly discusses Chinese government policies as they relate to net zero supply chains; the second chapter covers the UK’s need for low-carbon energy infrastructure; and the third chapter outlines areas of Chinese dominance in net zero supply chains. The fourth and final chapter offers a preliminary analysis of the risks in order to guide thinking about the scale and nature of the challenge – identifying foreign policy, defence and economic risks to the UK associated with China’s control over net zero supply chains – before offering some preliminary observations and suggestions for further research.

I. Chinese Government Policy and Supply Chain Dominance

China does not have a critical materials strategy per se, but its dominance in new energy supply chains emanates from a combination of early moves into various industrial applications (rare earths, batteries, solar PV and, to a lesser degree, wind turbines) via central and local government support accompanied by low labour, land and electricity costs. Compounded by the Chinese government’s concerns about energy security, industrial policies have aimed to advance electrification as a means of limiting imports of fossil fuels, mainly through the development of electric vehicles (EVs). While the battery and EV sector developed differently from solar PV and wind turbines (as discussed below), they benefited from similar industrial policies and from the government’s ability to support long-term goals. As such, signals from central government indicating that these were priority industries led to preferential policies for manufacturing, as well as financial support for innovation and (at times) for infrastructure and deployment. In addition, the low input costs that attracted foreign investors were combined with obligations to partner with Chinese firms, which then led to technology transfers.

As these industries developed and scaled up in China, the state also supported outbound investments in mining, with varying degrees of success, and with substantial variation in corporate environmental, social and governance (ESG) practices. The incentives shifted from focusing on one part of the supply chain to targeting integrated supply chains and, as these industrial activities expanded, to supporting industries and the pools of experienced labour which formed around them. Development of the industries was economically, rather than geopolitically, driven, with China seeking markets where it might gain a competitive advantage in order to generate employment and industrial growth. China’s solar PV development was initially conceived as an export-oriented industry to benefit from feed-in tariffs in countries such as Germany. That said, the Chinese government already recognised in the late 1980s that the availability of critical resources (such as rare earths) offered it a strategic advantage. Deng Xiaoping is reported to have remarked that while “the Middle East has oil, China has rare earths”.

Preferential policies differed among the supply chains and varied depending on the availability of mineral resources in China. In rare earths, for instance, where China has abundant resources, policies to support mining and processing date back to the 1970s, while foreign investments were confined to joint ventures in the 1990s. From that point, policies focused on limiting exports and encouraging Chinese companies to develop high-end products and devices, while also aiming to limit illegal mining and exports (which had severe environmental and health impacts in China, and which depressed prices domestically).

The EV industry in China was born from a desire to foster industrial development and technological upgrading while also reducing the country’s dependence on oil imports. The government adopted supportive industrial policies for EV manufacturing, sales and charging infrastructure, offering tax incentives and subsidies for innovation and R&D as early as the mid-2000s. Much like the situation with rare earths, government policies that made foreign investments appealing were accompanied by cheap input costs, with the quid pro quo of partnering with Chinese car and battery makers. In 2012, as part of the 12th Five-Year Plan, the government issued the “Energy Saving and New Energy Automobile Industry Development Plan (2012–2020)” aimed at developing EV science and technology. The “Made in China 2025” plan, issued in 2015, introduced the development of the new energy vehicle (NEV) industry as a national strategy and, more broadly, encouraged new energy industries such as renewables. This built on the “Strategic Emerging Industries” initiative that was announced in 2006, but broadened it out from a focus on technical innovation to encompass the entire manufacturing process.

Over this period, government departments introduced various plans to guide the development of the NEV industry, encouraging the creation of an ecosystem to support these industries. Government policies focused on innovation in EVs and batteries, as well as on encouraging both production and sales of EVs and infrastructure build-out. In 2021, policy guidance also looked to address the use of EV battery packs in other applications after their removal from EVs, including as part of China’s long-term plan to develop smart networks and to achieve vehicle-to-grid integration. The Ministry of Industry and Information Technology’s 12th Five-Year Plan for the nonferrous metals sector noted that priority would be given to developing China’s overseas presence. Chinese banks have therefore supported Chinese miners in their efforts to acquire ownership interests in mines and processing facilities in Africa, Australia, Europe, North America and South America, and in signing offtake agreements with operating mines.

As the domestic EV market grew, government policies facilitated and prioritised the development of an integrated battery and EV supply chain. To be sure, some developments, including e-bikes and a burgeoning solar heating industry, have emerged in China due to innovations by local companies that saw new demand emerging, even though they were not formally encouraged (some were even discouraged, as in the case of e-bikes). This is important to note, because not all of China’s initiatives are led and directed by the government, nor are they perfectly implemented. When discussing China, it is important to note that there is a difference between central government’s policy framing on the one hand, and corporate activities and behaviours on the other.

Nonetheless, the state-led industrial policy framework has been a key contributor to China’s dominance in these industries of the future. Some of the attributes seen in the EV sector also supported the development of China’s solar industry: manufacturers benefited from local government support such as land concessions, tax benefits, less expensive operating environments and, in some cases, even direct investment. The central government contributed by directing state financing to these projects and even helped to catalyse cost declines in input materials like polysilicon. However, when polysilicon prices plummeted (due to a fall in demand as trade restrictions were imposed on Chinese solar exports, combined with the existence of large stocks of polysilicon) local governments provided further support to shield these industries. That said, solar PV, unlike other industries, did not begin life as a domestic industry. Chinese firms first entered PV module manufacturing through technology acquisition, before gradually succeeding in building their competitiveness and technological capabilities throughout the supply chains, as they saw new opportunities for growth, as well as via local interactive learning networks.

In a somewhat similar vein, the Chinese government has, since the early stage of wind energy development, focused on establishing a domestic wind industry supply chain, initially by financing investments in small wind farms, and through the development of wind projects as early as the 1980s. Foreign expertise was then brought in, but joint ventures were designed to include substantial local content requirements (later abolished). In addition to policies that stimulated renewable R&D and equipment manufacturing, the government also introduced pricing policies to support the integration of renewable energy.

Industrial policies in support of manufacturing, innovation and deployment have had unintended consequences from the Chinese government’s perspective – among them subsidy fraud, illegal mining and negative environmental impacts – while incentive structures have evolved to deal with regulatory gaps, financial stress along the supply chains and other challenges. Notwithstanding the challenges, these policies have, over time, allowed China to become a critical and low-cost supplier of new energy materials.

In addition to industrial and innovation policies, the Chinese government regulates the mining of critical materials and their processing. China’s 2016 National Plan for Mineral Resources classifies the country’s mineral resources as “strategic”, “advantageous”, “protected”, or “strategic emerging industry” minerals. China does not have a critical minerals list akin to those in place in the US or the EU. For the different categories of minerals, the plan identifies where China needs to encourage exploration of minerals in short supply, regulate the amount of minerals defined as “advantageous”, cut production of minerals with excess capacity, and ensure the supply of minerals in strategic emerging industries. The plan identifies three broad categories:

• Energy minerals – oil, gas, shale gas, coal, coal-bed methane and uranium.

• Metallic minerals – iron, chromium, copper, aluminium, gold, nickel, tungsten, tin, molybdenum, antimony, cobalt, lithium, rare earths and zirconium.

• Non-metallic minerals – phosphorus, potash, crystalline graphite and fluorite.

This list includes metals and minerals that are not on developed economies’ lists of critical materials, but it also excludes a number of materials often cited by developed economies as “critical” (such as vanadium, tellurium, niobium and others that are used in hydrogen, solar PV or wind turbines). And while advanced manufacturing economies with a high dependency on imported raw materials include supply risk as a key parameter when categorising their lists of materials, Chinese assessments of “strategic minerals” use a broader, more flexible set of criteria, in which some “strategic minerals” are subject to supply risk and others are not. Indeed, according to China’s Geological Survey, the category of “advantageous minerals” includes rare earths and tungsten, and refers to minerals for which China has a domestic resource advantage relative to other countries, allowing it to control or influence global markets.

II. Demand for Low-Carbon Energy Infrastructure in the UK

In its 2023 analysis, the UK’s National Grid estimated that the national electricity supply would treble by 2035, through both domestic generation and imports. This would involve a massive increase in different forms of infrastructure (see Table 1).

▲ Table 1: National Grid (2023) Projections to 2035 for England and Wales. Source: National Grid ESO, “Bridging the Gap to Net Zero”, March 2023.

Concurrent global growth in demand will put great pressure on international supply chains. Mining companies in particular face a range of challenges, including high exploration and production costs, environmental and social concerns, access to capital and shortages of skilled labour. Currently, investments in both the mining of new minerals and processing capacity are falling short of estimated demand, notwithstanding the different demand outlooks and uncertainties around the impact of new technologies. The IEA, for instance, notes that “in a scenario consistent with climate goals, expected supply from existing mines and projects under construction is estimated to meet only half of projected lithium and cobalt requirements and 80% of copper needs by 2030”. Thus, if investment in new mine capacity is not accelerated, the pace of the energy transition will be constrained.

This raises a number of issues for the UK. First, its ability to meet its net zero goals will depend on the availability of new energy supplies. Meanwhile, the UK’s industrial and economic competitiveness will be closely linked to energy costs. Some military systems also use critical materials, and, while the quantities of these are relatively small, they require high-purity, high-value materials. Finally, supply disruptions, however limited, could reduce the UK’s ability to use renewable technology to meet its climate goals, as well as constrain its freedom of action.

To date the UK has relied on markets to satisfy its needs and, where effective and efficient markets exist, government policies suggest this will remain the case. The UK government recognised in its 2022 Critical Minerals Strategy that many critical mineral markets are “incomplete”, having inadequate data and transparency. The Critical Minerals Intelligence Centre was established at the British Geological Survey in July 2022, and the government has committed to convening a dialogue with industry, and to using multilateral engagement to promote market development. But establishing concrete policies to secure necessary supplies will be challenging without an industrial strategy to provide guidance on UK demand for critical minerals at the various stages of the supply chain.

The efforts of the UK and its allies to build out new energy supply chains are likely to involve a lengthy process – one from which China cannot be excluded, at least in the near term. While policy papers do not articulate what level of reliance on China is acceptable to the UK and its allies, the decoupling (now de-risking) narratives indicate that there will be an attempt to rapidly reduce dependence on China. In the US, for instance, the Inflation Reduction Act provides a range of tax credits, as the country seeks to encourage the sourcing of battery materials domestically, or from partner countries with which the US has free trade agreements. From 2025 onwards, EV batteries will only be eligible for US purchase subsidies if they do not contain any critical minerals that were extracted, processed or recycled by a “foreign entity of concern” – including China. Similarly, the European Commission’s proposal for a new Critical Raw Materials Act (CRMA) aims to achieve a high degree of self-sufficiency by 2030. According to the CRMA, EU capacity should reach at least 10% of domestic demand for mining and extraction and at least 40% for processing and refining, in a bid to address overreliance on China’s supply chains. The European Raw Materials Alliance, announced in September 2020 as part of the European Action Plan on Critical Raw Materials, focuses on developing sustainable and responsible supply chains for critical raw materials and fostering partnerships with resource-rich countries other than China.

Before the paper goes on to discuss the implications of this for UK security, the next chapter offers a brief overview of key net zero supply chains and their complexity.

III. China’s Dominance of New Energy Supply Chains

Supply Chain Components

Supply chains for low-carbon energy technologies have several stages and involve many different countries. A supply chain may comprise as many as six steps:

1. Extraction and beneficiation of mineral ores.

2. Processing and refining of the ores to produce metals.

3. Further processing to produce the required alloys or chemical compounds.

4. Manufacture of individual components.

5. Manufacture of intermediate products from these components.

6. Assembly of final product.

In principle, each step can be carried out in a different country. But China, as discussed below, has built a strong position that spans steps one to five in several important supply chains. The basis of this strength lies in China’s dominance of the extraction and, to an even greater extent, processing of certain critical minerals.

What are Critical Minerals?

The criticality of a specific mineral is generally assessed on the basis of the risk of interruption to supply and on the economic or security importance to the importing nation or region of such a disruption. One factor that contributes to the assessment of supply risk is the market concentration of the production of a mineral ore or refined metal. Most assessments do not consider the geographic concentration of primary mineral ore resources, as these are – in most cases – abundant and geographically widespread. However, the known high-quality accumulations tend to be geographically concentrated, though future exploration may yield some new high-grade deposits.

The principal focus of such criticality assessments is the mineral inputs required to produce advanced technologies, notably in the low-carbon and defence industries. Assessments carried out by different organisations result in different lists of critical minerals. This is due to a combination of differing geographic scope and economic/security concerns, as well as different methodologies. This study draws on four such assessments, conducted respectively by: the US Department of the Interior; the IEA; the British Geological Survey; and the European Commission.

The minerals identified as critical by one or more of these assessments, and which are inputs to low-carbon energy technologies, are listed in Table 2.

▲ Table 2: Critical Minerals Relevant to Low-Carbon Energy Technologies. Sources: US Department of the Interior, “2022 Final List of Critical Minerals”, Federal Register (Vol. 87, No. 37, 24 February 2022), p. 10,381; IEA, “The Role of Critical Minerals in Clean Energy Transitions”, May 2021; Paul Lusty et al., UK Criticality Assessment of Technology Critical Minerals and Metals, British Geological Survey, CR/21/120 (Keyworth: British Geological Survey, 2021); Silvia Bobba et al., Critical Raw Materials for Strategic Technologies and Sectors in the EU: A Foresight Study (Brussels: European Commission, 2020).

The growing demand for clean energy technologies will sharply accelerate the demand for some of these critical minerals. Table 3 summarises the IEA’s estimates for this growth to 2040.

▲ Table 3: Estimated Growth in Demand for Selected Critical Minerals and Share of Clean Energy Technologies in Total Demand. Notes: 1. STEPS and SDS refer respectively to the IEA’s “Stated Policies” and “Sustainable Development” scenarios. 2. * refers to neodymium only. Source: IEA, “The Role of Critical Minerals in Clean Energy Transitions”.

It is clear that China holds a significant or strong global position in the extraction and/or processing of a large number of the minerals listed in Table 2. In most cases, China’s global share of processing is significantly larger than that of ore extraction, as China imports large quantities of ore for domestic processing. The strength of China’s position is enhanced by its growing involvement in mining and mineral processing overseas (Table 4). The scale of overseas investment in this sector accelerated in the first half of 2023, with a focus on nickel, lithium and copper. The countries that host Chinese mining companies will play a growing role in the global energy transition.

▲ Table 4: Examples of Countries Where China is Deeply Involved in Critical Minerals. Note: PGMs = platinum group metals. Sources: Christoph Nedopil Wang, “China Belt and Road Initiative (BRI)”; Chen Aizhu and Fransiska Nangoy, “Shandong Nanshan May Expand Indonesia Site into $6 bln Aluminium Complex”, Reuters, 15 May 2023; Saliou Samb, “China to Loan Guinea $20 Billion to Secure Aluminium Ore”, Reuters, 6 September 2023; James Attwood and Leonardo Lara, “China’s BYD Takes Next Steps on $290 Million Lithium Project in Chile”, Bloomberg, 3 July 2023; Jonathan Gilbert and James Attwood, “China’s Zijin is in Talks with Argentina to Turn Lithium into Battery Cathode”, Bloomberg, 10 July 2023; Thomas Graham, “Bolivia’s Dream of a Lithium Future Plays out on High-Altitude Salt Flats”, The Guardian, 25 January 2023; “Gabon, CITIC to Mine 26 Mln T Manganese Resource”, Reuters, 23 October 2010; Harry Dempsey, “Indonesia Emerges as World’s Second-Largest Cobalt Producer”, Financial Times, 9 May 2023; Yudith Ho and Eko Listiyorini, “Chinese Companies are Flocking to Indonesia for its Nickel”, Bloomberg, 15 December 2022; Harry Dempsey and Leslie Hook, “China Set to Tighten Grip over Global Cobalt Supply as Price Hits 32-Month Low”, Financial Times, 13 March 2023; Simon Mundy, “China Enters South African Platinum Sector”, Financial Times, 18 December 2010.

The UK has no significant mining production of the critical minerals identified by the British Geological Survey, but prospective areas for mineral extraction do exist in the UK, notably for lithium in Cornwall. Whether extraction of any of these deposits can be brought to a significant scale by 2035 is an open question, not least due to social and environmental concerns. Likewise, the UK’s processing capacity for these minerals is very limited. Nevertheless, the UK is home to a number of international mining companies that could, in principle, supply some of the required minerals. Recycling is often seen as having more potential in the UK, but in a rapidly growing market, recycled materials originating in the UK will lag behind demand significantly.

Below is a more detailed look at some of the other key supply chain components that will need to be addressed in any shift away from Chinese dominance.

Batteries and EVs

Lithium-ion batteries are the most commonly used form of energy storage for electric and hybrid motor vehicles and are also used for household and grid electricity storage. Their key components are anodes, cathodes and electrolytes. Lithium is the most important metal in this context, as it provides the electrolyte as well as most forms of cathode. The chemistry of the cathode and anode varies, and this results in six main types of lithium-ion battery:

• NMC: Lithium nickel manganese cobalt oxide.
• NCA: Lithium nickel cobalt aluminium oxide.
• LCO: Lithium cobalt oxide.
• LFP: Lithium iron phosphate.
• LMO: Lithium manganese oxide.
• LTO: Lithium titanate.

The composition of the cathode is the main differentiator between these battery types. The anode is commonly composed of graphite, either natural or synthetic (manufactured from hydrocarbons). The main exception is the LTO battery, which uses lithium titanate for the anode. Tin and niobium are likely to be used in the future to increase the energy density of the anode.

Table 5 illustrates in simplified form the supply chain for lithium-ion batteries, from raw material (in the form of ore) through to final battery assembly. This shows that China’s strong position in mineral ore extraction only applies to natural graphite and silicon. In contrast, China has built a strong – and even dominant – position in mineral processing and in the refining of domestic and imported ores, the manufacture of anodes, cathodes and electrolytes, and in the manufacture of the lithium-ion cells that go into the final battery pack. The import of beneficiated ores from overseas through bilateral offtake agreements has been key to this success (see Table 4). Chinese mining companies have enhanced this advantage through their overseas investments, notably in the Democratic Republic of the Congo for cobalt, in Latin America for lithium and in Indonesia for nickel, in some cases supporting not only mining but in-country refining and processing.

Ongoing technological advances are likely to achieve two things. The first involves cost and efficiency improvements for existing lithium-ion chemistries, which could reduce the unit requirement for critical minerals. The second is the development of entirely new designs that could radically reduce or even obviate the need for critical minerals: these potential designs include solid state batteries, redox flow batteries, sodium-ion and iron-air chemistries, and supercapacitors. Japanese firms have been leading these innovations, but companies from South Korea, the US, China and Europe are also contributing. These advances are not currently being pursued at scale by the UK, but should they be developed and deployed rapidly it remains to be seen whether they could materially change the UK’s demand outlook by 2035.

In 2022, only 6% of the UK’s EVs were produced domestically, and even now direct exposure to the Chinese supply chain – which is most dominant in refining, components and intermediate products (see Table 5) – is limited. Some 47% of the UK’s battery EVs were imported from the EU in 2022, up from 44% in 2019, followed by China at 32%, up from 2% in 2019. Sales of Chinese EVs in the UK and EU are growing. Moreover, Chinese companies already manufacture batteries in Europe (which are consequently not subject to tariffs), and this capacity could rise to 322 gigawatt hours per year (GWh/yr) by 2031. Chinese car manufacturers will also look to start production in Europe.

As of August 2023, the UK hosts two operating lithium-ion battery plants:

• Envision–AESC’s LMO plant in Sunderland, with a capacity of 1.9 GWh/yr and plans to expand to 11 GWh/yr by 2024 and 35 GWh/yr by 2030.

• AMTE’s lithium-ion battery plant in Thurso, with a capacity of 0.5 GWh/yr.

On 18 July 2023, it was announced that Tata had committed to building a 40 GWh/yr plant in Somerset. Other potential gigafactories in Coventry and Dundee have yet to be confirmed.

According to the Faraday Institution, the UK’s manufacturing capacity could, based on current plans, reach a combined 57 GWh/yr by 2030. That falls short of the UK’s estimated requirement of 100 GWh/yr of battery supplies (or gigafactories) to meet demand for batteries for private cars, commercial vehicles, heavy goods vehicles, buses, micromobility and grid storage by 2030, the date at which the UK had intended to end the sale of fully internal combustion engine vehicles and vans, which was delayed to 2035 in September 2023. By 2040, that demand could rise to nearly 200 GWh/yr. According to data from UK Trade Info, the UK currently relies on China for 42% of its lithium-ion battery packs.

It is unclear whether the UK can become an attractive destination for battery makers in the future given the limited nature of UK incentives (at least compared to support schemes rolled out in the EU and the US) and due to uncertainty about future trading rules with the EU. Lithium mining locally could help attract battery makers, but lithium mining tends to take years to scale up. Even if the UK did increase its battery manufacturing capabilities, it would need to attract both auto assemblers and battery makers – which would likely be Japanese, South Korean or Chinese – or to support local companies in the face of strong international competition.

Assuming that the UK will not be able to meet all its battery and EV requirements domestically, it will continue to import both batteries and EVs from Europe and China, with Chinese EVs and batteries looking likely to be more cost competitive than their European counterparts. With more gigafactories opening up in Europe, the UK will be able to diversify its battery and EV imports, but will remain dependent on a limited number of producers who, in turn, will remain reliant on Chinese components and minerals (see Table 5).

▲ Table 5: China’s Involvement in the Supply Chain for Lithium-Ion Batteries. Notes: 1. Italics indicate estimated share of Chinese production once overseas projects are included. 2. C* = natural graphite. 3. C** = high-quality spherical graphite. 4. metals in brackets are likely to be used in the future. Sources: US Geological Survey, “Mineral Commodity Summaries 2023”, 31 January 2023; IEA, “The Role of Critical Minerals in Clean Energy Transitions”; Lusty et al., “UK Criticality Assessment of Technology Critical Minerals and Metals”; Bobba et al., “Critical Raw Materials for Strategic Technologies and Sectors in the EU: A Foresight Study”; IEA, “The State of Clean Technology Manufacturing”, May 2023; IEA, “Energy Technology Perspectives 2023”; Heejin Kim and Gabrielle Coppola, “Chinese Firms are Seeking Korean Partners to Skirt US EV Rules”, Bloomberg, 30 July 2023.

Wind Power Plants

Large, modern wind turbines place significant demands on material supply to maximise their energy output and strength. The respective key components are permanent magnets for the generators and steel for the tower, nacelle and other parts of the turbine. Permanent magnets are also essential components of the traction motors in EVs. The most commonly used form of permanent magnet in wind turbines is the NdFeB magnet (neodymium iron boron), whose production requires neodymium, along with other rare earth metals such as dysprosium and praseodymium. China extracts around 70% of the world’s rare earth metal ores (see Table 6). Moreover, China is responsible for around 90% of the global output of rare earth metals through its longstanding dominance of rare earth ore processing and refining. China has taken advantage of this strength to build manufacturing capacity that now provides nearly 90% of the world’s supply of NdFeB magnets.

Most of the other critical minerals shown in Table 6 are additives to steel (manganese, chromium, molybdenum, nickel, niobium) or inputs to other turbine components. As is the case in battery materials, China has a strong mineral processing industry that allows it to import ores to produce refined metals. This has given the country a dominant position in the supply of refined manganese and relatively strong positions in aluminium, copper and molybdenum.

These foundations in the production of permanent magnets and in metallurgical industries have given China the basis for achieving a large share of global production of key components such as generators, gearboxes, blades and nacelles.

In 2022, the UK had over 14 GW of offshore wind. Half of the UK’s renewable energy comes from wind, and by 2030, offshore wind will supply a third of the country’s electricity. In its 2022 Energy Security Strategy, the government scaled up its plans for wind to reach 50 GW by 2030, compared to a 40 GW target previously, including up to 5 GW of innovative floating wind. RenewableUK, the country’s renewable trade body, estimates that the pipeline of projects either under construction or highly likely to start construction is on track to exceed this 50 GW target.

The UK hosts plants that manufacture wind turbine blades and towers, but it imports most of the other components. While some of these components can be manufactured in Europe, most of the generators will rely on permanent magnets from China, and even manufacturers of permanent magnets outside China may still be reliant on rare earth metals supplied by China. To address this supply risk, manufacturers are finding ways to reduce or change the mix of rare earth metals in NdFeB magnets, and research is underway to develop entirely new technologies.

However, the likelihood that these developments will substantially reduce the need for rare earth metals or dramatically change China’s centrality in the near term – even as its share of these components falls – is low. This is because of the scale and cost competitiveness of the Chinese industry compared to competitors, and the concentration of the refining of most other rare earths and metals in China.

▲ Table 6: China’s Involvement in the Supply Chain for Wind Turbines. Note: Italics indicate estimated share of Chinese production once overseas projects are included. Sources: US Geological Survey, “Mineral Commodity Summaries 2023”; IEA, “The Role of Critical Minerals in Clean Energy Transitions”; Lusty et al., “UK Criticality Assessment of Technology Critical Minerals and Metals”; Bobba et al., “Critical Raw Materials for Strategic Technologies and Sectors in the EU: A Foresight Study”; IEA, “The State of Clean Technology Manufacturing”; IEA, “Energy Technology Perspectives 2023”.

Solar PV Modules

The majority of PV cells are manufactured from silicon, generally in polycrystalline form. Polycrystalline silicon cells also require germanium and borates. China’s key strength lies in the production of polycrystalline silicon (see Table 7). The country’s domestic manufacturing capacity has grown in recent years, allowing China’s share of global output of polycrystalline silicon to reach 89% in 2022 and the quantity of imports to decline. On this basis, China has achieved almost total dominance (around 95%) in the supply of silicon wafers and a very strong position (around 85%) in the supply for silicon cells. It also makes more than 70% of the world’s solar PV modules.

China is also a dominant supplier of germanium, a by-product of zinc ore processing, and has a strong position in the production of metals such as copper, aluminium, lead and tin that are necessary components of solar PV panels.

Other technologies in this sphere include cadmium telluride (CdTe) and copper indium gallium selenide (CIGS) cells. Table 7 shows that China has a moderately strong position in the production of tellurium, indium, cadmium and molybdenum, as well as a dominant position in gallium. All of these metals are produced as by-products of other processes, and their availability depends in part on the production of ores containing other minerals and on the processing of these ores to recover the by-products. Future technological options for solar PV include gallium arsenide and amorphous silicon cells.

The UK lacks manufacturing at scale of polycrystalline silicon, silicon wafers and cells, and cells based on other technologies. Facilities for such production are thin on the ground: Power Roll has opened a plant in Durham to manufacture flexible solar film using perovskite technology, and while Oxford PV has developed perovskite-on-silicon cell technology, its factory is in Germany and the company has stated that it is reluctant to build the next factory in the UK due to the lack of incentives. A number of companies in the UK manufacture solar PV modules from imported cells, such as UKSOL, UK Solar Power, Sharp and GB Sol, but imports of modules from China remain significant. For example, up to 40% of UK solar farms were built with Chinese modules in 2021. The supply chains for these modules allegedly involve forced labour in Xinjiang, where the production of polysilicon is concentrated, meaning that companies sourcing panels already face an ethical, reputational and compliance challenge.

▲ Table 7: China’s Involvement in the Supply Chain for Solar PV. Notes: 1. Metals in brackets are those needed for CdTe and CIGS cells. 2. Italics indicate estimated share of Chinese production once overseas projects are included. Sources: US Geological Survey, “Mineral Commodity Summaries 2023”; IEA, “The Role of Critical Minerals in Clean Energy Transitions”; Lusty et al., “UK Criticality Assessment of Technology Critical Minerals and Metals”; Bobba et al., “Critical Raw Materials for Strategic Technologies and Sectors in the EU: A Foresight Study”; IEA, “The State of Clean Technology Manufacturing”; IEA, “Energy Technology Perspectives 2023”.

Electricity Grids

The principal metals required for transmission lines and transformers are copper, aluminium, zinc and cadmium, along with iron. None of these metals were considered critical for the UK by the British Geological Survey, although China accounts for between 40% and 60% of some of these metals, and aluminium is considered critical by the EU and the US. The supply of critical minerals such as gallium and germanium for microchips – or the supply of microchips themselves – could increase in significance if China becomes a dominant global supplier.

Rather than raw materials, the main China-related vulnerability for UK electricity grids may be cyber security (not considered in detail in this paper). The IEA estimates that by 2025 there will be 30–40 billion devices linked to electricity grids across the world, and that any of these could be used to attack the grid. This is a major security challenge, and will require governments and companies to act in concert to ensure the resilience of power systems – a process that cannot be discussed in detail here. Instead, the broader responses from government and industry to China’s dominance in the sphere of raw materials are considered.

Government and Corporate Responses

A combination of deteriorating relations with China and rising demand for the minerals that are critical to the low-carbon transition has led governments and companies from industrialised countries to take steps to reduce their reliance on China for these minerals. Government actions include imposing import restrictions, incentivising domestic investment and production, stockpiling, and building partnerships with other countries. An additional priority is R&D to develop alternatives to the currently used minerals so as to enhance the efficiency of their use and expand recycling.

The US government has been among the most active in seeking to decouple from China in this regard, including through the 2022 Inflation Reduction Act, which supports investment and guides procurement along the full length of the supply chain. Resource-rich Australia and Canada are also supporting investment in mining and processing, while in 2023 the EU published its draft Critical Raw Materials Act, which includes 2030 targets for mineral extraction, processing and recycling, as well as limiting over-dependence on a single third country. At the same time, the EU published a draft of the Net-Zero Industry Act, which aims to scale up the manufacturing of new energy technologies in Europe.

Realising that international cooperation was needed, the US led the establishment of the Minerals Security Partnership in June 2022 to “bolster critical mineral supply chains essential for the clean energy transition”. The first meeting in September 2022 was attended by official partners Australia, Canada, Finland, France, Japan, South Korea, Norway, Sweden, the UK, the US and the EU. Mineral-rich countries such as Argentina, Brazil, the Democratic Republic of the Congo, Mongolia, Mozambique, Namibia, Tanzania and Zambia also attended.

In addition to the construction of new mines and processing plants outside China, two trends in particular may help reduce dependence on China. The first is reducing or obviating the need for critical minerals in key technologies. Such measures would include the development of sodium-ion batteries for EVs and permanent magnets free of REEs, as well as increasing the efficiency of use and recycling of the materials. However, the time needed to scale up these innovations is uncertain, and China itself may still play a leading role in these technologies. The second trend involves the increasing level of support being given to promote the domestic production of renewable energy equipment and EVs in the US and Europe, which will bolster the growing capacity to process and refine metal ores.

Taken together, these moves mark a potential turning point in international policies to address Chinese dominance in the mining and processing of critical minerals. However, the impact of these measures is likely to be modest over the period to 2035, given the time needed to commission new mines and processing plants and to scale up the use of new technological solutions, not least due to environmental and social concerns, as well as the energy and water requirements of these processes. In light of this, it is important to consider how China could leverage its dominance in these critical supply chains, and what the implications of such leverage could be.

IV. What Threat Does China’s Dominance Pose to the UK?

This chapter sets out a preliminary analysis of the risks posed to the UK by China’s domination of new energy supply chains. It assesses the extent to which the UK is at risk of being singled out as a target, whether it is more vulnerable to being targeted as part of a broader regional- or alliance-level bloc, and the extent to which it is vulnerable to disruptions to the global market. It ends with a discussion of other risks relating to international relations and defence that the UK should consider in parallel with the China-related risks.

Global energy supply chains are important tools for soft power and greyzone contestation. China’s role in new energy supply chains is already an important factor in great power politics – and the importance of this influence will only increase. The US’s Inflation Reduction Act denies subsidies to EV producers that are dependent on Chinese materials on grounds of security, and not for diversification or industrial reasons, as discussed earlier. Furthermore, supply-chain organisation, both in terms of the location of different activities and in terms of market relationships, may be a significant source of tension and instability. Dependence on digital technologies for the operation of some new energy technologies also raises questions about their use in defence and by the diplomatic and security services.

The risks posed by China’s role in the supply chain must be understood alongside other international developments in the energy industry, including Russia’s invasion of Ukraine and industrial strategy in the US and the EU. This chapter will offer some initial analysis before recommending useful avenues for further research, and preliminary observations on how the UK might consider its security posture with regard to China and net zero.

At the outset, it should be noted that the character of the risk from net zero supply chains is fundamentally different from that of fossil fuel supply chains. Disruption to fossil fuel supply chains has immediate and widespread consequences which can be catastrophic for society, the economy and defence. Net zero systems are not primarily based on fuel supply, but most commonly on electricity infrastructure. This makes them by default more resilient to supply chain disruption. Delays and temporary price escalation in new energy supply chains would not have an immediate appreciable impact on energy production or consumption in the UK. That said, prolonged disruption would negatively impact the UK’s ability to meet its net zero targets and its climate action, and could impact energy security in a situation where electricity demand was increasing rapidly and equipment for generation or grid storage could not be sourced. Put simply, the short-term risk to physical energy supply in the UK from China is much less than from fossil fuel markets.

Could the UK be Individually Targeted?

In recent years, China has demonstrated a willingness to leverage the export of critical materials and technologies to achieve domestic and international political objectives, and as a response to sanctions. In 2010, as part of the government’s efforts to clamp down on illegal mining and trade of REEs within China, and coinciding with a fishing dispute with Japan, the Chinese Ministry of Commerce increased the tax imposed on exports of rare earth ores, oxides and compounds, introduced an export tax on end products, and tightened production quotas. These strategies resulted in a reduction of the share of production being exported, from 90% in 2000 to 20% by 2012. While exports to Japan fell, flows to other countries – including Australia and the UK – also declined. The imposition of these export restrictions in 2010 has become the poster child for concerns about China weaponising its dominance in critical materials.

More recently, China announced export controls on gallium and germanium in response to US, Japanese and Dutch export controls on semiconductor chips. China is the world’s top supplier of these two metals, which are used to make semiconductors, solar panels and fibre optics. In July 2023, citing national security concerns, China’s Ministry of Commerce announced that all exporters of these products must apply for export licences for dual-use items and technologies starting on 1 August 2023. Obtaining the licences can take up to two months, and it is unclear how many will ultimately be issued. The sharp limitation of such export licences by Beijing would give additional impetus to diversification efforts in importing countries, but could also give rise to a wave of illegal production and exports from China, as was the case with rare earths in the past. The timing of the announcement suggests that the ban is a political signal more than an attempt at economic coercion, but the line between the two is dangerously blurred. The announcement of the export restrictions led to higher prices and a rush to stockpile but also, as was the case in 2010, to a diversification of supplies and processing away from China.

Although sanctions and export bans could weaken China’s position in the long term, by accelerating this diversification, China has nonetheless used these tools in response to actions that it perceives as aggressive. China is therefore only likely to manipulate new energy supply chains against the UK in the face of perceived aggression from the UK against Beijing. Indeed, there is currently no indication that China is more likely to use new energy supply chains than any other supply chain in this way, when it can leverage instead either high levels of concentration or high levels of foreign-owned manufacturing in China. In the case of gallium and germanium, restrictions were carefully calibrated in response to restrictions on the sale of defence-related semiconductor chips to China, where gallium and germanium are important inputs. Consequently, other materials with dual military and energy-technology uses appear most likely to be caught in the crossfire of any future trade restrictions. China could constrain parts of net zero supply chains in response to UK policies perceived as hostile to China, but at this juncture, net zero supplies appear unlikely to be the subject of export controls other than in reciprocation.

The exposure of the UK to export controls varies considerably depending on the commodity or product, and is determined more by UK demand than by Chinese dominance. Only limited data is publicly available for detailed trade between the UK and China: the UK does not publish any figures, and data from China is limited. What data is available shows that in areas that are more critical for net zero the UK is not necessarily heavily dependent on direct supply from China: for example, China’s exports of copper to the UK were worth only $145 million in 2022 and nickel exports only $11 million. Aluminium trade was much more extensive, being worth $2 billion. Net zero technologies make up only a small proportion of UK demand for aluminium, but the metal has wider importance for net zero as a lightweight alternative to steel used to improve efficiency, particular for automotives and buildings.

The imposition of export controls by China would ultimately limit Beijing’s dominance over time and affect its reputation as a reliable supplier, just as infrastructure bottlenecks have already expedited trading partners’ efforts to diversify supply chains (as seen during the Covid-19 pandemic). Additional restrictions would only accelerate these trends. Russia’s invasion of Ukraine has already prompted a rethink by governments and international companies that are dependent on China, with many taking action to diversify. This shift emanates from rising tensions between the US and China and from concerns about decoupling, as well as worries about a military conflict between China and the US (and any potential sanctions that could ensue).

Manufacturers are already looking to diversify production to other low-cost countries – a move also incentivised by rising wage and other input costs in China – at the same time as flagship programmes such as the US Inflation Reduction Act and the EU Net-Zero Industry Act provide new incentives. This reinforces the well-established principle that countries that lose their reputation as reliable suppliers can incur serious economic penalties in the long run. For now, China is unlikely to engage in direct sanctions against the UK, but should it seek to retaliate against UK policies (or in the event of a broader conflict with the UK or the West), China’s control over net zero supply chains offers it considerable leverage over all consumers, including the UK. The short-term impact would be more limited than disruption to the supply of fossil fuels, but would still put pressure on the UK economy and its ability to meet its net zero targets. Using economic coercion would also impact Chinese companies, and the Chinese economy would incur large costs too, especially given the growing importance of new energy exports compared with other exporting sectors.

From the UK perspective, efforts to diversify production and supplies should at least partially mitigate China’s ability to individually target the UK in many areas over the medium term. Moreover, UK demand for materials is small by global standards, and will remain so. This means that the development of relatively limited international supply chains, independent of China, would likely be sufficient to rebalance the global market should export controls specifically target the UK. Such a scenario would see production that is not under China’s control redirected to the UK, with China-influenced supply chains redirected to fill the gap, albeit at a cost.

Currently, the UK’s limited manufacturing capacity shields it from the impact of any potential cut-off by China: taking wind energy as an example, China’s dominance in permanent magnets is unlikely to be an effective sanction, as the UK does not directly import magnets but instead imports generators using those magnets from multinational companies in third countries. However, the threat should not be underestimated, particularly as the UK aspires to increase its manufacture of net zero equipment. The further the UK moves up the supply chain, the closer it moves to direct dependence on Chinese suppliers. But as domestic industrialisation will take time, new supply chains are likely to develop in tandem, particularly given strong government support for alternative supply chains within the EU and the US. Indeed, the UK will require more localisation of supply chains in order for its automotive production to qualify for tariff-free trade with Europe.

While China’s ability to coerce the UK is therefore limited, any supply shortages (due to retaliatory measures, blockades or export controls imposed by China for a variety of reasons) will likely impact three main categories of new energy industries – the automotive sector, electricity generators, and UK companies with manufacturing operations in China.

In the automotive sector, the UK government is likely to aim to maintain existing production capacity by converting it to EVs. China’s dominance in battery minerals as well as anodes, cathodes, electrolytes and lithium-ion packs, coupled with the apparent requirement for battery production for automotive manufacturers to be located in the UK, suggests that UK automotive companies will be directly dependent on Chinese suppliers. This would increase the overall vulnerability to restrictions targeting the UK.

As discussed above, China is actively investing in manufacturing capacity in Europe. In situations such as mineral shortages, this could make the European manufacturing base more resilient, as Chinese companies might maintain supply to their own operations, potentially at the expense of other customers. However, during a major confrontation, Chinese-owned automotive capacity – assuming it would cease to operate – could prove a liability, because of the potential impact of interrupting production.

The second group of entities that might be vulnerable to export controls targeting the UK consists of large-scale electricity generation project developers, where original equipment manufacturer (OEM) warranties are typically required to finance the purchase of key equipment, and where operations and maintenance may be dependent on the OEM for supply of spare parts and technical support.

With many power plants relying on spare parts from China in the event of a breakdown, there may be some risk to their ongoing operation should access to spare parts and OEM expertise be restricted for an extended period of time. A more detailed assessment of exposure and scale may be beneficial in this case to determine whether risk is limited to power plant owners and operators, or whether it might threaten the security of electricity supply – but this assessment is not attempted here.

The third group vulnerable to sanction is made up of UK companies that have manufacturing operations in China. China’s unique industrial ecosystem means that many UK technology companies manufacture equipment in the country, covering everything from smart meters to EVs and EV chargers. These companies are perhaps the most susceptible to intervention by the Chinese government, since small companies (such as these typically are) can be targeted by domestic legislation which, without risking significant international escalation, still sends a strong political message to Western governments, while big companies are able to pressure home governments to compromise in order to protect their businesses.

Looking beyond these three vulnerable groups, it is likely that Brexit has reduced the potential cost to China of taking action specifically against the UK (as opposed to against Europe more broadly), and this might increase the likelihood of symbolic action being taken against the UK alone in order to send a message to the wider European community. Targeting an individual member of the EU with export control measures would mean targeting the entire bloc, with potentially significant repercussions for China. The UK, by contrast, might be individually targeted, causing relatively little short-term economic damage to Chinese companies while still making a strong political statement.

For now, the threat of export controls targeting the UK alone appears to be limited. This is because direct UK consumption of China-dominated materials is very limited, due to the lack of manufacturing of net zero technologies in the UK and because alternative sources of supply will emerge over the medium term sufficient to meet UK demand. However, because of the likely scale of future UK demand, particularly as battery production for EVs grows ahead of 2030, more government planning may be advisable to ensure that alternative supply chains are being developed, in the UK and globally, at sufficient scale to keep up with demand. Moreover, protectionist penalties incorporated into industrial legislation in the US and the EU may make supply chains less fungible, and could limit the extent to which the UK can benefit from new supply chains.

Regional Vulnerability

The analysis above suggests that, if the UK alone were to be targeted by Chinese export controls, the impact under current conditions might be limited by low demand for intermediate products and diverse markets for final goods; and that such action taken in the future would also be limited in impact due to the emergence, over time, of alternative supply chains. This should insulate UK foreign policy somewhat from possible Chinese coercion using new energy supply chains.

However, any confrontation with China over an issue such as the sovereignty of Taiwan would mean the UK facing China as part of a bloc, which could result in retaliatory measures from Beijing that targeted groups of countries. As a member of NATO, Five Eyes, and a group of likeminded nations opposed to Beijing’s aggressive expansionism in China’s immediate neighbourhood, the UK is exposed to geopolitical escalation involving sanctions and counter-sanctions against its allies. The 2022 energy crisis showed the extent to which regional disruption magnifies risks in concentrated markets, since global markets areunable to readjust to meet demand without generating very high prices. It also highlighted the interconnected nature of markets: even though the UK does not import gas directly from Russia, it was not insulated from higher gas prices.

Again, the automotive sector might be the most immediately affected in the event of multinational action against China, as lack of access to Chinese supply chains would have an immediate impact on the UK economy. If the UK were targeted individually, it is likely that alternative supply chains would be available, whereas these alternatives are unlikely to be sufficient to sustain industries in the UK and the EU or the US concurrently in the event of multinational action. This kind of impact is currently hypothetical, as the UK does not yet produce a significant volume of EVs, but as the production of internal combustion engines is scaled back across the Western world, the potential for disruption grows significantly. That said, the ability to extend the life of the existing vehicle stock and the likely continued use of fossil fuel-powered heavy goods vehicles beyond 2030 means that any impact on the wider economy would likely be limited.

Export controls affecting whole regions would undoubtedly put UK climate targets in jeopardy. As the Covid-19 pandemic demonstrated, sudden price inflation or delayed availability of key components for renewable power projects could result in delays and project cancellations. If supply-chain concentrations are not addressed, they could become an energy security challenge over time: the energy transition is set to result in a rapid increase in electricity demand from decarbonised sectors such as heating and vehicle transportation. This demand is not likely to be met by additional fossil fuel capacity, leaving the UK reliant on a steady supply of renewable electricity generation equipment to meet demand. For grid stability and to meet peak demand, the expansion of variable renewable capacity will also require substantial additions of flexible battery capacity. Furthermore, as fossil fuel plants are retired, non-renewable back-up options may become less available to increase output during periods of tight supply, while relying on fossil fuel plants for more of the time will leave less in reserve for emergencies.

National Grid ESO estimates that the UK will need anywhere between 13 GW/44 GWh and 31 GW/118 GWh storage capacity by 2030, up from 3 GW/29 GWh in 2022. Energy security is linked to the UK’s ability to extend the electricity network and to deploy smart technologies whose supply chains currently depend on China. If the ramping up of mutually dependent net zero elements of the grid does not proceed in step with the retirement of fossil fuel infrastructure, energy security issues could emerge.

In this context, the timing of any export controls would be critical. The UK will be most vulnerable while dependencies on China remain high and as investment in fossil fuel infrastructure becomes minimal and some assets are permanently retired. The duration of any disruption would also be important, with a short period of export controls unlikely to have a significant impact on citizens, as existing technologies would continue to operate and new projects would only be delayed by temporary price spikes and shortages. An extended period of export controls lasting years – not at all inconceivable in the history of modern sanctions – would pose a more severe energy security challenge.

These questions about the UK’s vulnerabilities have led to some debate about whether net zero targets jeopardise UK security. But the reality is that trying to slow the energy transition risks worsening energy security challenges.69 Reliance on fossil fuels, coupled with price volatility, creates risks and vulnerabilities, whereas renewable electricity offers secure and affordable supplies – assuming prices continue to fall. A slower transition extends the period during which parallel infrastructures must be maintained, at increasingly high costs, and during which assets intended for retirement see reduced investment and decreasing performance, increasing the risk of unplanned outages and failures. Furthermore, many aspects of the energy transition – such as EV adoption – have a momentum of their own. Creating uncertainty about whether infrastructure will be available on time to meet demand by attempting to slow the adoption of net zero technologies may simply result in inadequate infrastructure due to insufficient investment. Ultimately investors will take their own view on likely demand, and if additional redundancy is desired it will need additional financial incentives.

Global Exposure

The most significant sources of vulnerability the UK faces in terms of China-dominated new energy supply chains are undoubtedly those that have an impact on the global market. These include non-political events such as natural disasters and pandemics, common to all concentrated markets, as well as market risks that are already highly likely, such as shortages of key minerals. In its base case analysis, based on current policies, McKinsey estimates that by 2030, some eight out of 14 minerals essential for net zero technologies will have shortages of more than 10% of demand, with two facing shortages of more than 50%. In a scenario where commitments are achieved, all but two minerals face shortages of more than 10%. Primary production is already largely committed over this period, meaning that forecasts are relatively certain to be realised if demand increases at the expected rate. Recycling might be expedited to reduce shortages, with primary production increases possible over the longer term, but recycling policy and implementation of critical minerals strategy in the UK remains limited.

▲ Table 8: UK New Energy Technology Demand and Forecast Supply Adequacy for Related Critical Minerals with High Levels of Chinese Control. Projected 2030 mineral supply and demand imbalance figures are based on the current trajectory base case laid out in Patricia Bingoto et al., “The Net-Zero Materials Transition”. Sources for other information in the table: Faraday Institution, “UK Electric Vehicle and Battery Production Potential to 2040”; National Grid ESO, “Future Energy Scenarios 2023 Data Workbook”, July 2023; Department for Business, Energy and Industrial Strategy, “Appendix I: Electricity Networks Modelling”, August 2022.

Shortages could create allocation problems for China of the kind that are common to all major producers during tight markets. If shortages cause production to fall significantly below global demand, China will have to decide which markets to serve first, and it is probable that the domestic market will be prioritised. This behaviour is common for most producers – for example, oil exports were banned in the US between 1975 and 2015, and some Australian states have legislation allowing export bans under some circumstances. Disruption in battery supply chains during the Covid-19 pandemic tended to result in contracts with the largest volumes and biggest customers being honoured. This would favour larger EV manufacturers, which are then likely to prioritise between their assets across countries according to commercial strategy.

With shortages looming, investments in mining by Chinese companies should generally be welcomed and not seen as a threat. Indeed, growing Chinese investment in mining and its increasing share of the market reflects the lack of activity among other actors. While China is working to secure upstream mineral supplies, the UK and other countries around the world are failing to move at sufficient pace to encourage additional sources of supply and incentivise processing capacity outside China. The more important question over the longer term is whether Chinese investments will support the development of a liquid and fungible market. Evidence from sectors such as LNG, which were initially entirely bilaterally contracted, suggests that more actively traded markets are likely to emerge as the number of producing countries proliferates, but this can take a long time. This may not be relevant for some of the speciality minerals that are required in very small quantities, and where stockpiling may be a better solution, but the availability of traded markets in larger commodities can mitigate the impact of supply outages.

The extent of China’s dominance of supply chains and the likely persistence of this position for at least the next decade means that UK-based companies will be exposed to sharp tactics and aggressive competition. Aggressive price competition is a periodic feature of commodity markets, and marginal producers tend to be casualties of this dynamic. For example, aggressive competition between Saudi Arabia and Russia for oil market share in 2020 put sufficient pressure on US shale oil producers for then-president Donald Trump to call for OPEC to reduce production and increase prices. In another example, a flood of Chinese steel onto global markets in the mid-2010s as Chinese domestic demand slowed and spare capacity became available resulted in bankruptcies and protectionism across the rest of the world. China has the capacity in many areas of the supply chain to pressurise competitors, but over the next decade this is likely to be mitigated for mining upstream and midstream by shortages, which make sharp commercial tactics much less effective (as all additional capacity will be utilised). As discussed earlier, the situation for manufacturers dependent on scarce Chinese supplies will be different, and state support for underutilised gigafactories is expected by some in the industry.

Defence

Growing demand for critical minerals is prompting questions from defence analysts within and outside government. Three questions appear particularly pressing:

1. How secure are defence and security supply chains, and how secure will they continue to be?

2. How secure is the use of net zero technologies by the military and security services?

3. How will changing demand patterns for minerals affect where the military is called upon to deploy?

The research for this paper suggests that the risks stemming from China’s role in supply chains affecting access to new energy technologies for military purposes are likely to be similar to those affecting civilian applications: over the next decade, military net zero technologies are likely to use similar materials and components to civilian technologies. Land mobility may be one of the main drivers of demand, which, while deployed in different formats, will likely use the same underlying battery materials and technologies as civilian EVs. The same is true of renewable or hybrid mini-grids deployed at military bases. Targeting military usage specifically would therefore be very difficult to do without targeting the entire civilian supply chain. That said, large-scale military procurements might be vulnerable to delays should aggressive corporate tactics be adopted, which could have implications for military capability by extending the use of outdated equipment.

Secure operation of net zero technologies is the critical area for military and security services. China already bars EVs from sensitive sites over fears that data could be misappropriated. There are similar fears in Western security services and militaries about how easily the movement of EVs used in covert operations might be tracked. While Chinese-made vehicles may pose a particular risk, this is a concern for all EVs, which tend to transfer large amounts of data on vehicle movement and usage. But the issue is not limited to EVs, with all vehicles being increasingly dependent on software and sending usage data to manufacturers.

The question of how demand for critical minerals might affect the location of conflicts around the world is an important one, although largely beyond the scope of this paper. China does play a significant role as the primary offtaker of mining for net zero resources internationally. The way that China chooses to behave with respect to the interests of other countries seeking access to mines creates risks, such as ensuring access to logistics and infrastructure, allocation of promising concessions, and contest for political influence should tensions between China and other major mineral consumers escalate. Similarly, opaque contractual structures create uncertainty about the degree of liability of sometimes fragile governments. Externalities from poor mining practices can be a significant source of instability and are by no means limited to Chinese interests, but they highlight the need for more engagement by international and multilateral institutions with miners on best practice and market reform.

A longer-term question that may not be receiving sufficient attention is what the impact might be should China leverage its industrial and, increasingly, technological advantage in net zero technologies for military purposes. Net zero technologies are still at an early stage in their innovation trajectories, and are receiving much more R&D investment globally than conventional technologies. In many areas, they may ultimately outperform fossil fuel technologies, in terms of both cost and capability, particularly in logistics. It is not yet clear what scope there is for major technological breakthroughs in China to impact relative military advantage, particularly with respect to China’s neighbours. Such innovations might ultimately affect many areas – from the relative efficiency of Chinese industrial defence production and cheaper logistics with superior capability, potentially through to battlefield advantages from developments in areas such as sheet metals and electric drones – and will have their origins in a superior industrial–technological ecosystem.

There is no doubt that China’s influence in new energy supply chains will expand its already significant global footprint. Similarly, China’s higher risk tolerance compared to many Western actors, combined with companies’ willingness to operate with razor-thin margins, will further enhance Beijing’s control over new energy mineral resources. As seen in other areas, China’s economic and commercial presence in a wide range of producer countries also aids Beijing’s efforts to garner backing in multilateral bodies and global institutions in support of China’s position on a given issue. To be sure, Chinese companies operating abroad have a mixed track record in terms of their ESG practices, and have suffered pushback from host countries. China’s growing global footprint and fear of decoupling with the West is already leading it to rally developing countries to reduce the West’s influence. On a bilateral basis too, China’s involvement in producer countries could have implications for broader UK foreign policy goals. The extent of this influence will, however, depend on the degree of support China is offering, how it is perceived in host countries, and how alternative influences are perceived. The UK should review its foreign policy approaches in this context too. China’s foreign policy is closely linked to new energy supply chains, but is not defined by it. At the same time, foreign policy initiatives can support commercial and strategic objectives, including expanding and deepening China’s dominance of net zero supply chains. These interconnections deserve further research and analysis.

Conclusion

China holds dominant or strong positions along several global supply chains for the clean energy products that are critical to the net zero energy transition in the UK and elsewhere. Examples include lithium-ion batteries, wind turbines and solar PV modules. China’s strength in this regard encompasses the extraction of raw mineral ores, through the processing and refining of the ores to produce the final metals, to the manufacture of intermediate and final products. China’s dominance is particularly pronounced in the processing and refining of ores. Significant quantities of some of these ores are imported to China from overseas, often from mines in which Chinese companies hold a significant or majority share, or with which they have secured offtake agreements.

Scale of dominance: In lithium-ion battery supply chains, for example, China is responsible for more than 80% of global supplies of spherical graphite and refined manganese, and of anodes and electrolytes. For wind turbines, it controls more than 80% of refined rare earth metals and manganese, as well as NdFeB magnets. Finally, in solar PV modules, it accounts for more than 80% of refined germanium, polysilicon, wafers and silicon cells. Elsewhere in these supply chains, China is responsible for more than 60% of global output, pointing to very high degrees of market concentration.

Processing and refining: Chinese dominance pivots on its control of the processing and refining of minerals. This rests on economies of scale built up over many years, government financial incentives, and on an increasingly strong stock of intellectual property. Chinese companies’ importance in upstream mining is further reinforced by control of the midstream, but also by a relatively high degree of risk tolerance, which backstops upstream mining investments, ensuring access to the highest-value parts of the supply chain. This position will not be usurped over the next decade, and potentially will only be to a limited extent in the decade afterwards. Any inroads into reducing Chinese market share willcrequire heavy public investment and protection from dumping and aggressive state-backed competition.

Potential leverage: China could potentially exploit its strength for coercive purposes: it is already using export quotas and administrative processes to complicate access to supplies of gallium and germanium, as well as graphite, which in turn has impacted costs. Arguably, infrastructure bottlenecks in China during the Covid-19 pandemic or outages due to floods and power cuts have had a more material impact on the cost and availability of new energy supplies to date. Going forward, the lack of critical materials will also have an inflationary effect on new energy supply chains. Market concentration in China will clearly give it commercial advantages, but the extent to which Beijing will use it for geopolitical leverage remains uncertain. For now, Beijing is more likely to use its leverage in response to perceived aggression – but this could change over time.

Comparisons to Russia’s importance in terms of gas supplies have been made frequently since the Russian invasion of Ukraine. However, there are important distinctions to be made. First, Russia accounted for 40% of European gas supplies before the invasion, whereas market concentration in China is vastly more significant. Second, the impact of an oil or gas outage is different to curtailment of sales of critical materials or components. A direct oil or gas shortage imposes costs on a country’s economy and can limit activity in certain sectors if no alternatives are available; shortages of critical materials, on the other hand, do not cripple economic activity immediately. Third, given the existence of fungible traded markets for oil and gas, supply outages can be mitigated at a cost, which in turn has implications for the entire global economy. Even though the UK does not import Russian pipeline gas, the impact of higher gas prices was also felt in the UK. Equivalent market mechanisms for critical materials are nascent or immature, making it harder to offset shortages. Overall, supply outages for materials and components have a longer-term inflationary impact and risk slowing the energy transition. A simple comparison to oil and gas is not enough. The risks associated with market concentration for new energy supply chains must therefore be assessed more holistically, as should the trade-offs associated with de-risking or decoupling from China.

Risks to the UK: The coercive risk for the UK is related to the degree of separation between the stage of the supply chain dominated by China and the stage at which UK consumers enter the market. The likelihood that China would be able to target the UK exclusively is small, as the UK today is principally an importer of final or near-final products. As the UK’s capacity to manufacture these products grows, its vulnerability to Chinese coercion increases, and will require a diversification of supply chains. However, even with more diverse supply chains, the UK’s access to materials and components (as well as their cost) would be determined by industrial policy choices made in the EU and the US. Conversely, given the wider tensions between China and the West, any action taken by China to restrict exports of clean energy metals and products would more likely impact the UK, the EU and the US together in response to a perceived provocation, either economic or military. If prolonged, such an embargo would have a profound impact on the UK’s low-carbon transition (alongside other economies’ transitions), but only a modest effect on the wider economy. The greatest risk for the UK stems from events that have a global impact. These could arise from a natural disaster or pandemic, or from a general shortage of critical materials that forces China to prioritise its domestic market.

Battery supply chains: The UK is likely to be most heavily exposed to China’s dominance in battery supply chains. This is because China is dominant across most elements of the battery supply chain, and UK automotive manufacturers and the UK electricity grid are expected to rapidly increase demand for batteries. Wind is another area of concern, but the concerns are currently mitigated by a degree of separation between Chinese suppliers and UK users. Nuclear power is not discussed in this paper, but is another supply chain where China is increasingly influential.

China’s political/economic calculus: China’s ability to leverage its position in net zero supply chains for political ends should be neither overstated nor underestimated. The reason it should not be overstated is because China could use other supply chains to impose coercive pressure on the UK: the total value of UK trade with China in the year to end Q1 2023 was £107.5 billion, with £69.5 billion of imports. China was the UK’s fourth-largest trade partner over this period. This shows that, in circumstances that might give rise to a serious ratcheting up of pressure on UK–Chinese trade, the UK would have much more immediate concerns than net zero supply chains. The reason that China’s ability to leverage its dominance should not be underestimated is that the relatively limited (but symbolically important) role of net zero technologies – as well as China’s unusual dominance in those industries – might make them a useful target should China wish to make a political statement. This paper shows that there may be ways for China to use net zero supply chains in this way without provoking a major escalation.

Military considerations: The risks to new energy technologies for military purposes stemming from China’s role in supply chains are likely to be similar to those facing the wider population. However, in a time of actual or potential shortage the military could be vulnerable to aggressive corporate strategies and, meanwhile, the military faces the same data security risks as civilian users of Chinese equipment. The extent to which China will be able to use its technological and manufacturing strengths in net zero products to yield military advantage is not clear. In contrast, China’s growing international sales and investment in net zero minerals and products is already boosting its soft power in ways that will impact the UK’s foreign policy goals.

Risk mitigation: Mitigating China-centred risks will require action across the entire supply chain: accelerating investments in upstream mining developments, diversification of processing and refining, and recycling of critical minerals and materials. International efforts should aim to engage all actors, including China, to align objectives as far as possible towards the development of open markets which will ultimately benefit everyone, at least economically. Involving China directly in UK projects may mitigate some risks related to shortages, but may also hamper longer-term efforts to develop alternative supply chains that are fully independent of China, and so a mixed approach might be optimal.

The fallacy of delay: Risks related to China are not likely to be significantly reduced by delays to the transition to net zero. Energy security during the transition is most closely associated with delay and uncertainty as systems are simultaneously scaled up, ramped down, or repurposed. Abandoning national targets would simply increase uncertainty about government commitment to putting in place the infrastructure that will underpin future energy security.

Research needs: Internally consistent public data is not available on China’s market position in most minerals and products, with multiple reputable sources giving significantly different figures. Better publicly available data on the following issues would help improve analysis of:

• China’s domestic extraction capacity for critical minerals.

• China’s domestic processing capacity and annual output of critical minerals.

• Capacity and annual output of critical mineral mines and processing plants outside China that involve Chinese investment.

• Data around prices of critical minerals and materials.

• Details of China’s international trade (import and export) in critical mineral ores and refined metals, including routes through third countries (in terms of quantity and value).

• Detailed information on China’s international trade in intermediate and final products of net zero energy technologies, including routes through third countries and products manufactured by Chinese companies in third countries (in terms of quantity and value).

Countries do not need to be close allies to be close trading partners. Political or ideological alignment is similarly non-essential. China is deeply embedded in new energy supply chains and its long and steady cultivation of these industries has been essential for the progress made towards reducing the cost of new energy technologies worldwide. Despite some risks, the UK should not seek to exclude China from its supply chains. Instead, the country should seek to communicate effectively with China about the need for diverse supply chains as a point of principle for robust markets and to make the case clearly that this is both in the UK and China’s interests. Bigger, more reliable markets will result in a larger and more diverse client base for China and more supply chains for large-scale new energy technology consumers in the UK and allied countries.

In its domestic policy, the UK should aim to encourage consumers to invest in diversity at all stages of the supply chain, without seeking to exclude China from any of them. Likely shortages in critical minerals offer an opportunity to do this as more mining and refining capacity will probably be required, some of which might usefully be located outside China.

Michal Meidan is Head of China Energy Research at the Oxford Institute for Energy Studies (OIES). Before joining OIES in July 2019, she headed cross-commodity China research at Energy Aspects. Prior to that, she headed China Matters, an independent research consultancy providing analysis on the politics of energy in China.

Philip Andrews-Speed is a Senior Research Fellow at the OIES. He has more than forty years’ experience in the field of energy and resources, starting his career as mineral and petroleum exploration geologist before moving into the field of energy and resource governance.

Dan Marks is a Research Fellow in energy security at the Royal United Services Institute. His research focuses on national security dimensions of the energy transition in the United Kingdom and internationally.