Recently I published a series on sexy vs impractical decarbonization solutions across multiple domains and closed — for now — with a quadrant chart and explainer on residential, commercial, and industrial heat. The updated chart leads this article and I encourage people to look at it as well as the original version and article. This led to Saverio Zefelippo, a representative of the €3 billion European investment fund Ambienta SGR S.p.A., reaching out to discuss industrial heat specifically, as they had interests in the space as part of their sustainable-investments-only portfolio. Zefelippo also provided some suggested improvements which are embodied in the updated version, and so a thank you to him is in order.
As we agreed, there isn’t a lot of good material available on decarbonization of industrial heating. Some is simply off-base, with green hydrogen as a clear case in point, others are overhyped, especially thermal storage for electricity and long-duration energy storage, and there was a lot of muddiness. We agreed that electrification was the winning strategy, but trying to create a solid investment thesis around it was sometimes challenging. Our conversation covered many of the blockers I perceive for effective decarbonization in the space, and as usual that means I’m going to write it out.
The first area is a paradigm and context challenge. People who burn liquids and fuels in industrial processes today to get energy typically ask what they will burn tomorrow in order to get the same energy, and then ask how much it will cost. However, this is the wrong question. The question should be where they will get the energy from the many available forms of energy.
This seems to be asking the same question, but it isn’t. Many industrial engineers have less experience with electricity than with fossil fuels, so it tends not to come to mind. As soon as you abstract upward to energy from fuel, electricity becomes a more readily available option.
And as soon as you get to considering electricity, decarbonization becomes much easier as grid electricity is decarbonizing globally. A solution which converts to electricity this year becomes more virtuous with each passing year, while a solution based on, for example, more efficient use of fossil fuels locks in CO2e emissions for likely decades.
There’s a related issue. Industrial processes which are large consumers of fossil fuels for heat typically have close relationships with their suppliers, often personal friendships that have lasted for years or longer. As they consider how to decarbonize, their suppliers will be people that they ask for guidance on how to achieve it. A fossil fuel provider will point to numerous options that fit within their business model, but are deeply unlikely to point at the advantages of electricity, quite the opposite in fact. Fossil fuel suppliers and electricity utilities may have strong relationships as well, but when it comes to supplying energy to industry, they are competitors.
This has two different cognitive biases baked in. The first is simple confirmation bias, where any data point which supports what someone is already predisposed to is considered more credible than many data points which dispute it.
The second is knottier — tribalism — and I’m not sure how prevalent it is, but I’d be interested in hearing from others about this one. To clarify, what a major group a person belongs to believes is what the person believes, more often than not. I spoke with John Cook, PhD of cognitive science and the person behind Skeptical Science, the pre-eminent climate change denial debunking site a few times, but on record for Clean Tech Talks a couple of years ago. His PhD thesis, supervised by another cognitive scientist whose focus is trying to figure out how to get people denying climate change and opposed to solutions, Stephan Lewandowsky, was on how to get people unlocked from their logical fallacies about specific subjects. He admitted to me, ruefully, that tribalism trumped logic and information, no matter how it was presented. As a result, he focuses on inoculation against logical fallacies now with his Cranky Uncle vs. Climate Change cartoons and book and efforts on COVID-19 disinformation.
The tribalism I suspect is present is the group of suppliers and consumers of fossil fuels in the industrial heat industry. They all agree that heat comes from stuff that burns, so they all agree that heat comes from stuff that burns.
As I pointed out recently about the new US hydrogen strategy, they make the same error, stating baldly that heat about 300° Celsius can’t be delivered via electricity, despite 1,500-3,000° Celsius electric arc furnaces, electric steel minimills which turn scrap steel into new steel, and electric aluminum smelters.
Groupthink is real in industrial heat, and it means that in many cases they can’t get to real solutions.
Many of the industrial processes used today would be recognizable to people 100 or 200 years ago. The Solvay process for manufacturing carbonates like baking soda was commercialized in the 1860s and is still dominant today globally. Portland cement preceded the Solvay process by 40 years, and is the single biggest industrial commodity today. The people who worked in those early industrial plants would probably have little problem understanding exactly what was occurring today.
These are major consumers of industrial heat. Cement uses a lot of natural gas or coal to heat limestone to turn it into quicklime, releasing CO2 from burning the natural gas and the heated limestone itself. The Solvay process uses a lot of heat in one process, a lot of cooling water in another, and a lot of fossil-fuel hydrogen in the form of ammonia in another, with almost three times the mass of CO2e emissions as manufactured carbonate.
These are non-trivial consumers of industrial heat. They are major capital chemical industrial processing plants with high sunk capital costs.
And a lot of industrial processes like them aren’t particularly susceptible to decarbonization in their current form. Instead, completely different processes are likely to be used as they are less carbon-intensive and lower cost than trying to replace the heat.
Taking the Solvay process with its heating, cooling, and ammonia, industrial components of the future like the Agora Energy Technologies electrochemistry process which can manufacture carbonates of various types with inputs of renewable energy and CO2 are likely to replace the Solvay process globally. That means that the entire capital cost of existing plants is a stranded asset. Agora’s technology will be placed where there is a strong grid connection, a source of CO2, and probably high local demand, not where the Solvay process plants were. Agora’s technology runs at room temperature with quiet pumps and electricity, so it can be placed at the point of consumption of high-quality carbonates. Agora’s technology doesn’t have noxious fumes and returns a big portion of the electricity even after drying the suspended carbonate solution for other industrial purposes, allowing time arbitrage of electricity if that’s of value.
This isn’t replacing heating, it’s replacing an entire technology with a different technology which doesn’t require industrial, high-quality heat at all. The Solvay industrial plant is no longer a maintained, likely depreciating asset, but a liability brownfield remediation site. That’s a fiscal barrier to displacement, and plant owners will try to keep the asset alive as long as possible. That means whatever company owns all of the global Solvay process plants, if Solvay itself manages to sell that division, will have a portfolio that they will replace with modern technology only as maintenance and fuel costs become too expensive, something likely to take a couple of decades.
Opex, Carbon Pricing, & Hedging
Industrial processes have persisted in using coal, oil, and gas for decades after we realized the negative externalities weren’t localized but global for a simple reason: they remain dirt cheap as long as we are allowed to use the atmosphere as an open sewer for CO2 and other pollutants. Cheap wins.
When I looked at cement a couple of years ago, assuming that the energy needs could be met purely with electricity, the operational costs would have gone up quite a bit. To square that circle, carbon pricing would have had to increase the cost of the fossil fuel energy substantially, and even then electricity would have had to be less expensive.
Industrial processes usually require high utilization rates, often 24/7/365, in order to have the unit cost of production be sufficiently competitive. That requires firmed energy which doesn’t fluctuate. Even just a couple of shifts during the daytime requires firmed energy for the entirety. Electrifying these processes requires firmed electricity, which means grid electricity, which means grid industrial rates. Morocco is at US$110 per MWh, as I found when I looked at green electricity manufacturing there earlier in 2022. Italy is currently running around $130 per MWh per Zefelippo. Canada’s major low-carbon electricity economies, BC and Quebec, are running around $100 per MWh.
The cost of wind or solar PPAs, as with the LCOE of nuclear or gas or the like, is merely the starting point for grid electricity rates. I project that by around 2100, electricity rates from the grid will be down around $20 per MWh in 2020 dollars, but that’s a long way and a lot of sensible and strategic investment in long-lived storage and transmission assets away. As a side note, close-to-water jurisdictions with low-cost, low-CO2e electricity such as Quebec or British Columbia become very desirable locations for the decarbonized industrial plants of the future.
However, natural gas prices, as I predicted a couple of years ago, have increased substantially over inflation and become more volatile. My projection wasn’t for as much of an increase or the degree of volatility, falling short of the winter 2021-2022 spikes and I missed the illegal invasion of Ukraine by Russia as well, something that exposed both the short-sighted over-dependence on Russian natural gas in Europe, and the more global over-dependence on Russian nuclear fuel supplies.
That means that fossil fuels have to be hedged in business cases two different ways. The first is for the inevitable reality of carbon pricing, whether domestically as in Canada under the carbon tax, in California under cap and trade, in Europe under their ETS scheme, or in China under their carbon market, which is twice the size of Europe’s last time I checked. And by carbon pricing, I mean not just CO2, but methane emissions as well. CO2e pricing is going be a thing. At present Canada has chosen to ignore oil and gas methane emissions in its carbon pricing, but that has to change to deal with the climate crisis. Every jurisdiction is going to be looking at cutting down upstream fugitive methane emissions, and the toolkit will inevitably create downstream cost adders.
As I noted a couple of years ago, burning natural gas for electrical generation or home heating should bring an additional carbon price surcharge of $8.50 CAD (US$6.33) per gigajoule of natural gas when the carbon price hits peak in 2030 at $170 CAD (US$133), just for the CO2 emissions. by comparison, Alberta’s natural gas price per gigajoule peaked at $6.53 CAD in May 2020. An equivalent increase in Europe would add a noticeable amount even to the current price of €39.02 per MMBTU.
The second is for volatility of fossil fuel prices, which is going to increase, not decrease as peak oil demand arrives between 2025 (IEA) and 2028/2029 (McKinsey/ Equinor). High-cost suppliers such as Alberta’s oil sand producers will suddenly find markets drying up and the price discount due to low-quality, far-from-water crude sharply increasing. This is going to drop various suppliers out of the market and potentially into bankruptcy, along with financiers still exposed to the stranded assets and surrounding liabilities. While the overall price is going to decline, with some upside demand as a result, it’s going to be a lot spikier, year to year. 2021 and 2022 are just the beginning.
So, lots more hedging for CO2e pricing and volatility for fossil fuels.
Meanwhile, as electricity rates become less and less exposed to fossil fuels with expansion of renewables, the price certainty of that source of energy will have economic advantages. But we aren’t there yet.
Next up is a corollary to the discontinuous technology challenge, which is fitting the technological component into the current system of systems, corporate structures, and market places. It’s not just refueling an existing capital asset, or replacing a capital asset with a new one somewhere else, it’s reshaping business models, often with a strain on the industries firms consider themselves to be part of.
As one example, while there are few places where direct air capture (DAC) solution makes sense, I did find one potential one in 2012 with Canadian National Railroad (CNR), my client at the time. I was Margaret Atwood’s pro bono, clean tech consultant based on some interactions with her and others on her blog related to wind energy. Every month or two Atwood would reach out to me to ask if a particular proposed solution someone had brought to her attention made any sense. I’d have a look and outline the likelihood and conditions for success.
One she reached out to me about was the DAC firm Global Thermostat, founded by Kyoto carbon market architect Graciela Chichilniski and Peter Eisenberger out of the Columbia Climate School. They had an off-the-shelf DAC solution that was targeted at places with waste industrial heat to power the energy intensive recovery of CO2 from Corning sorbents that was also a consumer of CO2. It hasn’t gone anywhere, but at the time there was an interesting intersectional opportunity.
CNR’s freight engines were diesel-electric hybrids, just like virtually every other freight engine. While they used the electric traction motors for braking, there was nothing for the electricity to do, so they pumped it into heating coils in the roof of the locomotives to blow it off. There was the potential to build a carbon capture freight car that used the movement of the train to push air through the sorbents and dynamic braking heat to extract the CO2, all on the lowest carbon form of ground transportation. The business case I put together made sense, although the assumptions were likely optimistic, and I had a global technology major, the lead of rail innovation for the global technology major, Atwood, and Global Thermostat lined up behind it.
But I couldn’t get CNR interested. They weren’t a commodity manufacturing and sales company, they were an efficient bulk goods distribution company. They acquired commodities such as diesel, they didn’t manufacture or market them. It was a market that was arguably adjacent, but outside of their business model.
Similarly, the Agora technology in the carbonate manufacturing mode isn’t an easy one to sell to cement manufacturers or utilities. The commodity isn’t cement, so cement firms don’t consider it sufficiently in their domain, and the excess electricity isn’t only somewhat interesting, and certainly not to sell. Utilities just want lights-out, hands-free storage boxes, not manufacturing plants.
Many of the industrial components of the future will be tangential or even orthogonal to current business models and structures. That’s going to take creative, inventive business innovation within industrial firms today and by new contenders in the marketplace. It’s disruptive.
Deeptech Patient Capital
Debt financiers and institutional capital investors like to know what market you are going to be selling a standard commodity into. Their models understand current boundaries and energy costs. VCs mostly understand software type plays with near term ramping revenues.
Deeptech, which is where most industrial technology transformational plays sit, requires patient capital. Ian Rountree, General Partner of Cantos Ventures, put it well in a Medium post in early 2022. Deeptech typically outperforms, but it hits it bigger with a significant step later in the investment cycle, rather than increasing proceeds throughout it.
The recent SPAC pump and dump retail investors would have been well served by paying attention to Rountree’s guidance, as many of the lawsuits from that crop were purported deeptech solutions with promised first year revenues, something difficult to believe.
While most of the plug-and-play industrial heat solutions I outlined are bog standard technologies such as heat pumps, thermal storage, electric arc furnaces, electromagnetic spectrum heating such as microwaves and the like, the discontinuous technologies aren’t. They require patient deeptech capital.
But when you start displacing a global industrial chemical manufacturing industry like Solvay that’s been in place for 150 years, a bit of patience seems appropriate for the upside.
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