How cloud solutions can benefit the energy sector amid the global chip shortage

We are now well into the second year of the global chip shortage that ravaged the production of electronics and raised prices and demand for microcomponents significantly. The crisis impacted almost all markets in some way, be it with halted production, service costs, parts availability, or the soaring prices of consumer electronics. How did we get here, and what future awaits human-centered investments like green energy?

What caused the global chip shortage?

The global chip shortage was jump-started by the covid pandemic. In its first months since reaching the west, the pandemic had destructive effects on production in the majority of markets, crippling supply chains, impacting sales, and promising further instability. Semiconductor production took its first disruptive blow, and the following labor issues further stifled both the chip manufacturers and their suppliers of resources. The pandemic is then followed by geopolitical tension, which further impacts a seriously crippled market.

These first tangible effects of the shortage come at a time of biggest demand, where several industries are becoming much more digitized. Cars are more digital than they ever have been and the automotive industry, somewhat intuitively, is a major receiver of chips. But when the chips don’t arrive, production is completely halted. Likewise, the crisis practically stopped production in the world of IoT hardware, which in a majority of use cases requires 5G chips to function.

The population lockdown and the growing adoption of the work-from-home approach created a consumer spending boom, especially in electronics, further expanding the demand for chips. The stifled production cannot keep up with the colossal demand. A global shortage is born by the first quarter of 2021.

After a very long and painful year, on August 9th the US tried to combat the shortage by passing the CHIPS act. The intention is to bolster the semiconductor supply chain, promote the research of advanced technologies, and encourage a bigger production of semiconductors domestically with attractive tax laws. The EU is soon to follow with a similar act. However, experts say that a positive change in the global market is estimated to be possible by late 2023. At the earliest.

The impact on the energy sector

A global shortage of semiconductors, that ravaged the automotive industry and electronics production, has hit the energy sector as well. In 2021, while experiencing one of its most successful financial first quarters, the American Energy Technology company Enphase announced that semiconductor constraints will most likely impact its following quarter. This statement alone plummeted the company shares by 14%. Although throughout the year, Enphase managed to recoup the share price, they did not manage to keep up with the demand for their solar energy solutions.

Enphase should have been somewhat better prepared for the shortage than most companies, having already experienced a crucial shortage of a different component in 2019. That year, in an amusing stroke of irony, a scarcity of electric transistors forced the company to compete with electric-vehicle makers for supplies. The same electric-vehicle makers they sold their solutions to.

The crisis looms above other green investments too. Renewable energy projects require chips in almost any area. Wind turbines, for example, require chips for converters in turbine generators. Besides, green investments require more than just generators. A full IT infrastructure is needed to command and maintain green energy production. Data centers are another element of IT infrastructure that is severely impacted by the global semiconductor shortage. Physical servers are becoming increasingly costly, and this trend is not foreseen to change. Fortunately, most manufacturers have stockpiles of needed components and technologies, as the market favors investments that are prepared and stocked well before deployment. But this crisis is not ending soon, and future investments are endangered without a reliable and cost-effective method of managing IT systems.

Cloud solutions to alleviate localized IT systems

A possible solution for future investments comes in bigger reliance on cloud solutions. By design, cloud solutions alleviate local IT systems by taking over the most taxing computing. Cloud solutions offer a powerful and capable alternative to onsite networks, providing hardware acceleration where it is most needed, without the need for actual hardware.

There are several immediate and money-saving benefits to cloud adoption, starting with minimized maintenance costs to infrastructure due to the smaller reliance on hardware, through real-estate costs avoided by not needing large server rooms, and ending on better workforce management. McKinsey cites that organizations that shift to public cloud unlock additional value by repurposing and reskilling their workforce to focus on higher-value tasks.

Google even suggests that AI and Cloud solutions can be implemented by chip manufacturers themselves to strengthen supply chain intelligence, optimize manufacturing and accelerate development. But companies are often reluctant to adopt cloud solutions due to the associated costs.

While these may seem high in the short term, an investment in cloud solutions almost always pays back in the long run. According to a research note by Oracle, cloud solutions deliver 4 times the ROI than the same setup on-site. The research note is the result of an in-depth analysis of ROI case studies published from January 2018 to November 2020. With the crisis further impacting the prices of hardware from 2021 onwards, we can safely assume that in 2023 this multiplication will be larger.

Why are cloud companies less affected by the crisis?

Large cloud providers like Amazon’s AWS and Google Cloud are not only stockpiled with the needed components, they are in general much more effective in managing their chip-based resources. These giants employ the latest in multitenant systems and virtualized computing. They are also, obviously, leaders in researching cloud-based technologies, and can utilize their research to benefit their service.

But most importantly, both Google and Amazon produce their own chipsets and iterate upon their production. They can skip the middleman entirely, and by controlling every step of chip manufacturing, they can tailor and optimize them down to the most specific requirements. Whilst they do rely on the same resources that traditional chip manufacturers do, thus competing with them, they save on costs by having their own production, and as US based companies, they benefit strongly from the previously mentioned CHIPS act.

What can we expect in the near future?

Probably at least another year of shortages, but it is hard to predict. In 2021 experts assumed the shortage will end by January 2022. It did not. In early 2022 J.P. Morgan shared their research and estimated that more chips will be available within the year. They were not. While the crisis seems to be evening out, this is more due to widespread implementations of alternative solutions and creative business. It is safe to assume we will not be able to rely on a steady supply chain of affordable microchips anytime soon. But we can rely on the ever-present resilience of IT to prevail in hardships and create solutions. We should all strive to be a part of that.