What we talk about when we talk about energy

Aluminum industry insiders often joke about the metal being solid electricity due to the high energy intensity that goes into producing it. Some may argue that the term comes from the aluminum formation process through electrolyzed alumina, though for now, we will stay with the former.

Producing one tonne of aluminum consumes roughly 14,000 kilowatt hours, making the cost of energy amount to almost 37% of its total cost of sale. In this sense, shipping aluminum is a way of moving the vast amounts of electricity that goes into producing it from places where it is ideally cheap and abundant to where it is more likely to be expensive or in short supply. The industry dynamics of aluminum smelters observed over the past 50 years seem to sustain this point.

The 65 million ton-per-year aluminum industry would rank as the fifth-largest power consumer in the world if it were a country. Its energy matrix would be composed of coal (61.3%), hydro (26.2%), natural gas (10.2%), nuclear (1.3%), and renewables (0.9%), according to the iea. Typical thermal efficiency for utility-scale electrical generators is around 37% for coal and 56–60% for combined-cycle gas-fired plants. But it is not efficiency, and instead the cost of electricity that moves the industry. And because aluminum is not turned back into electricity at the destination, and is instead used for many other purposes, no one thinks twice of the term “solid electricity” or its round-trip efficiency rate (from the first electron to the final atom.) Whether it is produced in coal-powered plants or natural gas-fired plants matters to few. People just focus on its final cost per ton and move on.

So, what’s so exciting about the term “solid electricity?”

The Electrification of Industry

Renewable sources could produce more than half of the world’s electricity by 2035 at lower prices than fossil fuel generation, according to McKinsey. Lowering renewable electricity costs, along with cheaper electric equipment and more stringent greenhouse gas (GHG) emission regulation, should encourage industrial companies to plan for the adoption of electric technologies for their current fuel use, a trend known as the electrification of Industry.

Industry consumes roughly 30% of the world’s energy, 160 terajoules annually, and only 20% of that is used as electricity, mostly to drive machines such as pumps, robotic arms, and conveyor belts. Fuel consumption for energy, on the other hand, accounts for almost 45% of total industry energy consumption, including generating heat for processes such as drying, melting, and cracking.

Electrifying those processes comes with several benefits for industrial companies. Starting with electrically-driven equipment being slightly more energy efficient than the conventional option and having lower maintenance costs, and, in the case of the industrial boiler, lower investments as well. If powered with zero-carbon electricity, the greenhouse-gas emissions of the industrial site decrease significantly.

Electricity could replace around 50% of the fuel industry uses for energy with commercially-available technologies. Alternative electric equipment for up to a heat demand of approximately 400 degrees Celsius is commercially available, while electric heat pumps for low- and medium-temperature are already used on industrial sites.

Processes that require heat up to approximately 1,000 degrees Celsius do not require a fundamental change in the process setup but rather a replacement of a piece of equipment, such as a boiler or furnace, running on conventional fuel with electric equipment.

But market dynamics are market dynamics. At the end of the day, it all comes down to the cost of electricity versus fossil-fuel alternatives. It is when you combine inexpensive renewable electricity and GHG emission regulation when a clean-energy-powered industry emerges, reinforcing the concept of shipping solid (or liquid) electricity from where it is abundant to where it is most needed.

Back to Aluminum

As of 2019, the largest smelters are located in China, India, Russia, and the United Arab Emirates, following a cheap electricity price migration. China, the top producer in the world, has a share of 55%, while the EU has lost more than 30% of its primary production capacity since 2008. The war in Ukraine has only accelerated this trend. Many more European smelters could close as the area enters into a power-starved winter, pushing industrial corporations to rely on imports.

At the same time, German energy costs for the subsequent year, a benchmark for Europe, soared to €543 per megawatt hour, 12 instances greater than two years in the past, due to the record-breaking rally in fuel costs after the conflict between Russia and Ukraine. To put that into financial terms, a German smelter exposed to one-month baseload rates for power would need to pay about $4,000 for the energy to produce a ton of metal, far outstripping current aluminum prices. European electricity prices have gone up much stronger (>300%) than aluminum prices (50%).

Since 2020, when electricity prices fluctuated around 40 €/MWh, they have quadrupled across Europe, reaching today 3-digit figures, sometimes even above 200 €/MWh increasing from 580 €/tonne to over 2,000 €/tonne: more than 80% of LME sales price for aluminum.

In wider Europe, which incorporates Norway, Iceland, and the UK, consultancy CRU expects additional disruption to trigger aluminum manufacturing capability to fall by an extra 20% to 4mn tonnes in contrast with final September.

“The situation is dire,” stated Adina Georgescu, vitality and local weather change director at Eurometaux. “The rule of thumb is once you close down a smelter, you have little chance of bringing it back online.”

For decades, while industry chased affordable energy prices, GHG emissions raced behind. Regions with lower fossil-fuel energy prices had typically more relaxed policies around pollution. Today, the average European smelter generates much lower GHG than the average Chinese, which commonly relies on coal to generate energy. As a result, the industry’s carbon footprint grew much faster than its global production.

The saying goes crises contain the seeds for success. The same dynamics that pushed industrial companies to migrate towards regions with inexpensive energy and flexible emission policies could pave the way for their decarbonization through -yes,- the electrification of industry.

By 2030, new renewable generation capacity could be cheaper to build than continuing to use the existing coal- or gas-based generation capacity — according to McKinsey. Starting with industrial applications that can fluctuate their electricity consumption, regions with outstanding renewable potential could become hubs for industrial companies capable of electrifying part of their fuel consumption… and significantly reducing their GHG emissions.

Ammonia is Leading the Way

One of the most highly produced inorganic chemicals in the world, ammonia’s 200MM tons in annual production consumes 2% of the world’s energy and is responsible for ~3% of global CO2 emissions. Its energy intensity comes in large part from the process of obtaining hydrogen, which even though is the most abundant element in the universe, is never found ready to use. Hydrogen atoms bond tightly to whatever is around them, making the process of breaking those bonds super energy intensive. Traditionally, hydrogen was extracted from reforming natural gas (methane - CH4), breaking its bonds with the Carbon atom. In this process, gas is also used as feedstock to power the plant, transferring almost 60% of the cost of obtaining one kilogram of hydrogen to the cost of natural gas, and making it a very carbon-intensive process.

As the costs of producing renewable energy decrease, production projects emerge around the globe to electrify the entire process without relying on gas. Known as “green” hydrogen/ammonia, this process is powered by renewable electricity and extracts the hydrogen atoms from water (H20) using seawater as feedstock, to then combine it with nitrogen (captured from the air) in a renewable electricity-powered Haber Bosch process. The cost of electricity still represents roughly 60% of the cost of a ton of ammonia. This would make this highly energy intensive process a way of shipping renewable energy from where it is abundant and cheap to where it is either expensive or necessary to replace traditional, CO2-heavy, ammonia production processes (while unlocking a few new use cases along the way.)

The technology to produce green ammonia is commercially available and works relatively fine with renewable intermittence. Scale is still key to making its production costs competitive vis-a-vis traditional ammonia, which makes OEMs a critical player in the process. The largest export-scale projects in LatAm are aiming at producing a ton of green ammonia at a price at destination port of USD ~650 for the first wave of projects to emerge and potentially USD ~500 for the second wave of projects.

Traditionally, ammonia ranged in the ~USD 450 zone which worked fine to produce fertilizers at affordable prices for farmers to produce food at affordable prices. Traditional (grey) ammonia prices are tied to the prices of natural gas and are currently extremely high due to the conflict in Ukraine and years of underinvestments in most extraction regions (for an array of reasons that we won’t cover in this post.) Conflicts and CAPEX aside, green ammonia at USD ~650 per ton may not be competitive to replace grey ammonia in the mid-term for the production of fertilizers. But there are other applications for which it could be not only competitive but also transformative.

Carbon-free green ammonia is being tested as feedstock for energy generation in co-fired coal plants in regions where energy is both imported and expensive, and as a maritime fuel, replacing or complementing diesel dual-engine vessels. Both technologies have been in pilot phases for a while and should be commercially available by 2025. And since they are aimed at reducing carbon emissions, grey ammonia is not an option.

Forward-looking nations are counting on those use cases and green ammonia as the backbone of their energy and transport decarbonization strategies. Countries like Japan and Korea aim to consume up to 20% of ammonia in their coal-powered plants by 2030. Burning 20% ammonia in a coal co-fired plant significantly reduces its carbon footprint, which currently represent 40% of the nation’s CO2 total emissions, with minimum investments (swapping the burners.) Japan and Korea import roughly 90% of the energy they consume and often LNG and coal imports could get up to 100% more expensive than in other regions, making green ammonia at USD ~650 per ton a serious contender.

For that to become a reality versus competitive (and CO2-intensive) alternatives, the cost of producing a ton of green ammonia would need to go down compared to current costs. And that, like we mentioned, requires scale. In this sense, for countries betting on burning green ammonia to reduce their CO2 emissions, it is close to a meaningful-or-nothing vector strategy. Scale is required to both push costs down and increase OEM capacity while continue reducing the costs of producing renewable energy. It will never work as a few percentage points of the energy matrix.

This is how ammonia becomes liquid electricity: A carrier for storing and moving abundant renewable resources to where they are most needed. And one that, if turned back into electrons by burning it, takes care in large part of the problems associated with renewable intermittence.

In a world with regional tensions impacting the price of fossil fuels, decreasing extraction-investment fossil-fuel CapEx, and growing demand for CO2-free energy, green ammonia and the electrification of industry have a clear shot at shifting predominant industry dynamics. Some analysts would still discuss the energy round-trip efficiency, from the first green electron to produce a green ammonia molecule to the first electron obtained from burning ammonia at the destination. But efficiency never was and never will be a key argument. The most important questions or ways to measure progress remain the final cost of a MWh, the alternative ways to generating that MW, and how many tons of CO2 equivalent are saved by choosing to electrify and power industrial operations with clean energy.

Should those questions remain valid, in a not too distant future many industrial companies will be shipping solid or liquid electricity from places where it is abundant to where it most needed through a wide array of end products.

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NewBalance Energy

NewBalance Energy

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NewBalance Energy is a platform that sources and supports competitive and reliable green hydrogen production today to supply a network of off-takers tomorrow.