Electrification is the name of the game
Heat is a crucial element in almost every manufacturing process, whether it is in the heavy stuff of melting glass and steel or firing ceramics at scorching temperatures (800°C-1,500°C), producing chemicals (100°C-500 °C), or the more mundane making of paper, and cooking, pasteurising and drying food (<200 °C). In jargon, all this heat use is grouped together under the header of industrial process heat.
Industry is the EU’s third largest energy user (25%), just behind transport and households. In 2023, around 70% of all industrial energy demand in Europe was for process heat. This heat is mainly supplied by combusting the fossil fuels gas, coal and oil, leading to high carbon emissions (around 20% of all EU emissions) and reliance on fuel imports.
Moreover, emissions in the sector have only declined by 8% over the last decade. These practices threaten Europe’s goals of achieving a climate-neutral economy by 2050.
Clean sources
Electrification has a huge potential to decarbonise industrial heat use and support reaching EU climate targets. The generation of electricity in Europe is rapidly decarbonising and becoming a possible source of clean heat, with over two-thirds stemming from renewable and low-carbon sources in 2023.
Technologies have improved over the past decade; experts estimate that 78% of all industrial energy use could be electrified using commercially available technology, as opposed to the approximately 30% presently electrified. For process heat specifically, 60% could be electrified with existing technology, a far cry from the current 3%.
Electrification has much more to offer, however. It reduces primary energy use as it is almost always more efficient than fuel combustion, making the challenge of switching to renewable and low-carbon sources smaller. Large heat pumps, a prime heat electrification solution, can tap into unused ambient heat from the air, ground and water, and can harness waste heat streams from industrial processes.
Uncertain economics
What is holding industrial actors back from making the switch? One of the biggest barriers to electrification is the high cost of electricity compared to gas, largely because electricity is taxed at much higher rates. This “spark gap” can be as high as 1:3 or 1:4 in many EU countries.
Even though, once electrified, less energy will be needed due to the higher efficiency, such ratios leave businesses with higher running costs.
Add to this the significant investment costs of retrofitting equipment with electrified solutions and, where necessary, modifying production processes, electrification can have overly long payback times or simply be uneconomical. For industrial players active in a competitive market with high return-on-investment demands and short payback times, electrification is a hard sell under current circumstances.
It’s not just economics that hinder industry investment; it’s also uncertainty about future fuel and carbon prices, demand for their products and hopes for alternative solutions such as hydrogen gas supply. In a time when industrial outlooks in Europe have soured, businesses are weary of investing in solutions seen as novel.
Another key barrier is the availability and cost of electricity grid connections. Grid congestion, whether perceived or real, and the difficulty of getting an upgraded connection to handle the enlarged loads is increasingly an obstacle.
The right conditions
Policymakers and regulators can tip the balance away from gas and towards electrification. A mix of policies that make electrification more attractive, reduce uncertainty for businesses interested in making the switch, and support upscaling and standardisation can lead to technology cost reductions and easier integration of solutions into production processes.
Shifting tariffs and levies from electricity to fossil fuels or into the general budget is crucial to reducing operational costs. Finland shows how this can be done, having reduced the spark gap from 2:3 to 1:3 through fiscal policy, giving a strong tax reduction for electricity used in manufacturing and industrial heat pumps and implementing a national carbon price to raise the cost of fossil fuel use.
While most European countries do not share Finland’s generally low electricity prices, they can take inspiration from the approach to make electrification fiscally more attractive.
Plans afoot
New policies are on the way. In March 2024, Germany launched an innovative multi-billion-euro support scheme to de-risk investments in industrial decarbonisation. These Climate Protection Contracts will be awarded on a competitive basis to projects achieving the lowest cost per tonne of emissions, providing companies with a fixed carbon price and technology support.
The novelty is that when carbon prices rise above the agreed limit, businesses will return revenue to the state, while companies receive a subsidy when the price drops below the agreed baseline, thus sharing the costs and benefits between taxpayers and shareholders.
On grids, the EU should make better use of existing capacity while ramping up investments in expansion. Flexibility and adaptability are key in this respect. For example, in the Netherlands (perhaps the EU country with most pressing congestion issues), grid managers are reassigning unused capacity from existing connections and implementing flexible contracts that avoid peak times.
Together with measures such as increased transparency on available capacity and standardised and shorter application procedures, this can reduce the short-term grid concerns the industry might have.
Action plan
Ramping up industrial electrification is a win-win for EU import dependency and climate. A front-running group of member states is waking up to this, but we need an EU-wide and targeted approach.
In its climate plans, the European Commission aims for 70% industrial electrification by 2050. As we are currently not on course to reach this, it is critical we put in place a clear EU action plan to accelerate industrial electrification.
A version of this article originally appeared on Foresight Climate & Energy.
Photo credit: Waldemar via Unsplash.
