Europe's bridge to 'green' steel
European steel has a relatively low emissions intensity, but it has been under pressure from cheaper imported steel. Unfortunately, many of those imports have been sourced from countries with a significantly higher emissions footprint. According to
the race to replace domestically produced steel is increasingly being won by the dirtiest contenders:1Ten years ago, the EU’s mix of finished steel product imports was far more diverse than it is today. Countries with steel emissions intensities below the global average – Taiwan, Vietnam, Egypt and Brazil – were vying for a spot in the top-ten EU exporters club. Fast-forward to 2023 and those countries have lost significant market share to rivals with much higher steel products emissions factors: China, India, South Korea, Russia and Ukraine. The exception to the rule is Turkey, which has below average steel product emissions and was the EU’s top supplier by volume in 2022.
Steel is the biggest industrial emitter of carbon dioxide in Europe, responsible for 5.7% of total EU emissions. Up until recently the industry has had little incentive to decarbonise further given the availability of free EUAs. Meanwhile, exporters of steel to Europe have been able to undercut the relatively low emissions footprint of European steel without penalty (see Europe's steel industry yet to feel the full force of the carbon market).
However, this will all change over the next 10 years. Free emission allocations to European steel producers will be gradually phased-out between 2026 and 2034. This will occur in parallel to the phasing-in of the CBAM, requiring carbon intensive products imported into the EU to face the same high cost of carbon that domestic producers face.
European steel industry will have to up its game, not simply to negate the impact of high carbon prices, but to fend off competition from abroad. We may be moving towards a more level playing field, but that does not necessarily mean that Europe holds all the cards (see No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win).
How is European steel currently produced?
Blast furnace / basic oxygen furnace (BF-BOF) is the oldest and most common way of producing steel. The majority of EU steel production (60%) is manufactured using this process. Approximately 2.2 tonnes of CO2 are emitted per tonne of crude steel produced.
The quickest and most economical route to decarbonising Europe’s blast furnaces is to install carbon capture equipment. The problem is that the rollout of CCUS in Europe is still at a very early stage. Developers have focused on cement kilns and energy from waste plants, yet steel plants have not received the same attention. It can take several years to install a large-scale CCUS facility and significant investment is required to develop the pipeline infrastructure to transport the captured carbon dioxide and ensure it is stored securely (see Why Europe's heavy industry needs carbon capture and storage).
Electric arc furnaces (EAF) use approximately 80% steel scrap as an input, and potentially up to 100%. This manufacturing process emits significantly less carbon than BF-BOF; around 0.3 tonnes of CO2 per tonne of crude steel. EAFs accounts for around 40% of Europe’s steel manufacturing capacity.
Powering EAFs solely on renewable energy is one solution to decarbonising Europe's EAFs even further. Unlike BF-BOF, EAFs have several operational attributes that can be exploited to complement and grow the demand for intermittent renewable energy according to
. 2EAFs run in batches, and these can be scheduled for when electricity is cheaper – when strong winds coincide with low demand, for example. EAFs consume a huge amount of electricity, so power prices are the single biggest operating cost and a major price driver for steel produced from recycled scrap.
EAFs can change their power consumption very quickly by adjusting their instantaneous melting power rate during operation. This enables very fast demand response, meaning EAFs can provide valuable services to grid operators without impacting the quality or safety of the steelmaking process.
Despite this potential opportunity, there is no getting away from the main challenge to scaling EAF capacity - the availability of scrap. According to estimates from Natixis, the scrap pool available to EAFs is only equivalent to 54% of current European steel output - insufficient to meet European steel demand.
Other routes to decarbonise European steel will have to be found.
Domestic H-DRI
Alternatively, steel manufacturers could replace the carbon intensive reducing agent used to produce steel, with a low or zero carbon alternative. The reductant is used to reduce iron ore pellets to produce ‘direct reduced iron’ (DRI), also known as ‘sponge iron’. Hydrogen-based direct reduction ironmaking (H-DRI) replaces coke or natural gas with hydrogen as the sole reductant of iron ore.
The H-DRI is then fed into an EAF and turned into steel by further processing it and adding carbon. Alternatively, the H-DRI can also be fed into a blast furnace in the form of "hot briquetted iron" (HBI). This significantly increases the efficiency of the blast furnace, reducing the use of coke while avoiding having to do away with the sunk cost of the blast furnace (see Stranded asset, or last mover advantage?).
Recall that the REPowerEU plan is targeting 10 million tonnes of domestically produced green hydrogen by 2030 and a further 10Mt of imports by 2030. REPowerEU also calls for around 30% of EU primary steel production to be decarbonised on the basis of renewable hydrogen by 2030.3
One of the biggest issues with producing green hydrogen in Europe is the energy mix (the proportion of renewables) and the energy intensity required. The inherent characteristic of solar and wind generation are their intermittency, and so significant investment may be required to compensate for this according to Natixis. If that is the case then green hydrogen may remain prohibitively expensive:
The alternative, which is a mix of using much larger electrolysers and/or increasing renewable capacity along with the installation of storage (battery for electricity and/or H2 storage) could make the project prohibitively expensive. For example, one could potentially need to install two or even three times the nominal capacity if a single source of intermittent renewable energy was used.
It’s why France has a point when it argues that hydrogen produced using nuclear should count as renewable, or at the very least countries with a high degree of reliance on nuclear should be exempt from certain rules on renewable capacity additionality. Under EU rules announced in February (Article 4 of the Delegated Act), hydrogen producers in regions where the power generation carbon emission intensity is lower than 18g of CO2e per megajoule can take electricity from the grid and offset their consumption with a power purchase agreement (PPA) for renewables. That could be a huge benefit to France, and to a lesser extent Sweden who will then be able to run electrolyser plants 24/7, without fear of intermittency, avoiding some of the issues outlined earlier that could contribute to higher costs.
However, as Natixis goes onto say, if the EU wants to meet the REPowerEU 2030 steel target then there needs to be much more investment in nuclear. That’s a big problem given France’s patchy nuclear performance in recent years, not to mention the considerable time and prospect for cost overruns involved in constructing new nuclear facilities. In the meantime, a greater call on nuclear and hydroelectric generation for hydrogen production may mean that power is diverted from supplying residential and industrial customers:
If the EU wants the H2 electrolysis to happen on its grounds then it will need to increase the capacity of low carbon baseload by at least 14.3GW by 2030 [the equivalent of] 14 1,000MW nuclear reactors. All in all, to decarbonise the industry the bloc needs around 27GW of low carbon baseload.
Low cost, stable green electricity generation is not sufficient for domestic green hydrogen production to be competitive. The second largest cost component of green hydrogen production is the cost of the electrolysis unit. The growth in electrolyser capacity is pivotal to Europe's decarbonisation ambitions if it wants to meet its REPowerEU target of domestic production. And as I outline in Carbon's shifting anchor, electrolyser costs are likely to follow Wright’s Law, whereby the technology follows a learning curve approach with the cost declining as a function of cumulative capacity deployment.
The other option is to import renewable hydrogen from countries with high renewable power generation potential and existing interest in hydrogen export projects. Countries such as Australia, Chile, Morocco, and the United Arab Emirates for example. Despite additional transport and conditioning costs, imports are likely to remain competitive versus domestically produced green hydrogen. According to projections by Aurora, transporting liquid hydrogen by ship from Morocco to Germany will cost €4.58 EUR per kg by 2030. This compares with the levelised cost of producing renewable hydrogen in Germany in 2030 between €3.90 and €5.00 per kg.4
Imported H-DRI
Historically, access to cheap affordable energy has been the main factor in determining the location of steel plants. Even better if there is a rich seam of iron ore lying close by. The latter has become less important over time as iron ore is shipped around the globe. The ore is then processed into DRI at the steel plant.
But there is no reason why this supply chain has to remain that way. Given the challenges outlined earlier in this article, perhaps the most likely way that the EU will decarbonise its steel production is by importing H-DRI from elsewhere in the world.
Countries with significant low carbon baseload power and ample supplies of iron ore will of course be vitally important. Brazil, South Africa, and Australia are blessed with ample supplies of iron ore, while also benefitting from access to low cost renewable energy in the form of hydro and solar. The H-DRI could be produced relatively cheaply from whence it can then shipped to Europe and other destinations requiring H-DRI to decarbonise their steel plants.
The other factor that is often overlooked is the availability of high grade iron ore. EAF DRI requires high-quality iron ore (DR-grade) with iron content of 67% and above. DR-grade iron ore currently makes up only about 4% of global iron ore supply, according to a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA). The need to decarbonise steel is expected to lead to an increase in demand for DR-grade iron ore, while also seeing an increase in innovation into techniques which mean that lower grade iron ore can be utilised, or less DR-grade iron ore needs to be processed.
Steel production is not particularly carbon intensive, at least compared with other metals. It is the sheer volume of steel produced each year that is the problem. And that means it’s too big to fail, it simply must be decarbonised if net zero targets are to be met.
In a perfect economic world in which countries are unconcerned about geopolitics, industrial activity would migrate to where there is a comparative advantage, with the supply chain responding to the price signals (commodity, energy, shipping and carbon, etc.) given to them. Splitting the green steel making industry along the lines described above is one such example.
Unfortunately, the steel sector has always been seen as a strategically important industry. This means that governments may well be hostile to the development of trade routes that increase the risk of destabilising an important steel making ingredient, or undermining the national sovereignty of their steel sector.
Nevertheless, I believe that the fragmentation of the green steel industry is probably the optimal way to achieve the decarbonisation of European steel. Over the next few years it will be important to watch out for H-DRI exporters announcing technological breakthroughs, followed by joint ventures between iron ore miners, hydrogen producers and steel manufacturers, and finally, potentially even trade deals with H-DRI at their core.
https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en
https://auroraer.com/media/renewable-hydrogen-imports-could-compete-with-eu-production-by-2030/