Strategies for supply chain risks in energy transition
Kim Sung-woo
Having painfully experienced the vulnerability of fossil fuel dependence through the war in Ukraine and conflicts in the Middle East, the world is accelerating the transition to clean energy.
Paradoxically, however, in an effort to escape the risks of fossil fuel supply chains, countries are now facing a new risk: dependence on specific nations for energy transition technologies. Korea is highly dependent on China for its energy transition technology supply chains.
In the solar power sector, the share of Chinese-made modules rose sharply from 29 percent in 2023 to 58 percent in 2024 and reached 69 percent last year. In just two years, dominance has shifted from domestically produced products to ones from a single foreign country.
Furthermore, the share of Korean-made cells — the core components of solar modules — plummeted from 35 percent in 2021 to just 4 percent last year. This is attributed to the fact that more than 80 percent of domestic solar power plants are small-scale facilities under 100 kW, making them price-sensitive for smaller investors. Moreover, the cells produced domestically are primarily exported to the United States.
The situation is not much better for batteries used in electric vehicles (EVs) or energy storage systems (ESS). In August alone, domestically produced EVs equipped with Chinese-made batteries accounted for over 40 percent of sales, a 16 percentage point increase from a year earlier.
Dependence on the supply chain is even more severe. As of last year, Korea relied on China for approximately 98 percent of its graphite, a key material for anodes, and 94 percent of its precursor materials critical for cathodes. This means that any restrictions on upstream materials could impact the entire industry. The same applies not only to batteries used in electric vehicles but also to ESS batteries, which are experiencing explosive growth due to the proliferation of artificial intelligence (AI) data centers and the need to stabilize power grids.
It has become virtually impossible to rely solely on price competition to address supply chain risks in energy transition technologies.
Consequently, the Korean government has recently been formulating various non-price policies encompassing subsidies, tax incentives and public procurement systems. Notable examples include the Korea Energy Agency’s competitive bidding process for meeting renewable energy supply obligations, which awards differential points based on whether carbon emission-verified modules are used, and the Ministry of Climate, Energy and Environment’s introduction of bonus points for low-carbon certification in its carbon-neutral facility support program.
Furthermore, through amendments to the Act on Restriction on Special Cases Concerning Taxation, low-carbon modules with carbon emissions of 655 kg·CO₂/kW or less have been included in the scope of the integrated investment tax credit.
In addition, the government plans to grant tax credits starting next year for products in the solar power, wind power and secondary battery sectors if they are produced domestically. Linking tax benefits not only to simple technological investment but also to the installation of power generation facilities and the production of specific items represents a significant step forward across various clean energy sources.
However, supply chain risks associated with energy transition technologies are global in nature, and there are limits to addressing these risks through fragmented, domestically-focused policies alone.
This is not unique to Korea. I led a delegation of Korean companies to attend the Europe-Asia Clean Policy Workshop held in Paris from Oct. 26 to 27. Now in its fourth year, this event organized by the Institut Montaigne, a leading European think tank, served as a forum for Europe, Korea and Japan to discuss how they can collaborate on energy transition. The key topic at the event, which included government officials, corporate representatives and experts from each country, was focused strongly on supply chain risks for energy transition technologies.
Discussions primarily focused on which demand-side measures to adopt and how to collaborate to reduce supply chain risks. In particular, participants shared their countries’ experiences and proposed cooperation strategies regarding environmental, social and governance (ESG) criteria in public procurement, local content requirements, long-term offtake arrangements, carbon contracts, industrial partnerships for advanced technologies, and joint ventures aimed at strengthening supply chain security.
One notable proposal was “mutual recognition and market sharing” based on ESG and trust. The aim is to jointly reduce supply chain risks by linking and mutually recognizing the standards of each country’s relevant policies such as government support, public procurement and ESG regulations.This involves actions like mutually recognizing the verification of product-specific carbon emissions, which serves as the basis for imposing carbon border taxes or providing electric vehicle subsidies. If one country’s calculations of product-specific carbon emissions are recognized by another, the effectiveness of supply chain risk mitigation policies — which grant preferential treatment based on these emissions — will increase. This approach capitalizes on the fact that China’s carbon emissions from electricity used in manufacturing are relatively high.
The energy transition is not simply a matter of replacing or expanding power plants; it also requires the broader industrial ecosystem to evolve and demand for these technologies is expected to keep growing. Rather than becoming ever more dependent on a single country because of low prices and large volumes, countries should link their markets and standards and pursue cooperation on a principled basis. In my view, Korea already has the industrial base, ESG standards and international trust needed to make this happen.
Kim Sung-woo, head of Environment & Energy Research Institute at Kim & Chang, is a board member of Korea Institute of Energy Technology Evaluation and Planning.