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Semiconductor Supply Puts the UK’s Energy Transition at Risk

Evidence provided for the UK government’s inquiry into the domestic semiconductor industry illustrates the UK’s uphill battle to secure supply chains for its energy transition and net zero goals.

Chip crunch: the UK and other countries are dealing with a semiconductor shortage. Image: Andrii Chagovets / Adobe Stock

In May 2022, the Business, Energy and Industrial Strategy (BEIS) select committee launched an inquiry into the UK’s supply of semiconductors and its domestic semiconductor industry. This was prompted by a global shortage of semiconductors due to increased demand throughout the coronavirus pandemic, as well as the still anticipated acquisition of the UK’s seminal microchip manufacturing plant, Newport Wafer Fab. The possible acquisition has raised doubts around national security and the UK government’s strategy to secure its supply of semiconductors for critical technologies.

Although the two-year-long semiconductor shortage has led to severe delays in the supply of vehiclesgaming consoles and healthcare technology, limited supply and increased demand for semiconductors is already having substantial implications for the net zero transition. As just one example, smart meter manufacturing companies are currently struggling to meet demand due to finite semiconductor resources.

This comes at a time when the UK’s energy security has also been impacted by Russia’s invasion of Ukraine. The invasion has exacerbated the UK’s gas crisis, highlighting the risks from existing fossil fuel supply chains. It has also directly impacted the semiconductor shortage, as Ukraine contains two of the largest suppliers of neon, which is vital for the microchip manufacturing process. Both suppliers were forced to shut down operations less than a month after the invasion. Mitigating the impact of these events on the UK’s ongoing energy transition should be a top priority for government, and a strategic approach to protecting semiconductor supply is crucial.

Semiconductors and Net Zero Technologies

Last October, the UK government released its net zero strategy, which committed to decarbonising the electricity system by 2035 and reaching net zero carbon emissions by 2050. This will rely on a host of digital technologies, which are in turn dependent on the supply of semiconductors.

Despite the challenges faced by the industry over the past two years, there has been a lack of long-term strategic planning to ensure the growth of the domestic industry

Put simply, semiconductors are substances that conduct electricity under specific conditions. Since the mid-20th century, semiconductors have been used to develop the microchips which power all electronic devices, including the technologies needed for the net zero transition. These include solar panels, wind turbines, the powerful computer systems which control all aspects of the transmission and distribution of energy, smart meters and electric vehicles.

While the primary semiconductor component of many microchips – silicon – is the second most abundant substance on the planet, the development of microchips consists of a complex multi-step process. The three core processes in the global semiconductor industry are design, manufacturing and fabrication, together with a combination of assembling, testing and packaging. The UK is considered a world leader when it comes to semiconductor design, with long-term investment in research and development of alternative and new materials. However, when it comes to fabrication, the UK has limited input . The vast majority of cutting-edge semiconductor fabrication is carried out by the Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for over half of global microchip production.

Limited Strategic Planning

Although the UK government has acknowledged the critical importance of semiconductors for the UK’s prosperity and continued digital innovation in its recent Digital Strategy, understanding of their criticality in net zero technologies is limited. In its response to the inquiry, the UK energy industry’s trade association, Energy UK, emphasised that the impact of limited semiconductor supply on the changing landscape of the energy industry, coupled with high consumer demand, must be considered more thoughtfully.

Yet this also speaks to a broader issue highlighted by respondents from the UK’s semiconductor industry. Despite the challenges faced by the industry over the past two years, there has been a lack of long-term strategic planning to ensure the growth of the domestic industry. Moreover, although the UK’s upcoming semiconductor strategy is expected to be published by the end of the year, the lack of an existing strategy is at odds with the UK’s aspiration to become ‘a science and technology superpower’.

Recent acquisitions of important UK assets by foreign companies reinforce this lack of foresight. In 2016, the UK’s leading microchip design company, ARM, was sold to a Japanese multinational telecommunications corporation, SoftBank and another key microchip design company. Imagination Technologies was acquired in 2017 by Canyon Bridge, a Chinese state-owned private equity fund. This same fund attempted to buy the prominent US semiconductor design and manufacturing company Lattice Semiconductor but was blocked by the US government. The most peculiar of all is the potential acquisition of Newport Wafer Fab by Nexperia, a company which is based in the Netherlands but owned by Chinese Technology firm Wingtech. The sale represents a substantial loss for UK semiconductor manufacturing and domestic supply.

National and Energy Security Implications

Much of the discussion around the sale of Newport Wafer Fab has been focused on its implications for national security. Despite the suggestion in a recent report on the takeover by the Foreign Affairs committee, Nexperia has stated that it has no links to the Chinese state. Nevertheless, the prospective takeover is now undergoing government scrutiny as part of the ongoing inquiry. Yet the question still remains as to why the government permitted the sale with no review in the first place, especially following the enactment of the National Security and Investments (NSI) Act.

The UK government needs to consider the impact of increased demand, growing competition and limited semiconductor supply on its plans to achieve its net zero goals

Under the NSI Act, the government has the authority to block foreign acquisitions of ‘qualifying entities’ or service providers which hold significance for UK national security and prosperity. In this regard, Newport Wafer Fab and its acquisition have always been within the scope of the act. While it is one of 23 semiconductor fabrication factories in the UK, it is the only factory with the capabilities to produce advanced semiconductors – on a par with the TSMC – and has also been involved in work on UK Defence.

There are also implications for the UK’s energy security. With finite resources, the UK must rely on relationships with other countries which have more advanced semiconductor industries, such as China, to ensure enough supply to build new energy infrastructure. China’s close relationship with Taiwan and its multi-decade-long spending on net zero technology production makes it an important player in the global energy transition. Yet, relying on China poses a significant risk to supply chains due to increased geopolitical tensions between the UK and its allies and Beijing.

In short, the UK’s energy transition is at risk without effective strategic planning around its access to semiconductors. The UK government needs to consider the impact of increased demand, growing competition and limited semiconductor supply on its plans to achieve its net zero goals. This should be addressed in the development and implementation of its upcoming semiconductor strategy and will require active engagement with the semiconductor and energy industries. The government should also look to use the existing framework provided by the NSI Act to properly scrutinise any foreign acquisition of domestic semiconductor companies, in order to ensure a secure energy supply, develop sovereign capabilities and, above all, enhance its ability to respond to the climate crisis.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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