Renewable energy or sustainable energy?

Renewable energy generation is unquestionably at the heart of domestic and international policy for achieving committed net zero targets. It is recognised that achieving these targets will require a massive deployment of renewable energy technologies. For example, according to the International Energy Agency’s World Energy Outlook 2022, in order to reach net zero globally by 2050 renewable energy capacity will need to grow to more than 27,000 GW. In the EU offshore generation sector alone, the EU’s offshore renewable energy targets are an installed capacity of at least 300 GW of offshore wind and 40 GW of ocean energy by 2050.

How sustainable are renewable energy supply chains?

As part of the holistic assessment of the contribution of renewable energy generation to meeting net zero commitments, stakeholders and policy makers (and indeed critics) are increasingly focussed on questions as to the wider socio-environmental credentials of the renewable energy sector. This is particularly in the context of highly-globalised, complex, geo-politically affected, overly concentrated and often opaque supply chains which can have significant adverse environmental, biodiversity and human/social effects. 

Accordingly, there is a significant focus now on ‘sustainable energy’ as differentiated from ‘renewable energy’ - i.e. aligned with the United Nations’ definition of sustainability as generation capable of meeting the renewable energy needs of the present without compromising the resources and energy supply of the future. This is also enshrined in UN Sustainable Development Goal 7 – Ensure access to affordable, reliable, sustainable and modern energy for all.

It is increasingly being recognised that decarbonising the global economy will not only require a rapid acceleration and strengthening of the global supply chains for renewable energy technologies but also that it is critical that this supply chain becomes sustainable. In that context, aspects of the renewable energy generation supply chain which are under significant scrutiny from a sustainability perspective include raw material extraction and processing, deforestation, component manufacturing, transport logistics, project installation, project operation and maintenance, power distribution, forced labour, unsafe working conditions, exploitation of local communities and business ethics.

Significant supply chain concerns identify risks relating to access to critical/rare earth minerals and components for renewable energy construction, geographic concentration risk, waste management, knowledge risk and cyber security. Supply chain disruption and diversification issues have also been a key feature in recent years arising as a result of COVID, the Ukraine crisis, cost inflation and dominance of certain supply markets particularly China. Lack of holistic supply chain traceability is also a significant issue in the sector.

EU policy developments

While to date there is little policy and legislation specifically aimed at renewable energy sector supply chains, wider EU policy and legislative developments will be of relevance to the renewable energy generation sector. For example:

1. EU Green Deal Industrial Plan – this is designed to provide a more supportive environment for the scaling up of the EU’s manufacturing capacity for the net zero technologies and products required to meet Europe’s ambitious climate targets.
2. EU Critical Raw Materials Act (Regulation (EU) 2024/1252) – this aims to ensure secure and sustainable supply chains of critical raw materials for strategic sectors, including renewable energy. This act is one of the initiatives introduced as part of the Green Deal Industrial Plan.
3. Proposal for a Net-Zero Industry Act – this proposal is designed to scale up the manufacturing of clean technologies and their components in the EU. Once in force this act will simplify the regulatory framework for the manufacturing of these technologies. Solar, onshore wind, offshore renewables and sustainable biogas/biomethane are some of the key technologies that will be covered by the act. Again, this is one of the initiatives in the Green Deal Industrial Plan.
4. The Emissions Trading System and the Carbon Border Adjustment Mechanism – these are both tools used to reduce greenhouse gas emissions cost effectively and in the latter case involves an import levy on carbon intensive goods imported into the EU.
5. EU Taxonomy – the EU taxonomy introduced by the Taxonomy Regulation (Regulation (EU) 2020/852) aims to direct capital towards economic activities that can be considered environmentally sustainable while ensuring that minimum social safeguards are adhered to.
6. Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760) – this obliges relevant companies to assess and understand the environmental and human rights impacts of their business supply chains.

In addition, the EU Wind Power package published in October 2023 has stated aims of helping maintain a healthy and competitive wind energy supply chain. and competing on a level playing field globally. For example, one of its 15 actions (aligned with REPowerEU) focusses on improved renewable energy auctions which strengthen non-price award criteria that reward sustainability, innovation, energy system integration, high-quality products, social standards and the contribution to a resilient supply chain. This action also includes exploring the development of a European business conduct code that promotes, among other things, supply chain transparency.

Industry Associations and Stakeholder Individual Actions

There are also increasing signs that sustainable supply chains are a significant concern of industry and individual stakeholders in the renewable energy sector. For example, the Solar Stewardship Initiative (SSI) works with manufacturers, developers, installers, and purchasers across the global solar value chain to collaboratively foster responsible production, sourcing, and stewardship of materials. SSI has published a solar PV-specific standard for ESG compliance, which independent assessors will use to certify the ESG performance of solar production sites, and SSI also intends to establish a dedicated Supply Chain Traceability Standard in 2024.

Similarly last year an international responsible business conduct agreement for the renewable energy sector was signed by a broad coalition of renewable energy companies, industry associations, the Dutch government, NGOs and trade unions. The aim is to identify and prevent human rights violations and environmental damage in renewable energy value chains.

Ørsted has recently signed an agreement with German steel producer Salzgitter to supply it with the hydrogen and zero-carbon electricity (from wind) that Salzgitter needs to produce green steel, which Ørsted will then purchase for its wind turbines. In addition, scrap from decommissioned Ørsted wind turbines will cycle back to Salzgitter’s steel production process. This is just one example of internationally powerful energy companies’ increasing exploration of supply chain sustainability.   

Concluding thoughts

While the already huge demand and drive for renewable energy technologies will only increase, it is clear that there is an imperative for sustainable and traceable supply chains to support this demand and ensure renewable energy is ultimately sustainable energy. Whether the plethora of legislative and policy initiatives being introduced by the EU will have the desired impact on supply chains remains to be seen.

For further information in relation to this topic, please contact Ross Moore, Partner or any member of the ALG ESG & Sustainability team.