Decarbonisation of the steel industry
Attila L. MENYHART
Senior Advisor, Energy and Environmental Policy| International Relations, EU Regulations ((Views here are personal)
1. The role of the Green Deal and REPowerEU in greening the European steel industry
The European Green Deal is the concept presented by the European Commission on 11 December 2019 to reduce net greenhouse gas emissions in the European Union to zero by 2050. The Green Deal aims to become a central part of the European Union's climate policy. The European Green Deal has set the blueprint for this transformational change. A change that will bring a range of benefits, from creating new opportunities for innovation, investment and green jobs to improving our health and well-being.
All 27 EU Member States have committed to making the EU the first climate-neutral continent by 2050. To achieve this, they have pledged to cut emissions by at least 55% by 2030 compared to 1990 levels.
The EU now has legally binding climate targets covering all key sectors of the economy. The full package includes:
· emission reduction targets across a wide range of sectors
· a target to increase natural carbon sinks
· an updated emissions trading scheme to limit emissions, price pollution and promote investment in the green transition
· and social support for citizens and small businesses.
Member States have committed to dedicate 100% of their emissions trading revenues to climate and energy-related projects and the social dimension of the transition.
The Social Climate Fund, established under the Green Deal, will allocate €65 billion from the EU budget and more than €86 billion in total to support the most vulnerable citizens and small businesses in the green transition. This will ensure that there are opportunities for all by tackling inequalities and energy poverty and boosting the competitiveness of European businesses, leaving no one behind.
To ensure a level playing field for European companies, the new carbon border adjustment mechanism will ensure that imported products also pay a carbon price at the border in the sectors concerned. This is a valuable tool to promote global emission reductions and mobilise the EU market to achieve our global climate policy goals.
As a further step on the path to climate neutrality, the Commission presented in February 2024 its assessment of the EU's 2040 climate target, which is already in line with the latest scientific advice and the EU's commitments under the Paris Agreement. In its proposal, the Commission proposed to reduce the EU's net greenhouse gas emissions by 90% by 2040 compared to 1990 levels.
In response to the pandemic and the disruption to world energy markets caused by the Russian-Ukrainian war in February 2022, the European Commission has developed the REPowerEU plan.
The plan aims to increase energy savings, accelerate the transition to clean energy and diversify the EU's energy supply.
REPowerEU aims to dramatically accelerate the transition to clean energy in the face of new geopolitical and energy market challenges. It also needs to make Europe's energy supply less dependent on unreliable suppliers and volatile fossil fuel supplies.
Through the REPowerEU plan, the European Commission is working to make Europe independent from Russian fossil fuels well before 2030.
The REPowerEU plan outlines a series of measures to rapidly reduce dependence on Russian fossil fuels and to achieve the green transition as soon as possible, while improving the resilience of the EU energy system.
Diversification
Working with international partners, the EU is looking for alternative energy supplies. In the short term, alternative sources of gas, oil and coal are needed as soon as possible, and in the longer term, the availability of renewable, i.e. green hydrogen, must be ensured.
Saving
Every citizen, business and organisation has the opportunity to save energy. If we all make small changes to our habits, we can make a big difference. Extraordinary measures will also be needed in the event of a supply disruption.
Faster transition to clean energy
Renewable energy is the cheapest and cleanest energy source available and can be produced within the EU, reducing the need for energy imports. REPowerEU will accelerate the green transition and encourage significant investment in renewable energy. Another objective of the Plan is to enable industry and transport to replace their fossil fuel use more quickly with other energy sources to reduce emissions and dependencies.
Renewable energy is the cheapest and cleanest energy available. Renewable energy can be produced within the EU, reducing the EU's need to import energy. The REPowerEU plan would increase total renewable energy generation capacity to 1236 GW by 2030, compared to 1067 GW in 2030 under the "55% to Go" package.
The EU's solar energy strategy encourages the deployment of photovoltaic energy. As part of the REPowerEU plan, this strategy aims to deliver more than 320 GW of newly installed solar PV by 2025, double today's level, and nearly 600 GW by 2030. These projected additional capacities could replace 9 billion m³ of natural gas consumption per year by 2027.
Electrification, energy efficiency and the uptake of renewable energy sources would allow industry to save 35 billion m³ of natural gas by 2030, on top of the targets set in the "55% on track"[1] package.
The largest reductions in gas use are expected in non-metallic minerals production, cement, glass and ceramics, chemicals and refineries. Taken together, these areas could see a reduction of up to 22 billion m³.
By 2030, it is expected that around 30% of the EU's primary steel will be produced using a low-carbon process based on renewable hydrogen.
The industrial sector will also play a key role in expanding the production of equipment and components needed for the rapid transformation of our energy system.
Financing REPowerEU:
210 billion worth of additional investment is needed by 2027 to phase out Russian fossil fuel imports, which currently cost European taxpayers nearly €100 billion a year.
The Recovery and Resilience Facility (RRF), which will provide additional EU funding, is central to the implementation of the REPowerEU plan. Member States will need to complement their recovery and resilience building plans with a specific chapter on the REPowerEU plan to ensure that they target investments to REPowerEU priorities and implement the necessary reforms.
Member States can use the remaining available RRF credit line (currently €225 billion) and new non-reimbursable RRF support (€20 billion) financed by auctioning allowances held in the Market Stabilisation Reserve.
REPowerEU will also be financed by other sources, including:
· Cohesion policy funds
· European Agricultural Fund for Rural Development
· European Network Financial Instrument
· The European Regional Development Fund
· National and EU funding to support REPowerEU objectives
· National budgetary measures
· Private investment
· European Investment Bank
2. The decarbonisation of the European steel industry
The steel industry is responsible for around 5% of the EU's carbon emissions and the sector needs to reduce carbon emissions by 55% by 2030 to meet climate targets.
Member States have announced €10.5 billion in aid for steel producers between January 2023 and March 2024.
[2]
In the EU, ArcelorMittal is the main recipient of state aid - up to 28% of total aid, as it is Europe's largest steel producer, with a broad presence and a pioneer of the green transition in the steel industry.
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The level of funding per Member State is disproportionate to the level of steel production. Germany is the most active in financing decarbonisation projects. It provides 70% of all notified aid projects - around €7 billion for 5 projects.
Other European steel producers are also expecting to receive public support for decarbonisation. Voestalpine and Tata Steel Ijmuiden have applied for public funding. It is likely that the change of investor in Acciaierie d'Italia will prevent the Italian government from deciding on specific sources of funding. In addition, there are no publicly available data on public support for the decarbonisation of Liberty Galati and Liberty Ostrava.
European governments are implementing direct subsidies, soft loans, OPEX compensations, etc. to support the decarbonisation efforts of the steel industry. The European Commission expects that, in line with the REPowerEU Plan, all support measures should contribute to the EU's hydrogen strategy, the European Green Deal targets and the rapid progress of the green transition.
The projects that have received public support are mainly aimed at the transition from the BF-BOF to the DRI-EAF[3] route.
The overall EU policy target for domestic renewable hydrogen production for green steel is 1.7 million tonnes per annum (MPTA) by 2030, which is expected to increase to 1.9 MPTA by 2045.
Renewable electricity demand from green iron and steel projects is likely to reach 135 terawatt hours per year - equivalent to the annual electricity consumption of a country the size of Sweden.
According to the REPowerEU plan, at least 30% of EU primary steel production in 2030 would rely on renewable green hydrogen. This will lead to an increase in demand for renewable electricity.
Steel production could reach full decarbonisation by 2050 with an additional investment of $278 billion, according to Brussels plans[4].
3. Decarbonisation of the global steel industry
The global steel market is estimated to be worth USD 1 469.04 billion in 2023 and is projected to grow at a CAGR[5] of 5.3% from 2024 to 2030. The global steel market is expected to be driven by growth in construction investments. The steel products are high strength and 100% recyclable, making them suitable for use in residential, commercial and infrastructure projects. Increase in construction investments is expected to boost the growth of the market.
[6]
For the transition from fossil fuel-based electricity generation to green hydrogen-based iron and steel production to be successful, reliable estimates of the growth in renewable electricity demand are needed. Such estimates are also needed to align the transition of the steel sector with the energy sector and other industrial sectors.
Car manufacturers and suppliers of consumer goods and equipment have all set decarbonisation targets for their supply chains. This is putting pressure on raw material suppliers to send them more low-carbon, recycled or sustainable raw materials: steel in particular. But many of the technologies that can produce large quantities of green materials are not yet at commercial scale. Demand for green steel from sectors that can absorb the green premium - such as transport - should contribute to the risk of financing commercial-scale low-carbon steel mills.
[7]
Hydrogen and recycling play a key role in reducing emissions from steel production. The steel industry is one of the world's most polluting sectors, responsible for around 7% of all man-made greenhouse gas emissions each year.
Steel companies are being pushed to achieve net-zero emissions by 2050 as a result of government and corporate net-zero commitments. Efforts to decarbonise steel production are at the heart of the net-zero targets of China, Japan, Korea and the European Union.
8]
By 2050, green hydrogen could be the cheapest steel production technology, accounting for 31% of the market. A further 45% could come from recycled materials. The remainder will come from older coal-fired plants equipped with carbon capture systems and powered by new electricity-using iron ore refining processes. This would represent a significant change in the types of furnaces and fuels used for steel production.
Today, about 70% of steel is produced in coal-fired blast furnaces, 25% from electric furnace scrap and 5% from a newer, usually natural gas-fired method known as direct reduced iron (DRI). More DRI units and electric furnaces would be needed to convert most of the fleet to hydrogen. In this case, coal-fired blast furnace production would be reduced to 18% of total capacity.
Green steel production using hydrogen and electric furnaces would require huge amounts of renewable energy and a switch to higher grade iron ore.
Russia and Brazil have high quality iron ore reserves and abundant renewable energy sources. Brazil is expected to have the lowest hydrogen production costs in the world by 2030. South Africa and India have abundant iron ore deposits and can produce huge amounts of cheap renewable energy. However, Australia, the world's largest iron ore producer, now produces lower quality ore and could lose its position at the top of the supply chain without further investment.
China is expected to remain a major player. With 57% of the world's steel-making capacity, China's moves to reduce emissions could set the pace for decarbonisation of the whole sector. Prior to early-stage technologies such as hydrogen and coal separation, the Chinese steel sector plans to prioritise recycling and energy savings.[9]
However, it should not be overlooked that as domestic demand slows, China is selling increasing quantities of steel abroad. As such exports are made at prices below the cost of production, which depresses steel prices worldwide, they cause serious damage to the local steel industry.
To the great disappointment of other steel countries, Chinese steel capacity, mainly through the dismantling of obsolete and polluting plants, has been cut from 1.116 million tonnes in 2023 to only 1.078 million tonnes, contrary to preliminary expectations.
At the same time, the global steel industry is facing a huge shift from coal to hydrogen. After increasing recycling levels, green hydrogen is the cheapest and most practical technology to produce green steel.
Public policy makers' support for industrial decarbonisation could be a decisive factor for steel producers. Green steel mandates for public investment, such as the industrial deep decarbonisation initiative announced at COP26, or rising carbon prices, such as those in the EU Emissions Trading Scheme, can all help green steel compete with fossil fuel-based production.
The cost of producing green hydrogen is expected to fall by more than 80% to below USD 1/kg in most regions of the world by 2050. At this price it will already be competitive with hydrocarbons.
Another possible promising direction could be green recycling. Steel recycled with 100 percent renewable energy would only have to pay a 5 percent premium over the current price of recycled materials.
4. Conclusion
Experts agree on the inevitability, necessity and direction of decarbonisation of the world steel industry. There is considerable disagreement about the pace of decarbonisation itself. Forced 'greening' too quickly could easily be to the detriment of competitiveness. It is in the strategic interest to coordinate the development of individual industrial segments and their development. The existence of a system for harnessing, storing and transmitting renewable energy is essential for the production of green hydrogen. Its absence or partial availability can lead to serious disruptions in the production chain. The decarbonisation of the steel industry can therefore only be achieved in parallel with the development and modernisation of an energy system that can absorb and store all aspects of renewable energy. The existence of conditions for the production and transport of green hydrogen and its integration into the energy and transport system of a country or region is essential for the greening of industries, including the steel industry.
[1] The 55% Action Plan includes proposals to review and update EU legislation and introduce new initiatives to ensure that EU policies are in line with the climate policy targets agreed by the Council and the European Parliament.
[3] Steel is used to make almost everything that surrounds us in our modern world. It is produced by two main methods: the blast furnace-base oxygen furnace (BF-BOF) and the electric arc furnace (EAF). There are also variations and combinations of production routes. While EAF-steel production relies on electricity and recycled metals, Blast Furnace/BOF relies on raw materials such as iron ore and metallurgical coke, as oxygen is blown into the furnace at high speed. H2-DRI-EAF involves the use of hydrogen (H2) to produce direct reduced iron (DRI), which is then processed in an electric arc furnace (EAF) to produce steel.
[5] Compound annual growth rate (CAGR) measures the rate of return on an investment, such as a mutual fund or bond, over an investment period, for example 5 or 10 years.