Investing in Clean Energy Beyond Renewable Electricity
Published on : Monday 05-02-2024
Enabling a fair industrial transition and moving towards clean energy use for process heat is one of the key challenges ahead, says Timo Gerres.
European Union. Source: EUROSTAT
Energy efficiency and the push for renewable electricity consumption are among the most common actions taken by companies to reduce their carbon footprint. Both measures are low-hanging fruits. Efficiency improvements offer a return on investment by lower energy bills, while renewable electricity has become the cheapest source of electricity generation in most countries across the globe. A company that opts for ‘going green’ using renewable electricity has a choice. It can purchase renewable grid electricity, for example, with power purchase agreements (PPAs), or invest in on-site renewable generation capacity, becoming both energy producer and consumer. Long-term PPAs and on-site renewables have the advantage of electricity price stability for at least some of a company's consumption at a potentially lower cost than paying the market price for electricity. Hence, many in the industry see a strong business case for investing in renewables.
But what comes next? What are the next steps to go beyond renewable electricity consumption, and what is required for 100% clean energy use across all industrial processes? Renewable electricity is an important first step. However, most industrial emissions stem from using fossil fuels as thermal energy sources to provide industrial process heat. Is heat generation using electricity or other renewable sources a viable alternative?
Heat is not equal to heat. Many industries, especially in the food and manufacturing sectors, require almost exclusively heat below 200°C (low-temperature processes), often in the form of steam (see Figure 1). The good news is that electrification options such as electric ovens, heat pumps for boilers are commercially available and can replace fossil-fuelled heat generation. The situation looks different for energy and heat-intensive industries. Little electrification options exist if process temperatures exceed 500°C and often 1000°C, such as for (petro)chemicals, metals, and non-metallic minerals production. These high-temperature industries provide the basic materials for the entire industrial ecosystem and, according to the IEA, are responsible for more than two-thirds of global industrial energy consumption and emissions. The latter not only originate from energy use but also process emissions from fossil carbon as primary feedstock. Though there are also technological reasons for lacking electrification options, energy costs are the main barrier to renewable energy use in these industries.
The more energy-intensive the industry, the more competitiveness depends on the energy cost. Hence, the higher the energy cost intensity of a production process, the higher the entrepreneurial risk of switching to a non-conventional energy carrier different to those used by their competition. As a result, the most polluting industries face the greatest challenges in reducing the carbon footprint of their energy consumption.
The uncertainty about future energy costs creates an investment dilemma across all industries. Equipment costs for clean technologies do not drive a company's investment decision, but the future cost expectations for operating with conventional energy sources compared to using low-emission alternatives such as renewable electricity, biomass, or hydrogen. This observation also explains why alternative clean energy technologies for low-temperature process heat are not the first choice for many industries, regardless of whether commercially available, often less expensive to install, and energetically more efficient than conventional fossil-fuelled heating.
Clean heating technologies fail to be more competitive due to the big difference between the expected cost of consuming electricity (or other renewable alternatives) per unit of energy (kWh) and fossil fuels such as natural gas, fuel oil or coal. Though renewable electricity has become cost-competitive compared to conventional electricity generation, the cost per unit of energy for fossil fuel remains significantly lower than renewable alternatives in most countries and regions. It remains uncertain when and how renewables may become the cheapest energy source for thermal processes. As such, the investment cost benefit of installing clean technologies is dwarfed by the uncertain question of whether and when the equipment can be operated at a competitive cost.
The good news is that there is a solution for many companies aiming to decarbonise low-temperature process heat. Hybrid systems that can use conventional fossil fuels but are ready to operate with renewable energy alternatives allow companies to be future ready. For example, leading technology providers offer steam boilers that can burn natural gas or operate with electricity interchangeably. For other applications, equipment providers propose hybrid solutions that burn natural gas, biogas, syngas or hydrogen in varying compositions. Hybrid solutions are primarily being developed as standardised equipment for heat generation in industries with low-temperature heat demand (<200°C).
For industries operating high-temperature kilns and direct-fired furnaces, hybridisation of energy sources is often impossible since the fuel directly impacts and reacts with the material flows inside the kiln. Coking coal is fuel and feedstock in primary steelmaking, as is crude oil in the petrochemical industry. In the case of non-metallic minerals such as glass, the atmospheric conditions within the kiln are decisive for having transparent, opaque, or coloured final products, robust or fragile. Each fuel type combusts and reacts differently with feedstock flows within a combustion chamber. Switching to clean energy sources is an all-in decision for energy-intensive industries that operate high-temperature furnaces and distillation processes, fully exposing a company to the future cost uncertainties of clean energy sources compared to conventional fossil options.
Support is needed to overcome the operational cost and uncertainty barriers preventing the industry from investing beyond the low-hanging fruits of energy efficiency and renewable electricity. Only then it is possible to reach ambitious domestic and global emission reduction targets to limit global warming.
Policymakers around the globe are taking notice that the transition towards clean energy consumption in industry is not a question of subsidising clean technology investments but a matter of safeguarding the long-term availability of affordable energy supply. The United States Inflation Reduction Act provides strong incentives for low-cost hydrogen production that can make this alternative renewable energy source cost-competitive long term. In the European context, Contracts for Difference (CfDs) to safeguard low electricity prices for the industry are being explored. Carbon Contracts for Differences (CCfDs) shall either levy the production premium of low-emission technologies compared to conventional processes, as is the case for the German "Klimaschutzverträge", or provide long-term support for carbon storage facilities (the Netherlands) and hydrogen production (France).
Many such public support programs are in their early implementation phase, and their effectiveness and impact remain uncertain. Even if proven successful in accelerating the development and implementation of clean energy technologies in industry, they can only be the first step for an industrial transition towards clean energy use.
Industry is global, and companies compete directly or indirectly with businesses worldwide. Hence, the road towards clean energy use in the industry must also be global and should not lead to a segregated domestic industrial transition that fully relies on government subsidies to ensure the local availability of cheap renewable energy. Enabling a fair industrial transition beyond the low-hanging fruits and moving towards clean energy use for process heat is one of the key challenges ahead.
(This contribution draws on the insights of a new report by Timo Gerres and Pedro Linares, titled "Perspectives on the industrial transformation towards a green economy". The report can be downloaded free of charge on the website of the Fundación Naturgy: https://www.fundacionnaturgy.org/en/producto/prospects-for-industrial-transformation-towards-a-green-economy/)
Timo Gerres holds a PhD from the Pontifical University Comillas, Madrid, and is an expert on the economic and regulatory implications of industrial decarbonisation. Besides his numerous scientific publications and participation in international academic cooperations, he has advised the European Parliament, UNIDO and various national governments and private sector organisations on topics related to industrial decarbonisation and the future hydrogen economy. He currently works as an Energy Policy Coordinator for the Spanish transmission system operator Enagás and is a collaborating researcher and lecturer at the Institute for Research in Technology, Pontifical University Comillas.
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