5_triangleLithium
π Economy π Energy
Oil to lithium, the energy transition is shuffling the cards for global politics

Energy transition: a gold-mine for countries of the “Lithium Triangle”?

María Eugenia Sanin, Lecturer in Economics at the Université d'Evry
On May 13th, 2021 |
4 mins reading time
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Energy transition: a gold-mine for countries of the “Lithium Triangle”?
Maria Eugenia Sanin
María Eugenia Sanin
Lecturer in Economics at the Université d'Evry
Key takeaways
  • Argentina, Chile and Bolivia constitute the “Lithium Triangle”, a region that holds about 60% of global lithium resources. Peru has also recently discovered lithium hard rock deposits.
  • With the increasing demand for batteries, lithium production is estimated to increase exponentially in coming years.
  • Also, as much as 55% of energy generated in the LAC region is renewable, making it an important future hub for the production of green hydrogen.
  • To fully exploit the potential of these resources, the Latin America-Carribean region will need to implement sufficient regulation, pursue strategic alliances and invest in R&D.

In cer­tain coun­tries the abun­dance of oil can rep­re­sent a “resource curse” when the whole econ­o­my relies on the rev­enue com­ing from its extrac­tion, refin­ing and exports. As such, the indus­try can attract the country’s entire invest­ment cap­i­tal and qual­i­fied labor force, sti­fling oth­er sec­tors and hin­der­ing the devel­op­ment of the eco­nom­ic sys­tem. Whilst this was once the case in Latin-Amer­i­ca and the Caribbean, a shift is now set to occur.  His­tor­i­cal­ly renowned for its abun­dance in fos­sil fuels – most­ly from Venezuela – the region now holds the key to two new resources: lithi­um and green hydrogen.

Grow­ing glob­al demand for lithium 

Bolivi­a’s Salar of Uyu­ni holds the sin­gle largest deposit of iden­ti­fied lithi­um resources in the world. More­over, togeth­er with Argenti­na and Chile, Bolivia is part of the so-called “Lithi­um Tri­an­gle” that holds about 60% of glob­al lithi­um resources (see the fol­low­ing Fig­ure for the doc­u­ment­ed reserves and pro­duc­tion for a selec­tion of coun­tries). Addi­tion­al­ly, Peru has recent­ly dis­cov­ered lithi­um hard rock deposits. 

Pro­duc­tion of lithi­um (togeth­er with cobalt, graphite and oth­er min­er­als) is esti­mat­ed to increase expo­nen­tial­ly in the com­ing years. Demand will grow from 323,000 met­ric tons of lithi­um car­bon­ate equiv­a­lent (LCE) in 2019 to 1793,000 in 2030, with needs of the Chi­nese mar­ket being the main dri­ver. This growth is due to the grow­ing demand for clean ener­gy tech­nolo­gies imposed by the ener­gy tran­si­tion such as wind tur­bines and solar pan­els. These tech­nolo­gies depend on lithi­um-ion bat­ter­ies to mod­u­late the sup­ply of elec­tric­i­ty when there is no sun or wind and the use of elec­tric-pow­ered vehi­cles is set to increase, too. Hence, the demand for lithi­um will con­tin­ue to grow as a result. 

The val­ue chain for bat­tery pro­duc­tion is increas­ing­ly ver­ti­cal­ly inte­grat­ed and the con­tri­bu­tion of lithi­um in the total val­ue of a bat­tery can be esti­mat­ed between 4% and 7%. To ful­ly exploit the poten­tial of their huge lithi­um reserves, Latin-Amer­i­can coun­tries will need to imple­ment reg­u­la­tion and pur­sue strate­gic alliances and invest­ments – espe­cial­ly in research and devel­op­ment and qual­i­fi­ca­tion of the workforce. 

As such, it is expect­ed that lithi­um will become a resource that through its sus­tain­able exploita­tion and trans­for­ma­tion into bat­ter­ies will spill over the rest of the econ­o­my. But to make the most of this com­pet­i­tive advan­tage, it will require a delib­er­ate effort to work because lithi­um is a non-renew­able resource with lim­it­ed val­ue com­pared to the rest of the val­ue chain. As such, LAC coun­tries must invest in becom­ing rel­e­vant in the oth­er steps of the val­ue chain if they are to prof­it from this. If done cor­rect­ly this added val­ue could spill over to the rest of the econ­o­my avoid­ing the ‘resource curse’. 

For instance, Chile was the mar­ket leader until 2017, before it was out­gunned by Aus­tralia. This was in part due to the lack of clar­i­ty in tax­es, reg­u­la­tion and roy­al­ties imposed by the gov­ern­ment as well as its slow pace for new play­ers to enter the Chilean mar­ket. Had they reg­u­lat­ed their lithi­um mar­ket more effec­tive­ly they could have bet­ter retained their market. 

Momen­tum for green hydrogen 

A sec­ond resource gain­ing momen­tum in LAC is hydro­gen. Renew­able sources rep­re­sent 55% of Latin America’s elec­tric­i­ty gen­er­a­tion, almost dou­ble than the glob­al aver­age (35%), with some coun­tries like Uruguay reach­ing 95%. The source of this ener­gy is already com­pet­i­tive with fos­sil-fuel sources (see the fol­low­ing fig­ure that shows that pho­to­volta­ic gen­er­a­tion is already cheap­er than gas com­bined cycle gen­er­a­tion CCGT), but such tech­nolo­gies are vari­able and must be com­ple­ment­ed with non-vari­able ener­gy sources to ensure secu­ri­ty of the sup­ply. This vari­abil­i­ty comes from the fact that they only pro­duce ener­gy when the wind blows or the sun shines, and there­fore the need for effi­cient stor­age tech­nolo­gies remains, cre­at­ing an oppor­tu­ni­ty for hydro­gen tech­nolo­gies (increas­ing demand) on the side of batteries.

In the LAC region, hydro­gen prices are high­ly com­pet­i­tive rep­re­sent­ing a com­pet­i­tive advan­tage in the pro­duc­tion of green hydro­gen (increas­ing sup­ply) because renew­able ener­gy rep­re­sents around 60% of green hydrogen’s total cost. For exam­ple, Chile’s green hydro­gen is esti­mat­ed to become com­pet­i­tive with con­ven­tion­al fos­sil-based gen­er­a­tion already in the mid-term (and with­out con­sid­er­ing CO2 costs). This is bet­ter than what it is expect­ed for the whole world (see left pan­el of the fol­low­ing figure). 

More­over, the glob­al per­spec­tives for hydro­gen are very promis­ing (see right pan­el in fol­low­ing fig­ure). If there are sup­port­ive poli­cies in place, hydro­gen could meet 7% of the ener­gy mix by 2050 (187 mil­lion met­ric tons of hydro­gen) – in a sce­nario where glob­al warm­ing is lim­it­ed to 1.5°. But if strong and com­pre­hen­sive pol­i­cy is in force, 696 MMT of hydro­gen could be used, enough to meet 24% of final ener­gy demand. 

Hydro­gen economies are sim­i­lar to nat­ur­al gas in the sense that trans­porta­tion costs (par­tic­u­lar­ly dif­fi­cult for long dis­tance) are very high (as well as the lack of a cap­tive demand). These char­ac­ter­is­tics impose a mar­ket based on long-term con­tracts and, sim­i­lar­ly to the devel­op­ment of the lithi­um sec­tor, it requires impor­tant improve­ments in reg­u­la­tion for busi­ness to take place in an envi­ron­ment that min­imis­es eco­nom­ic risks both for buy­ers and sell­ers and that prof­its the rest of the economy. 

To sum up, both green hydro­gen and lithi­um are to become increas­ing­ly impor­tant in the ener­gy tran­si­tion to a net-zero emis­sion world by mid-cen­tu­ry. Pro­jec­tions are very promis­ing but, as it has hap­pened with pro­jec­tions regard­ing renew­able deploy­ment in the past (see the fol­low­ing fig­ure) they are most like­ly under­es­ti­mat­ing the poten­tial of hydro­gen and bat­ter­ies pro­duc­tion. To prof­it from the mul­ti­ple com­pet­i­tive advan­tages that the Latin-Amer­i­can Region has in terms of these new resources, and to make those oppor­tu­ni­ties spill-over the whole econ­o­my, the facil­i­tat­ing con­di­tions for invest­ments and val­ue chain trans­for­ma­tion must be put in place today. 

Contributors

Maria Eugenia Sanin

María Eugenia Sanin

Lecturer in Economics at the Université d'Evry

María Eugenia Sanin leads international research projects and supervises numerous PhD students at the University of Paris Saclay. She has been a consultant in energy and environment for multilateral organisations as well as for the public and private sector in America, Europe and Africa. A post-doctoral fellow at Ecole Polytechnique, María Eugenia Sanin holds a PhD from the Catholic University of Leuven and a BA from the Uruguayan University UDELAR.

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Production of lithium (together with cobalt, graphite and other minerals) is estimated to increase exponentially in the coming years. Demand will grow from 323,000 metric tons of lithium carbonate equivalent (LCE) in 2019 to 1793,000 in 2030, with needs of the Chinese market being the main driver. This growth is due to the growing demand for clean energy technologies imposed by the energy transition such as wind turbines and solar panels. These technologies depend on lithium-ion batteries to modulate the supply of electricity when there is no sun or wind and the use of electric-powered vehicles is set to increase, too. Hence, the demand for lithium will continue to grow as a result. 

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The value chain for battery production is increasingly vertically integrated and the contribution of lithium in the total value of a battery can be estimated between 4% and 7%. To fully exploit the potential of their huge lithium reserves, Latin-American countries will need to implement regulation and pursue strategic alliances and investments – especially in research and development and qualification of the workforce. 

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As such, it is expected that lithium will become a resource that through its sustainable exploitation and transformation into batteries will spill over the rest of the economy. But to make the most of this competitive advantage, it will require a deliberate effort to work because lithium is a non-renewable resource with limited value compared to the rest of the value chain. As such, LAC countries must invest in becoming relevant in the other steps of the value chain if they are to profit from this. If done correctly this added value could spill over to the rest of the economy avoiding the ‘resource curse’. 

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For instance, Chile was the market leader until 2017, before it was outgunned by Australia. This was in part due to the lack of clarity in taxes, regulation and royalties imposed by the government as well as its slow pace for new players to enter the Chilean market. Had they regulated their lithium market more effectively they could have better retained their market.  

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Momentum for green hydrogen 

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A second resource gaining momentum in LAC is hydrogen. Renewable sources represent 55% of Latin America’s electricity generation, almost double than the global average (35%), with some countries like Uruguay reaching 95%. The source of this energy is already competitive with fossil-fuel sources (see the following figure that shows that photovoltaic generation is already cheaper than gas combined cycle generation CCGT), but such technologies are variable and must be complemented with non-variable energy sources to ensure security of the supply. This variability comes from the fact that they only produce energy when the wind blows or the sun shines, and therefore the need for efficient storage technologies remains, creating an opportunity for hydrogen technologies (increasing demand) on the side of batteries.

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In the LAC region, hydrogen prices are highly competitive representing a competitive advantage in the production of green hydrogen (increasing supply) because renewable energy represents around 60% of green hydrogen’s total cost. For example, Chile’s green hydrogen is estimated to become competitive with conventional fossil-based generation already in the mid-term (and without considering CO2 costs). This is better than what it is expected for the whole world (see left panel of the following figure). 

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Moreover, the global perspectives for hydrogen are very promising (see right panel in following figure). If there are supportive policies in place, hydrogen could meet 7% of the energy mix by 2050 (187 million metric tons of hydrogen) – in a scenario where global warming is limited to 1.5°. But if strong and comprehensive policy is in force, 696 MMT of hydrogen could be used, enough to meet 24% of final energy demand. 

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Hydrogen economies are similar to natural gas in the sense that transportation costs (particularly difficult for long distance) are very high (as well as the lack of a captive demand). These characteristics impose a market based on long-term contracts and, similarly to the development of the lithium sector, it requires important improvements in regulation for business to take place in an environment that minimises economic risks both for buyers and sellers and that profits the rest of the economy. 

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To sum up, both green hydrogen and lithium are to become increasingly important in the energy transition to a net-zero emission world by mid-century. Projections are very promising but, as it has happened with projections regarding renewable deployment in the past (see the following figure) they are most likely underestimating the potential of hydrogen and batteries production. To profit from the multiple competitive advantages that the Latin-American Region has in terms of these new resources, and to make those opportunities spill-over the whole economy, the facilitating conditions for investments and value chain transformation must be put in place today. 

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