20.05.22 "The window for the technology change is opening” Interview with Dr. Felix Christian Matthes • Reading time: 4 min.

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Summary

Dr. Felix Christian Matthes is Research Coordinator for Energy and Climate Policy at the Oeko-Institut and an expert in decarbonization strategies. He is of the opinion that, alongside the new technologies, the infrastructure plays a decisive role in the future of energy-intensive industries in Germany.

What role do the energy-intensive industries play in Germany?

We need to differentiate between their importance as emitters of CO2 and their contribution to the national economy. Their share of greenhouse gas emissions is relatively high. Steel production, for example, still relies almost entirely on coke and a large amount of brown coal is used in the manufacture of cement. By contrast, the energy-intensive industries have a relatively small part to play in value creation in Germany. However, it is important to make a distinction here. Many of these industries, for instance chemicals and steel, are heavily integrated into the downstream levels of value added and are therefore important. Others, such as ammonia production for fertilizer manufacturing, are largely unintegrated and therefore less significant. In summary, you could say that the share of CO2 emissions produced by the energy-intensive industries in Germany is greater than the industries’ economic importance in the narrow sense of the term. But a closer look shows that the economic ripple effects of the main energy-intensive industries should not be underestimated. 

Dr. Felix Christian Matthes, Research Coordinator for Energy and Climate Policy at the Oeko-Institut

Which of these industries could bring about a noticeable reduction in their CO2 emissions?

On the one hand, that depends on the technology and, on the other, on the modernization cycles. If we take the example of the steel industry, blast furnaces in steelworks are replaced on average every 15 to 20 years. By 2030, around half of the German steel production capacity will have been renewed and by 2038 all the blast furnaces in the country are likely to have been completely renovated. The window for the technology change is opening now. The steel manufacturers could use their upcoming investments to fund the transition to the hydrogen/electricity route. Three of the large German companies are planning to do just that, but will need to make investments of around six billion euros by the end of 2022 or early 2023. If they fail to do so, the next window for a technology change will only come along in 15 to 20 years. 

From the perspective of the companies, what arguments are there against doing this?

The use of hydrogen instead of coal in steel production could bring about huge and rapid reductions in CO2 emissions. But it would also make steel more expensive, because green hydrogen is not currently available in large enough volumes or at competitive prices. This is why the intention was to run the new plants on natural gas during a transition period, but this has become much more difficult as a result of the war in Ukraine. Nevertheless, the steel industry will be forced to invest in new production processes, because there are no alternatives. The task is to bridge the gap of several years between now and the time when steel manufactured using hydrogen becomes competitive. The companies need a clear commitment from the government to provide state subsidies for the changeover period, which could help to remove the uncertainty from the planning process. 

What else, besides new technologies, has a role to play in the conversion of the energy-intensive industries? 

In addition to the technological modernization cycles, there is another inertia factor: the infrastructure. For instance, we need new pipelines to transport green hydrogen to the steel- and glassworks. The cement industry is also dependent on new infrastructure, because it will only be able to reduce its CO2 emissions if the carbon dioxide that it produces can be captured using carbon capture and storage (CCS) and stored in geological formations under the North Sea. But for that to be possible, pipelines are also needed, and the gas pipeline operators are currently carrying out a survey on precisely this subject. They want to know how much CO2 is generated and where, so that they can plan the transport capacity. This means that cement works will only have a future if they are located close to one of these pipelines. These examples show that the expansion of the infrastructure will have a decisive impact on many industries. And because the lead times for investments of this kind are between five and ten years, we need to start the planning process now. 

Will the importance of the regional economies in Germany change as a result of the energy transition?

Yes, and this is already happening today. The energy transition is giving a boost to many regions, because new investments are increasingly being made in the north, west, and east of the country. For instance, in northern Germany there is a good supply of green hydrogen for the steel industry, which could mean that the first stage in the production of steel – direct reduction with hydrogen – could move to cities like Bremen. The next stage – smelting with electricity – could take place at existing sites, but that is not yet certain. This shows once again how important the expansion of the infrastructure is. The more it lags behind, the greater the drift into new regions will be in the future. 

How could the expansion of the infrastructure be speeded up?

For example, by changing the regulation of the energy market. As things currently stand, before an investment is made, the investor has to demonstrate with almost complete certainty that it will be needed. That is a tough criterion to meet. Instead, we should allow for the precautionary development of infrastructure, such as power lines or pipelines for carbon dioxide or hydrogen. This may lead to mistaken investments, but it is better than doing nothing at all. 

What would you like the government to do?

It should make clear commitments and create instruments that will enable the big gap mentioned above to be bridged. For instance, green steel will not be competitive until the 2030s, but the industry has to make the necessary investments now. This is why the government needs to help fund these investments, for example by providing investment grants. And we also need to make the decision to subsidize higher operating costs, perhaps with carbon contracts for difference (CCfDs). The cheap natural gas that we had planned to use for the transition to green steel produced using hydrogen is simply no longer available. For this reason, we need to provide financial support for the transition, otherwise the technology change that is urgently needed to achieve climate neutrality will not take place. 

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