Understand the principal challenges and opportunities in the (necessary) energy transition of the industrial sector.
The world is experiencing an intense duality with regard to the balance between economic growth and environmental impact. On the one hand, the need for development, reduction of inequality, and increasing quality of life; on the other, the inevitable impact that all economic activity has on the environment, in particular in the form of carbon emissions into the atmosphere.
There are countless scientific studies that indicate significant correlations between the concentration of CO2 in the atmosphere and global warming. Although there still seems to be disagreement regarding the real influence of human action on climate change, it is certain that the effects of carbon and greenhouse gases create significant risks not only for ecosystems and health, but also for business performance and continuity.
In a world where the demand for energy is continuously increasing, governments and companies play a crucial role in developing policies, strategies, and technologies that promote the reduction of carbon emissions. The decarbonization of industry, the sector responsible for almost a third of global emissions of greenhouse gases, has finally received the attention and priority that the issue deserves.
And for good reason.
Investors are paying more and more attention to the environmental and social performance of large organizations. A recent example was the decision by the European Investment Bank to no longer finance oil, gas, and coal projects. The measure will be implemented by the end of 2021 and should eliminate more than €2 million in annual investments. In the new model, projects will only be approved that show that they can deliver less than 250 grams of carbon for each 1 kWh of energy produced.i
But how can industry be decarbonized?
The first part of the answer necessarily leads to efficiency of industrial processes.
Between 2015 and 2018, the increase of technical efficiency contributed to reducing 3.5 billion tons of carbon worldwide – the equivalent of the total issued by Japan during that period. For industry worldwide, investing in energy efficiency is a relatively low-cost measure that can reduce carbon emissions by between 15% and 20%.ii
Actions to increase efficiency can include everything from improvements in operational procedures to optimization of control loops and small investments in modernization of industrial assets. The technology currently available, both in management models and in software and hardware, is more than sufficient to achieve significant gains with relatively small investments.
However, 2018 showed the poorest rate of increase in industrial energy efficiency since 2010, with only a 1.2% improvement in primary energy intensity. This was due to the greater demand for coal in countries such as China and the United States, more intense winters and summers, and the lack of more effective policies and incentives. The opportunity lost – measured by the difference between the potential efficiency increase and the increase actually achieved during the period – amounts to a GDP of more than $2 trillion.iii
The second part of the answer is investment in new technologies or in technologies that are alternatives to those traditionally used by industry. There are several examples.
- A new technologyiv developed in Brazil for production of pig iron has the potential to replace a large part of the fossil fuels currently employed with biomass, reducing by 50% the emissions of carbon and consumption of water, and offering lower costs than traditional blast furnaces.
- The massive adoption of systems to capture, use, and store carbon (CCUS), technology that has existed for several years, is essential to avoid the emission of more than 9 billion tons of carbon per year by 2060, as established by the Paris Agreement. Despite the high cost of investment, policies, and government incentives could greatly encourage the expansion of CCUS projects in energy-intensive industries. In the next decade, development would have the potential to create a market valued at more than $90 billion.v
- The use of biomass as a primary energy source is also not new, but can bring significant gains, especially in certain industrial sectors. The low cost, the possibility of reusing waste, and their renewable nature make biomass an interesting alternative to fossil fuels, especially due to the zero balance of carbon emissions. Technologies for the production and use of biomass from various sources have become increasingly efficient and attractive.vi
- Depending on the intensity of the drop in prices of electricity produced from traditional renewable sources, their use in the production of heat (in place of the burning of fossil fuels currently used in reactors and industrial furnaces) or even hydrogen (as alternative input or fuel) is becoming increasingly viable.
It is, however, important to consider that decarbonization will require the adoption of technologies that can increase demand for carbon-zero electricity by up to 55 hexajoules per year, which could cost up to $21 trillion in new investment by 2050.
New regulations and incentives are essential to make this scenario possible, but the industrial sector needs a clear vision of the transformation that will be needed to achieve the objective. Diagnostics, analysis of available opportunities, and investments in energy efficiency, new technologies and business models, especially in a non-competitive way through the value chain, will be the new normal.
The third part of the answer is the introduction and adoption of new business models, something that has been happening with increasing intensity in recent years. Let's see a few examples.
Carbon offsetsvii are certificates that can be acquired by organizations (and even by individualsviii) in the form of investments in environmental projects, typically undertaken at locations that are far from emission sources, such as solar power plants, forest development and preservation operations, biogas plants in landfills, among many others.
These projects are created voluntarily by interested interested organizations and are part of the so-called Clean Development Mechanism (CDM), created by the Kyoto Protocol to encourage, award, and monitor initiatives for reducing the generation and emission of greenhouse gases. However, it is important to bear in mind that compensation does not directly reduce the carbon emissions of an industrial operation, despite being important complementary actions for the energy transition.
To reduce their carbon footprint, companies in the industrial sector can still uphold bilateral renewable contracts with generators that operate with fundamentally clean sources. The market for distributed generationix, for example, allows the purchase of energy from independent generators, like solar or wind power plants, with a reduction in costs and carbon emissions. Renewable Energy Certificatesx (REC) can be acquired by companies that which to prove that a certain part of their energy consumption comes from carbon-neutral sources.
Digitization, Decentralization, and Decarbonization
The year 2018 was the seventh consecutive year where the addition of energy generation capacity from renewable sources exceeded that from xiconventional sources. Digitalization can, of course, accelerate and leverage the gains in energy efficiency and in the reduction of carbon emissions in industry.xii
Sensors and intelligent meters are able to collect energy consumption data and information about the operational context (e.g. production as well as process and environment variables). This enormous volume of data feeds artificial intelligence algorithms that analyze and recommend actions that optimize, in a decentralized way, the energy and environmental efficiency of industrial teams and processes. Supply and demand of each energy input can then be controlled dynamically, capturing efficiency gains in the system as a whole.
The data collected from the factory floor also feeds forecasting models that precisely estimate, starting from the evaluation of scenarios and production conditions, the volume of each energy input required by the operation. Simulation tools allow the evaluation of different options for acquiring and executing contracts for buying and selling energy, aiming to reduce their unit costs and simultaneously prioritize sources having lower levels of emissions. Robust plans can then be created, reducing exposure to operational and financial risk and promoting cost control.
In addition, digitalization allows the returns of necessary transformation efforts to be measured and verified with greater accuracy, strengthening a virtuous cycle of investment, reducing carbon emissions, capturing value, and reinvestment.