ARE WE WILLING TO PAY THE COST OF DECARBONIZATION?

During 2021 BloombergNEF published an article about Sustainable Aviation Fuels, know as SAF. In a nutshell, the article exposed a crude reality, even having projects to implements SAFs, they are today between 2.5 and 8 times more expensive than traditional Jet Fuels.

We are working in several Decarbonization projects helping companies to build their own net-zero carbon roadmaps for 2050 or sooner. One topic is common to everybody and cross-industry, this is the balance between quickly decarbonize the assets and operations, Scope 1 and 2, supply chains and others, versus make some profit or at least a break-even in the process. The issue right now is that Energy Transition, even if not new, became more relevant in the last 2 years with Governments (mainly in Europe) major Energy corporations (like ENEL, TOTAL, BP, Shell, Repsol, ENI, etc) and several investment funds (like Blackrock or Lazar to name few) are putting the topic in the agenda, pushing for decarbonization in order to reduce the impact on Climate Change. And of course, we celebrate that, we all should.

What really happens is a clash of titans, in one hand you have a massive amount of companies (more and more every day) looking how they can be net-zero, not only because it is something good for the planet and the population in general, but also because the investors and consumers are every day more conscious about the power of choosing a “carbon neutral” product, service or investment, and this is generating a big push on that direction. In the other hand, we have also a considerable number of companies, some of them more “Energy Transition Ready” than others, offering a wide variety of solutions and technologies to tackle the issue. Still, and according our experience in the past 2 years, there is still a big question about what is the best way, what is the best technology, what is the best roadmap? Not easy to answer.

This, in part happens, because not all the available technologies are at the same level of “technology readiness” or TRL, and this is a quite important point. Let us explain better with a real life case. Let’s suppose for a minute that you are Susan, the General Manager of an utility company (that generates electric energy for certain Industry or city) with a thermal power plant where Susan has a gas turbine burning natural gas (pretty common example by the way). This is clearly an asset (the gas turbine generator) that produces CO2 emissions as products of the combustion. Then, in a very short period of time, the Board is asking Susan to prepare a plan to decarbonize the asset, because even having renewable energy available in the world, this specific power plant it’s necessary in order to provide back-up power, peak sheaving and grid frequency stability (very important in terms of renewable energy adoption). Doing some research, Susan and the staff contact a well-known consulting firm, some OEMs (Original Equipment Manufacturers, could be the company that designed and manufactured that specific turbine in the first place) and other technology providers, Susan starts putting on paper what could be the solutions and potential scenarios for the next Board meeting. (by the way, let’s suppose also that this time someone from Lazard asset management that is one of your major shareholders, it’s coming to the meeting, oh my goodness this is becoming serious really fast).

Soon, Susan discovers that this could be solved in mainly two ways, one is what we know as pre-combustion solutions (replacing the natural gas by Hydrogen for example) in such case this company changes the fuel, and the combustions products will not generate anymore carbon emissions (extreme simplification sorry). The other alternative is, post-combustion solutions (generally known as CCUS) in such case Susan keeps burning the natural gas that is cheap and available, but capturing the Carbon Emissions after the combustion happens in the turbine, and preferably doing something with that Carbon (purify, store, use as raw material for other process, etc, Susan is already calling an Synthetic Fuels company in Europe to explore the case). But Susan faces the complexity of the task, all these solutions, even if technically speaking are all feasible, there are not at the same level of TRL, and this brings time and cost implications.

For example, using Chill Ammonia Process (CAP) to capture the CO2 post-combustion it’s something well known (TRL 9, proven) already used several times and not that difficult to implement. Still, is not applicable for any case or situation. Replacing natural gas by green hydrogen (green hydrogen is the one we obtain using renewable energy sources to feed an electrolyzer that separates the hydrogen and oxygen from water, producing hydrogen) it is feasible because TRL should be 7 or 8 but the cost of the two solutions are quite different. Producing green hydrogen is, given or take, 3-4 times more expensive per ton than producing blue hydrogen (blue hydrogen is the one we obtain using natural gas as raw material, and separating the hydrogen and carbon producing hydrogen and capturing the carbon) and even more expensive than the natural gas as today prices (still, some analysis shows that green hydrogen will be cheaper than blue at 2030). In the other hand, applying a CCUS technology will still use natural gas but capturing the carbon emissions, with also some implications regarding the final destination of the Carbon, technology to use (yep, we don’t want to overcomplicate Susan’s life but there are different technologies each with pros and cons) or find the reservoir we will use to store that that carbon.

And then, we have the economic situation, both technologies can be somehow compared in order to understand what is better (in terms of USD/ton of CO2e avoided for example). Coming back to our example of the thermal power plant, this is what Susan and her staff should do. This is not an easy task, because most of the times this will involve several technology and engineering companies, that each is trying or pushing to be the selected one. So all rest on your shoulders Susan, the person in charge of putting together the decarbonization plan for the Board. This is a complex, multivariable and multi-scenario analysis, that only few companies are assigning dedicated resources, making the task even more challenging or time consuming.

Finally, after several months of hard work, Susan has something to present in the next Board meeting. But, in order to add another layer of complexity, the Board is asking Susan before the meeting to think this decarbonization plan economically self-sustainable, or profitable if possible. As we saw the cost of wind energy and solar PV decrease year over year with deeper worldwide adoption, making them more competitive vs thermal power plants, and in some cases (according oath recent study) even including battery energy storage (to equally compare apples to apples, as the availability of the wind or solar is not the same than a thermal power plant) we are sure that we will see decreasing big time the cost of electroayzers and hydrogen in general soon as well as other CCUS technologies. This will make a huge impact on decarbonization plans and roadmaps during the next 5 years. There are also technologies that could be more effective and cheap than current ones, but are still at TRL 4 or 5, so will need 2-5 years with the right funding to reach TRL 9.

And, this is the complexity of the decarbonization journey we were mentioning at the beginning of the article and after several months Susan and the staff also realized, because we have different roles to play. This company of the example, eventually can implement solutions today that are costly (and let us be clear, most of the solutions to decarbonize, other than offsetting, will take 1 or 2 years from design to construction even using technology at TRL 9 so better start early) and most probably not even break-even, but they will be doing something impacting about climate change. This early adoption they could do will also promote the use of these technologies and help to decrease the cost by increasing the scale (let us call it the active role). They can keep analyzing potential solutions and screening them until the point, that are self-sustainable in terms of cost, as happened with the renewable energy in some countries without subsidizes (let us call it the “wait and see” role). They can use (or push for it) economic incentives like tax-reductions, advanced amortization, carbon taxes, carbon bonds and subsidizes to speed up this process, or a combination of the different options. Finally, they can do nothing, not doing any research or analysis and waiting that magically the issue will be solve somehow (let us call it the sleeping role). In our example, Susan was finally able to find a specific consulting firm that helped her and the team to build a solid decarbonization plan using different available technologies, leveraging the experience of the OEM in the energy transition, wrapping all with carbon bonds and green financing and finally got the FID to move ahead in 2024 with the commitment of her main customers, to pay a higher energy and service tariff for a net-zero solution from 2024 and beyond, well done Susan!