Investments in green mobility and renewable sources of electricity are high on the agenda of the EU member states, to comply with energy transition targets.

With sales of electric vehicles (EV) increasing, additional renewable capacity is being installed alongside the growth in energy storage systems (ESSs), and demand for the key raw materials used in batteries, such as lithium, is expected to grow.

On Wednesday June 3, consultancy Wood Mackenzie released a study forecasting that a combination of wind and solar power, known as intermittent sources of electricity, could make up the largest share of installed capacity in Europe’s leading markets – the UK, Germany, France, Italy and Spain- as early as 2023.

It forecast that ESSs will show an eight-fold increase in Europe between 2020 and 2030.

Fastmarkets’ head of battery materials and base metals research, William Adams, expects that global demand for lithium-ion batteries for ESSs will reach 74GWh globally in 2025, compared with 4GWh in 2017.

ESSs will play a key role in stabilizing fluctuations in supply of electricity by allowing excess electricity from renewable sources to be stored and released into the grid at times of peak demand.

The long-term objective shared by European member states is to transition to net-zero carbon emissions by 2050.

Renewable electricity and ESSs
In Europe, government auction programs have been supporting the deployment of renewable electricity installations while their costs have reduced, making them a competitive source of electricity production against traditional coal-fired and gas-fired power plants.

By 2040, the consultancy group forecast that an extra 169GW of wind power and 172GW of solar power capacity will be connected to the European electricity grids. But this will put a strain on current assets and market mechanisms.

As a result, demand for flexible ESSs will increase with thermal electricity generation either reduced or phased out in Europe, while intermittent renewable power generation replaces it.

This transition of production sources will require the deployment of flexible assets, such as ESSs, to keep the grid balanced while allowing electricity price volatility to be monetized on swings in demand.

Some participants in the European wholesale power markets told Fastmarkets that they believe the Covid-19 global pandemic will temporarily slow down the investments that go into the installation of new renewable capacity, while governments focus their spending on support for their local economies.

But the European Commission recently reiterated its support for the transition to a cleaner economy in Europe, alongside securing battery capacity availability and critical raw materials such as lithium.

In May, Thierry Breton, the EU’s internal market commissioner, said that the Covid-19 crisis showed that vital supplies are exposed to disruptions and that Europe is dependent on China.

The chief executive officer of Australian miner Infinity Lithium, Vincent Ledoux Pedailles, said: “To meet climate goals, Europe will need more lithium by 2030 than the entire world production today. And today Europe is 100% reliant on imports of lithium.”

The Australian miner has secured EU funding for its San Jose project in Spain, which will be a fully integrated operation producing battery-grade lithium hydroxide. The raw material will be sourced locally from hard rock.

Bearish lithium prices
Prices for lithium surged in 2016 and 2017. But additional capacity expansions outstripped demand growth in 2018 and 2019, triggering a slump in prices that continues today.

Among key factors contributing to the price drop were the reduction in subsidies from the Chinese government for the EV sector, as well as United States-China trade disputes. China is a key consumer of the metal as well as a key processor of battery-grade lithium compounds.

The Covid-19 pandemic has added further bearish pressure to the market in 2020 with participants wondering when prices will bottom out.

Fastmarkets last assessed the price of lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices cif China, Japan & Korea, at $6.50-8.50 per kg on June 4, down by around 44% from $12.50-14.50 per kg on January 3, 2019.

The lithium industry has crossed an inflection point and is poised for a shift in the mechanism used by market participants to price lithium compounds, with spot liquidity starting to pick up pace in a market that has been dominated by long-term supply deals using a fixed pricing mechanism which does not reflect the supply/demand dynamics of the market.

Jon Mulcahy, price development manager at Fastmarkets for Metals and Mining, said: “Growing demand for transparency from the battery raw materials supply chain has been closely tracked by Fastmarkets.

“There is now an opportunity for key industries to rethink the way in which we consume energy from a more sustainable stance. Investment across the green energy sector has resulted in increasing demands for pricing transparency. Pricing mechanisms are evolving to reflect the new industry standards.

“This greater transparency throughout the supply chain has benefits, one of which is to secure long-term investment and protect growth. In other maturing commodity markets, we have seen the development of futures contracts which connect the financial community more to the physical one. We are increasingly seeing that in the battery space, with many new contracts underpinned by third-party pricing benchmarks.”

In response to this demand for price transparency and liquidity, the London Metal Exchange is planning to launch a lithium futures contract and has partnered with Fastmarkets to develop a cash-settled price to underpin a futures contract listed on the exchange.