Companies and governments have made considerable progress in the past decade toward decarbonization. In recent years, much of these efforts have focused on electricity, with significant strides made to drive energy efficiency and the adoption of renewables. Yet, as more countries and corporations set ambitious decarbonization targets, they must deploy a broader arsenal of solutions. The next notable frontier will be the decarbonization of heat, often known as ‘green thermal’
Thermal energy has two primary use cases: the heating and cooling of our buildings and the fuel for a wide range of industrial processes. While thermal energy accounts for over 50% of total global energy consumption, only 10% comes from renewable sources today. Even leading companies have delayed progress. According to an ENGIE Impact analysis of companies with science-based targets, 65% have made significant strides procuring renewable sources of power but only 27% have done the same for heat.
Why is the transition to green thermal so disproportionately slow? Many of the green thermal energy technologies that exist today are still relatively new and several may not yet be economically or technologically viable. This is particularly true for industrials, which require thermal energy to fuel high temperature processes such as the production of cement, chemicals and steel. For lower temperature needs, like those required to heat and cool buildings, technologies have become more viable in recent years, but still pose several discrete challenges. In both cases, companies seeking thermal decarbonization will require careful planning and data-driven strategies to invest in the right technology at the right time.
This article explores the barriers facing thermal decarbonization and key actions and case studies for companies seeking to overcome them.
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While optimizing for efficiency must remain a primary focus, adoption of newer, critical technologies (e.g., heat pumps, biomethane, hydrogen, biomass) will be critical to decarbonization. However, these technologies face the following four barriers to varying degrees:
A wide array of new low-emission technologies like hydrogen and biogas exist today, but few have been deployed broadly across industries. These limitations not only impact the cost of heat generated by these technologies, but the difficulty and risks associated to their deployment. While challenges vary by technology, centralized manufacturing, few installers, and limited technical expertise can make these technologies difficult to evaluate and implement.
Several green thermal solutions require new energy sources like biomass, biogas or hydrogen. Access to these sources is highly dependent on location, prevalence of suppliers and market availability. As these supply chains and markets mature, organizations can expect a more dependable, wider range of providers along with more access to standardized contractual agreements (e.g., Gas Purchase Agreements) that increase certainty and minimize the risks to facilitate the transition.
In most cases, the switch to green thermal requires significant changes to energy assets or core production processes. These assets typically have long life cycles, spanning over 40 years, making it challenging to both address existing assets and effectively plan for the evolving cost dynamics throughout the full lifecycle of new assets.
As the technology, regulatory landscape and renewables and carbon markets evolve, companies will be faced with fairly complex calculations to determine the optimal operating and investment conditions required to sustain the business cases behind heat decarbonization. Accounting for these costs will require a broader lens than traditional total cost of ownership calculations. Companies must shift from considering solutions independently or on a singular time horizon, requiring them to track clear market indicators over time to optimally invest in the right solutions at the right moment.
As seen in the illustration above, barriers to decarbonizing heat vary by technology. Companies must have a deep understanding of these barriers as a critical input into their decarbonization roadmaps. The path forward is highly dependent on the temperature needs of the application. For many lower temperature heat applications, green technological solutions, such as industrial heat pumps, are widely accessible and already economically viable. For industries requiring high temperature heat, however, barriers remain high and call for significant near-term actions if future targets are to be met.
Decarbonization hinges on the collaborative efforts of both the public and private sector. Strong policy is particularly important as it relates to the decarbonization of heat, a sector with long asset lifetimes and a nascent set of technologies and solutions. To ensure their development, policymakers should:
A myriad of cost-competitive technologies can accelerate decarbonization of low temperature thermal demands today. Though energy costs often represent a limited part of the P&L for companies with low-temperature needs, the reputational or revenue benefits of complete decarbonization often drive the business case for addressing thermal needs.
For these companies, the following steps are key:
Build a clear view of your thermal needs, across all your locations and processes. A robust analysis should define the following characteristics for each thermal need:
Develop a matrix that aligns each specific thermal need to green thermal energy technology options, quantifying the decarbonization potential of each. For each need, evaluate:
Sequence the prioritized investments such that technologies and capital are deployed to optimize the least-cost pathways, enabling the transition to green thermal technologies. This actionable roadmap should be coupled with a detailed business case with portfolio-wide capital allocation planning. Sequencing should account for asset replacement, technological learning curves and decarbonization milestones to ensure timely progress to goals.
The thermal needs-mapping approach proved beneficial for an ambitious retail company with over 300 mega-stores. To achieve goals that went beyond carbon neutrality, they engaged ENGIE Impact to first evaluate decarbonizing the power demand of their stores using energy efficiency, power purchase agreements (PPAs), Guarantees of Origin and rooftop solar where possible.
ENGIE Impact conducted a power and thermal demand scan spanning all 300 locations. The scan mapped quantity (MWh/year), seasonal and daily demand profiles, temperature requirements, carbon emissions and annual costs (energy, operational costs, depreciation and capex) to provide an exhaustive assessment of the portfolio needs. The assessment revealed relatively low temperature needs for heating and cooling, easy access to green and local photovoltaics (PV), limited access to local biomass and biogas, and moderate daily and seasonal variation.
With these insights, ENGIE Impact designed a portfolio-wide roadmap that centered around the rapid deployment of heat pumps and rooftop and carport PV, driven by a robust capital allocation plan that delivered a strong portfolio-wide return on investment.
When conducting a similar analysis for a production facility at a large chemical and consumer goods company based in Germany, ENGIE Impact’s recommendations revealed a unique course of action.
The company sought to replace their heat production system, which operated at 250 degrees Celsius. An initial analysis resulted in a recommendation to invest in a more efficient gas heating solution with a relatively low upfront cost but minimal reduction in emissions.
However, a deeper analysis revealed several viable green thermal energy technologies including biomass boilers, biomethane boilers and green electric heaters. When accounting for power, gas and CO2 prices, electric heaters initially appeared to be 18% higher in cost than gas boilers. After accounting for an increasing carbon price, however, electric heaters powered by green electricity rose as the best alternative, offering the lowest total cost while decreasing GHG emissions significantly over the asset lifetime.
Industries such as aluminum, pulp and paper, chemicals, cement, iron and steel require high heat, reaching up to 1000 degrees Celsius. While some of the most common decarbonization solutions, such as industrial heat pumps and geothermal, work well for low to mid temperature needs, they are not feasible for high temperatures. Instead, leaders in these industries must look to a different set of low-emission technologies such as electrification, hydrogen, biomethane, synthetic gas and carbon capture, and storage & utilization (CCUS). Unfortunately, several of these technologies are relatively nascent or high cost.
Despite the high cost today, it is the ideal time to begin planning to evaluate these solutions. When accounting for investment cycles, asset life, technology adoption and change management that must occur to integrate these green thermal energy technologies, companies must begin planning today. If not adequately prepared to implement solutions as soon as they become cost competitive, companies risk missing the window of investment in green fuels and feedstocks, jeopardizing their competitive position.
To remain competitive, companies should pursue the following:
Over the past ten years, we’ve witnessed the market be systematically wrong in assessing the long-term cost of renewables, frequently overestimating the cost and underestimating the speed of adoption. For industries like steel, chemicals, and aluminum, identifying the optimal time to invest in emerging fuels will be critical to maintaining a competitive advantage. With a strong and integrated understanding of cost dynamics, organizations evaluating emerging fuels can be far more precise in developing their least cost pathways to decarbonization.
In the case of hydrogen, for example, manufacturing efficiencies, better procurement of raw materials, and innovative new deployment strategies have significantly reduced the upfront cost of electrolyzers. Yet the operational costs remain high. However, as renewables continue to expand, supply will surpass demand and there will be a higher degree of curtailment. This presents a prime opportunity for hydrogen. If organizations can successfully operate their electrolyzers when costs of electricity are zero, they can produce cost-competitive hydrogen. This strategic, integrated lens into the cost dynamics will be critical to investment planning.
Where costs are high, companies should look for additional players to either share resources or share the costs of development. For example, industrial players can look to neighboring companies who may produce methanol or biomass that can be used as a fuel source for the consumer and a source of revenue for the producer. Identify the collaboration potential and future partnerships that will be needed to realize the investment objectives on your path to decarbonization.
Assets that are deployed today will lock in a large percentage of the emissions in the decades to come. To avoid lock-in effects, organizations must ensure that asset investments made today allow them to move away from carbonized energy sources at the exact time at which new solutions are viable. To do so, organizations should invest in assets today that offer flexibility to implement future technologies, such as dual-fuel or carbon capture-ready options. In the years before these technologies are cost-competitive, leaders should look to pilot projects to refine assumptions for broad scale deployment or identify niche applications where the green thermal options would already be cost-competitive today thanks to local circumstances.
Adopting new green thermal energy technology will require broad awareness and buy-in. To ease implementation, ensure broad C-suite alignment to the investment roadmap and cascade those plans with a clear explanation of the logic behind the change. Integrate KPIs that will not only drive broad accountability for efficiency, but also for value capture.
As one of the highest carbon emitting industries, the steel sector will be a critical focus for decarbonization. Yet, most steel operations are based on blast furnaces, high-emission, long lived assets with a lifetime of over 40 years.
A world leader in iron and ore production engaged ENGIE Impact to craft a decarbonization roadmap. The analysis revealed that, though hydrogen presented a highly attractive solution over the longer term (2040), green thermal options were not economically feasible in the short term.
Yet, the long-term planning and several short-term measures could be introduced right away. The steel plant was able to couple near-term reductions with longer-term preparedness by converting coal burners to natural gas burners. These burners provided lower energy and maintenance costs right away but were also enabled to convert to hydrogen once the market matured.
Furthermore, this steel manufacturer seized the opportunity to use these natural gas burners as a test, building up their hydrogen expertise and refining their estimates for broader rollouts. By burning hydrogen on a small share of the natural gas burners, they discovered that hydrogen can serve as 5% to 20% of the fuel in the natural gas burners with an incremental cost of only 5%.
ArcelorMittal, the world's leading steel and mining company recognized by CDP for its leadership on corporate transparency and action on climate change, published its climate action plan for Europe in May 2020. Underpinning the plan is a dual speed asset strategy, which couples a near-term lever which they call “Smart Carbon” production process with a longer-term strategy anchored on hydrogen.
In the near term, they will rely on a series of pilot projects with existing assets that explore the usage of biomass and waste, carbon capture, and the valorization of captured carbon to produce new recycled carbon materials.
In the longer term, they will enable the transition of their existing asset base to use hydrogen instead of natural gas, once the hydrogen markets sufficiently mature.
The transition to green thermal remains complex, but with a robust understanding of technological maturity, market readiness and evolving cost dynamics, there is a clear path forward. Green thermal presents senior leaders with real opportunity to:
Those that can successfully develop green thermal plans today to act at the optimal window of investment will lock in competitive advantage and reduced emissions for years to come.
The authors would like to thank Pierre-Lucille Laurent, Niels Leemput, Jaime Peirano and Philippe Rio for their contribution to this article.
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