Decarbonisation rules (but it doesn’t come cheap)

Decarbonisation is the order of the day. The pace of innovation in the energy sector is accelerating. A carbon neutral future is attainable and will eventually improve living standards. But it will be costly to achieve, writes Victor Hill.

Greener than thou

Last week I wrote that the transition to a net carbon-neutral economy will entail higher energy prices which will cause greenflation. On Wednesday this week (17 March), the UK government unveiled a package of proposals to induce heavy industries from steelmaking to automotive manufacture to reduce their carbon emissions. This package goes by the moniker of the Industrial Decarbonisation Strategy (IDS) and merits serious analysis.

One proposal is to extend the UK Emissions Trading Scheme (ETS – which succeeded the EU ETC on 01 January) beyond aviation and power generation to other high-CO2 emitting industries. Some commentators have speculated that it could even be extended to farming, which accounts for about 12 percent of the UK’s total annual emissions. Businesses which participate in the scheme must buy permits to cover their emissions. They can be allocated free permits from the government and can then trade these permits with third parties. We now know that the ETS will be formally reviewed next year.

Another proposal is to compel companies to label their products with details of how much CO₂ has been expended in the manufacture of those products. This would initially be voluntary but would force companies to undertake a detailed carbon accounting exercise right across their supply chains. That could be expensive, though it could also lead to increased efficiency. If consumers are willing to pay a premium price for low-carbon products, then those costs might be recouped.

The government has decreed that UK industry collectively needs to cut its carbon footprint by two-thirds by 2035 and by 90 percent by 2050, relative to 2018 levels. Britain’s factories produce about 16 percent of the country’s total emissions. The government concedes that making low-CO₂ products will usually be more expensive than those produced by current CO₂-intensive methods – but so far it has failed to quantify by how much. It is going to make £1 billion of public funds available to finance such things as domestic heat pumps and insulation, but big business will have to make huge new investments. The issue is then – how does UK PLC remain competitive while transitioning to net carbon neutral?

True, most advanced economies have committed to going carbon neutral at some point. In the US, the Biden administration is expected to make an announcement on that score shortly. So, we are all on the same path, though travelling at different speeds. To be ahead of the pack is good international PR and could create centres of excellence in green technology which others will want to buy into.

The UK is well ahead of many of its peers in decarbonisation partly because, as Boris says, we are the Saudi Arabia of wind power. (Mind you, the Nordics out-Saudi us.) By contrast, one quarter of Germany’s electricity is still generated by burning coal. (It is even higher in Poland.) Moreover, Armin Laschet, who is the front-runner to succeed Frau Merkel as Bundeskanzler later this year, has a track record as a coal enthusiast. The environment will be a central issue in Germany’s September federal election at a time when support for the ruling CDU-led coalition is falling in the wake of the hapless vaccination rollout.

The price of carbon under the EU ETS has soared to €43 a tonne recently – it has doubled in four months. (The UK has been living with a higher carbon price for years). That is driving coal out of the EU market – so all those German coal-fired power stations are losing money. As Ambrose Evans-Pritchard wrote in the Daily Telegraph on Monday (15 March), the new Datteln-4 coal plant, opened just last year in Nordrhein-Westfalen is effectively a stranded asset already. But the carbon price is also threatening to undermine the natural gas industry which uses a much cleaner fossil fuel. The Nord Stream 2 gas pipeline from Russia across the Baltic to Germany is becoming economically unviable as well as politically unacceptable. But will Frau Merkel’s successor understand that?

Hydrogen hopes

What if we could re-engineer gas-fired power plants to run on hydrogen? A German company called Uniper(FWB:UNO1), which is 75 percent owned by Finland’s Fortum (HEL:FORTUM), is working on this. They have been using wind power to generate clean hydrogen which is in turn fed into the gas network. Clean hydrogen is synonymic with green hydrogen (electrolysed from water using renewable energy); whereas old-fashioned blue hydrogen (manufactured using fossil fuels) is a no-no because it contributes to greenhouse gases. Siemens (ETR:SIE)have also connected electrolysers directly to offshore wind turbines to produce green hydrogen.

At present, it is impossible in the UK to buy a hydrogen-ready domestic boiler. As a result, housebuilders are concerned that the homes they are building are not future-proofed. 90 percent of British homes currently use gas to keep warm – 29 million of them – and that accounts for 20 percent of national carbon emissions. The working hypothesis is that heat pumps – a form of reverse-refrigerator, which can be air or ground-sourced – are the future. But heat pumps rely on electricity – hopefully, of course, of the renewable kind. The UK government aims for 600,000 heat pumps to be installed annually by 2028.

The IDS, announced this week, proposes a research initiative to determine how steel could be manufactured using hydrogen. Steelmaking is hugely carbon-intensive at present. Just two UK steelworks – Port Talbot (TATA) and Scunthorpe (British Steal) – produced 11 million tonnes of CO₂ in 2017. That was 15 percent of our total industrial emissions.

Chris McDonald, CEO of the Metals Processing Institute, reckons that it would cost £6-7 billion to decarbonise the UK steel sector, and production costs would rise by between 35 and 100 percent per tonne. This for an industry that already faces higher energy costs than many European competitors. One solution might be to erect tariffs on foreign steel imports to maintain competitiveness – but that is a slippery slope. Another could be to require that only British-made steel be used in national infrastructure projects. Now that we are out of the EU that becomes possible.

Hydrogen-powered aviation

What about hydrogen-powered aircraft? The conventional wisdom was that hydrogen must be stored at high pressure in very heavy metal containers, so it would make hydrogen-powered aircraft too heavy to get airborne. That view is now changing.

ZeroAvia, founded by Russian-born Val Miftakhov, who is ex-Google and ex-McKinsey, has the goal of producing a 100-seat hydrogen fuel cell-powered aircraft by 2030. ZeroAvia has been backed by Bill Gates, Amazon’s Climate Pledge Fund, Shell Ventures and the UK government.

There is a subtle difference between the electrification of terrestrial vehicular transport and the electrification of flight. Automotive manufacturers engineer their cars around the engines they themselves design and build. But in contrast, the aviation industry, for many decades, has been divided into airframe manufacturers and aero-engine manufacturers, with each airframe adaptable to different aero-engine options, depending on the needs and preferences of the final users – the airlines. Many engineers believe that the latter model has resulted in greater technical progress.

Most ZeroAvia employees now work in Cranfield, Bedfordshire. This was where the company achieved the first hydrogen fuel cell-powered flight in September last year. One future option could be hybrid aircraft which use a combination of hydrogen fuel cells and battery technology.

It is possible that airlines might be able to charge premium prices for eco-flights in the knowledge that eco-friendly companies will want to parade their ecological credentials. Thus, we can expect that hydrogen-electric airliners will be Business Class only – at least in the first wave. 

Using your EV to heat your home

Eco-homes of the future (there are already some today) will use solar panels on their rooves to generate electricity which will then be stored in the battery of their electric vehicle (EV). These EVs, in turn will be able to sell electricity back into the national grid overnight, thus substantially cutting homeowners’ electricity bills. But there’s even better news. The humble Nissan Leaf has enough battery capacity to power an average home for about two days. So, in winter or on days without sunshine (quite common in the UK), they can use their EVs to power their homes using stored electricity (assuming they don’t need to drive).

Apparently, Teslas are not yet vehicle-to-grid capable; but the company produces Powerwall batteries which can store electricity generated by domestic solar panels.

When variable charge rates come back into fashion (which I think very probable soon), families will be able to sell into the grid when the electricity price is high (because demand is high) and they use the power from their EV when demand and prices are low. Hands up people who used to use Economy-7 to run their washing machines overnight.

Octopus Energy is running a vehicle-to-grid Powerloop trial, initially until March next year. Ovo also offers a vehicle-to-grid package.

Electric-only aircraft: that’s the Spirit

Recently, a British-designed and manufactured aircraft named Spirit of Innovation, flying out of Bristol Airport, made an attempt to reach 300 miles per hour – that’s almost 100 MPH faster than a German aircraft which previously held the speed record for electric planes. Spirit was developed by a UK start-up called Electroflight, based in Cheltenham, which has teamed up with British aviation giant Rolls-Royce (LON:RR.) in something called the Accel Project.

Spirit weighs 1,000 kilograms: 300 of that is the airframe and the other 700 the propulsion system. There is room for just one pilot. The official record bid will take place in April when Spirit will zoom up the Welsh coast. The Accel Project is being partially funded by the state-backed Aerospace Technology Institute.

Carbon Capture and Storage (CCS): New Horizons

Not only can we extract CO₂ from production processes and bury it in carbon sinks, but we can also use that captured CO₂ to make things like cement, building materials and plastics. Extracting CO₂ from the atmosphere and then sequestering it – normally in disused mineshafts – is expensive, and potentially itself creates CO₂. That is why it is only done by using renewable energy such as geothermal power in Iceland. If you can use the CO₂ in a fruitful way by breaking it down, everybody wins.

Ethylene, the precursor to polyethylene, used in the production of synthetic materials, is already a $60 billion market. Ethylene can be created using copper as a catalyst to react with CO₂, water and electricity. In this process, much of the CO₂ turns into by-products such as carbonates.

Dr Torben Daeneke and his team at RMIT University, Melbourne, Engineering Department, has developed a low-temperature, low-pressure method of electrolysis using a unique catalyst which enables CO₂ to be converted from a gas into solid particles of carbon. Previously, this kind of process could only be achieved at high temperature, thus requiring much more energy. The carbon flakes produced can be used, in turn, in the production of graphene.

The Swiss company Climeworks AG operates giant CO₂ sucking machines in south-west Iceland. By May this year, they will be able to suck 4,000 tonnes of CO₂ out of the air annually. That’s about the CO₂ generated by 700 American homes. The gas will then be buried underground by Icelandic firm, CarbFix. Captured CO₂ is then pumped 1.5 kilometres deep into basalt injection wells. Once down there, natural chemistry begins to break down the CO₂. Essentially, it becomes rock. The process costs about $600-800 per tonne of CO₂ sequestered.

This project is being backed by Shopify (in which Bill Gates is a major shareholder) and Stripe which, along with other subscribers, will pay Climeworks to offset their own CO₂ emissions. This is a much more viable carbon offset model than the tree-planting schemes offered by airlines which have a dubious environmental impact.

A huge offshore carbon sink is now operated by Aberdeen-based Pale Blue Dot (owned by Storegga Geotechnologies). And Norway’s £2 billion Northern Lights Project aims to capture massive quantities of CO₂ and pipe it to 2,600 metres below the North Sea. It is backed by Shell, Total and Equinor.

Some climate scientists have questioned whether carbon sucking machines will ever have more than a very marginal impact on the climate crisis. But in 2018, the IPCC described carbon sequestration as critical in the battle to stop the ambient global temperature rising more than the benchmark 1.5 Celsius above pre-industrial levels. CCS featured in Prime Minister Johnson’s Ten Point Plan for a Green Industrial Revolution released last November.

With COP26 taking place in Glasgow in November this year, we can be sure that world leaders will be vying with one another to show how green they are. The great transition is upon us.

If investors are still sceptical: just consider that the market cap of Denmark’s wind power megalith, Orsted (CPH:ORSTED), at $63 billion, is akin to BP’s (LON:BP) market valuation of £63 billion. BP used to look unassailable. But times change quickly. And there are (approximately) only 100 billion seconds from now until 2050. The clock is ticking.