Aligning investment and innovation in heavy industries to accelerate the transition to net-zero emissions

Energy efficiency and renewables are fundamental for reducing global carbon dioxide (CO₂) emissions in order to move the world closer to meeting international climate and sustainable energy goals. But there are large portions of global CO₂ emissions whose mitigation will require the use of other technologies.

Much of these emissions come from industries where the technology options for reducing them are limited – such as steel, cement and chemicals. Decarbonising these industries to achieve government and corporate objectives of reaching net-zero CO₂ emissions in the coming decades will necessitate the development of new technologies that are not yet in use.

The multi-decade investment cycles in these industries mean that the timely availability of clean energy solutions is of critical importance. If innovation timelines can be aligned with investment windows and net-zero emissions objectives, then this will unlock multi-billion dollar markets for new energy technologies and reduce the risk of billions of tonnes of “locked in” emissions.

Existing energy sector assets can be viewed as either a barrier to change or as a stepping stone to a desirable new trajectory. In this article, we examine some of the key dynamics at play and use the example of heavy industries to highlight the importance of investment cycles in future decision-making for the energy sector. This topic and several other challenges and opportunities facing these industries in the context of a net-zero emissions energy system will be explored in the IEA’s forthcoming Energy Technology Perspectives 2020, a newly revamped flagship report, which will be published in mid-September.

For industrial sectors in particular, there are intervention points available at different stages in an asset’s lifetime beyond the typical cycles of commissioning and decommissioning. While many heavy industrial plants are in operation around the world more than 40 years after their initial construction, most will undergo significant maintenance and upgrades during this period.

In the steel sector, for example, a blast furnace typically requires its internal lining to be replaced after 25 years. Such an investment can be similar in magnitude to what is required for a new blast furnace, and it extends the life of the unit – and often the entire plant – typically by a further 25 years.

For cement kilns, the story is similar to blast furnaces. But chemical plants tend to have more frequent cycles of major maintenance and more continuous expenditure (more like power plants). Investment cycles can be repeated multiple times, but the typical lifetimes of existing plants (30 years for chemicals, 40 years for steel and cement plants) suggest that one or two cycles is most common.

Reaching net-zero emissions for the energy system, however, requires the development and deployment on a major scale of technologies that are not commercially available today – a topic that is explored in detail in the IEA’s Energy Technology Perspectives Special Report on Clean Energy Innovation. If development plans underway before the Covid-19 crisis go ahead, near-zero emissions technologies (those that achieve a dramatic reduction in emissions intensity relative to their existing counterparts) for heavy industries would not be commercially available before 8-10 years from now.

There are multiple options already available with which to pursue emissions reductions in industry today, such as incremental improvements in energy and material efficiency. But several important options – such as industrial applications of carbon capture utilisation and storage (CCUS), and the use of hydrogen – are at comparatively early stages in their development.

In the cement industry, for example, multiple projects are underway to examine the feasibility of CO₂ capture. There are few other options available to achieve deep reductions in emissions in the cement sector. This is becasue “process CO₂ emissions” – an inherent by-product of the chemical reaction that takes place inside a cement kiln – account for around two-thirds of the emissions generated by the sector globally. Even if low-carbon energy carriers (e.g. bioenergy, electricity or even hydrogen) were used to provide the heat required in a cement kiln, the majority of the emissions would not be avoided.

There are comparatively early stage proposals to substitute Portland cement – the type that is most commonly used around the world – with alternative binding agents, which could significantly lower the quantities of process CO₂ emissions generated. While some of these alternatives are commercially available today, those with the potential to dramatically reduce process CO₂ emissions are at much earlier phases of development. Consequently, CO₂ capture is the key near-zero technology option for the cement sector. Post-combustion (chemical absorption) technology is the most advanced among the capture options being pursued, and pilot and demonstration projects are being undertaken in Canada, Norway, China and India. Start dates for these projects at a commercial scale are planned for the mid-2020s. 

Similarly to the cement industry, various CO₂ capture systems are also being pursued in the steel industry. These projects cover both existing production processes – like the application of CO₂ capture to a commercial natural gas-based steelmaking facility in the United Arab Emirates – and new-build concepts, such as a CO₂ capture-ready ironmaking facility that is being demonstrated in the Netherlands.

Hydrogen technologies present a promising compliment to CO₂ capture systems. But the proposed dates for commercial scale operation of hydrogen technologies in the steel industry tend to be further in the future than their CO₂ capture counterparts. The HYBRIT (Hydrogen Breakthrough Ironmaking Technology) joint venture in Sweden is a project that aims to produce steel without the use of fossil fuels. Instead, it will use hydrogen produced via electrolysis to turn iron ore into direct reduced iron (DRI), which is subsequently converted to steel in an electric furnace. The project aims to deliver a demonstration plant by 2025, progressively scaling up successive trials until the mid-2030s, at which point the new technology is scheduled to be available for market deployment. A similar technology is being pursued in Germany by ArcelorMittal.

Most steel and cement plants will begin their next investment cycle in the coming two decades as they reach the point of needing refurbishments and replacements. If near-zero emissions technologies are not ready when they do, the plants will find themselves with no choice but to commit to another cycle of investment in emissions-intensive assets.

In May 2020, the IEA contacted a number of large companies that are active in the development of low-carbon technologies that will be critical for achieving net-zero emissions. Companies from the iron and steel, cement, and chemicals sectors were well represented. The responses indicate serious disquiet among experts about keeping their innovation pipelines flowing over the next couple of years.

Most respondents said it was at least “somewhat likely” that all elements of their research and development (R&D), demonstration and deployment strategies will be affected. There is unease in particular about the stability of public R&D funds, which are generally sought by corporations for testing in the field; the ability to execute large-scale demonstration projects; the resilience of collaborations; and a slowdown in adoption of new clean energy technologies. A positive message from many respondents was that their strategic priorities for clean energy technology development will not change. Respondents also expressed little change in their appetite for risk-taking in their priority technology areas.

To the extent that much of the existing capital stock as well the assets currently under construction will still be in operation decades into the future, the associated CO₂ emissions are often considered to be “locked-in”. However, these emissions are by no means destined to occur, and there are several actions that can help avoid future emissions from existing infrastructure:

• Early retirement or repurposing of assets (e.g. repurposing coal and gas power plants to provide balancing services or reserve capacity),
• Refurbishment and retrofitting (e.g. improving insulation of existing buildings, the application of CCUS to existing industrial and power infrastructure)
• Fuel switching and incremental blending (e.g. drop-in low-carbon fuels for various transport modes and blending shares of waste and bioenergy into cement kilns).

In advanced economies, where industrial capacity is generally older, early retirement is an option as the economic losses involved are generally moderate. In emerging economies with younger energy-related assets, the emphasis is likely to be more on retrofitting with more energy-efficient and less carbon-intensive technologies where it is economic to do so.

Beyond pursuing these mitigation strategies, existing infrastructure in certain sub-sectors can be used to bridge the gap to new low-carbon technologies that are currently still in development. In sectors where readily available and scalable alternatives for near-zero emissions technologies are lacking, such as heavy industries, strategically timed investments to partially renew – or not renew – existing infrastructure can form an important approach to avoid a new investment cycle occurring just at the wrong time.

Hydrogen concepts being pursued in the steel industry illustrate the menu of options to either adapt existing capacity or convert processes over to new technology. The consideration of existing equipment – and its investment cycles – can already be seen as pivotal in the implementation plans of key players in the sector.

In Europe, hydrogen is currently being blended into existing blast furnaces (ThyssenKrupp) and DRI furnaces (Salzgitter/ArcelorMittal). These are transition technologies aiming to bridge the gap to the ultimate goal of using pure hydrogen to reduce iron ore, and thereby dramatically reduce the use of fossil fuels in the steelmaking process (as the HYBRIT project intends to do).

Many of these projects are explicitly being planned around the utilisation and investment cycles of existing assets, with the aim of limiting early decommissioning and reducing technology risk. For example, SSAB, the Swedish steelmaker in the HYBRIT joint venture, is planning to replace one of its existing blast furnaces (in Oxelösund, Sweden) with an electric one in 2025, anticipating the arrival of the demonstration-scale hydrogen-based DRI furnace that year. Over the subsequent 15 years, two further blast furnaces (Luleå, Sweden and Raahe, Finland) are also due for replacement.

The enormity of the economic shock caused by the Covid-19 crisis is prompting governments around the world to enact recovery packages at a scale that will shape infrastructure and industries for decades to come. It is vital for these packages to align with national and global objectives for long-term growth, durable employment, sustainable development and human well-being. If they are designed well, these packages have the potential to stimulate investment in the energy sector, thereby sustaining existing employment and growth in the short term, as well as orientating the sector towards a more secure, resilient and clean future.

Economic recovery packages present a once-in-a-generation opportunity to ensure the right technologies are available at the right time and can be deployed for the next investment cycles. Recovery packages could support the series of commercial-scale demonstration projects that are generally needed to give the market confidence in a new technology. Recovery funds could also make capital available for adapting equipment that will reach its 25-year investment decision before 2028 so that it is capable of being retrofitted with the new technology that is currently under development. This strategy is mostly relevant to European and North American plants.

Strategically aligning interventions in upcoming investment cycles in heavy industries with the priority technology areas identified in the IEA’s Sustainable Development Scenario – electrification, hydrogen and derived fuels, CCUS and bioenergy – can speed up progress considerably towards net-zero emissions for the energy system at large. Deploying new near-zero emissions technologies 5-to-15 years earlier – or at the end of the next investment cycle – could avoid nearly 60 gigatonnes of CO₂ emissions (GtCO₂), or a 38% reduction in cumulative projected emissions from existing assets in the steel, cement and chemicals sectors.