Steel industry – climate protection agreements could be the last chance

Berlin Energy-intensive industries such as steel, chemicals or cement will be under immense pressure in the coming years to make their production processes climate-neutral. The steel industry is particularly in focus. It represents the largest industrial CO2 source in Germany. If you start here, there is enormous CO2 reduction potential that is limited to a few locations.

As an efficient instrument for reducing CO2 emissions, climate protection contracts are available, which compensate companies for the additional costs of climate-friendly steel production. These additional costs are considerable: “The financial requirement for the climate protection agreements to transform the steel industry by 2030, depending on the combination of policy instruments, amounts to a total of 13 to 35 billion euros,” says an as yet unpublished analysis by the Agora Energiewende think tank, which is available to Handelsblatt.

A permanent refinancing mechanism of its own is required, “so that the industry receives investment security,” says the study. In addition, green lead markets would have to be set up parallel to the climate protection agreements, “which honor the added value of climate-neutral steel and establish it as the standard on the market”.

Basically, climate protection contracts, called Carbon Contracts for Difference (CCfD) in technical jargon, work like this: The contracts compensate for the additional costs of switching to climate-neutral processes. They can be used to invest in a new system, but also to offset higher operating costs. A CCfD is concluded between the public sector and companies. Agora Energiewende is convinced that climate protection agreements are “the right instrument to secure the additional costs of climate-friendly steel production”.

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The transformation of industry to climate neutrality represents one of the greatest challenges in their history for the companies concerned. They have to completely convert the processes based on the use of fossil fuels to new production methods based on the use of climate-neutral hydrogen or electricity from renewable sources. This requires billions to be invested in new systems and also leads to rising operating costs. Companies need support for both investments and running costs.

Steel industry: There is a risk of bad investments

The next federal government will have to deal with the issue. Time is running out. Because by 2030, the basic industry must have renewed a considerable part of its plant park because existing plants have reached the end of their service life: 53 percent of blast furnaces are in the steel industry, around 59 percent of steam crackers in basic chemistry and around 30 percent of the Cement kilns for reinvestment.

The problem: if investments should be made again in conventional technologies in the coming investment cycle, there is a risk of bad investments. That’s why companies need help – right now.

“A quick and pragmatic implementation of climate protection agreements” is therefore “an important and necessary step in tackling the transformation of the steel industry”, according to the analysis by Agora Energiewende. It is important “to create the framework conditions for suitable investment decisions as quickly as possible, since the downstream approval procedures and the plant construction require about three years”.

The decisions to promote investments and commitments to cover the additional costs during operation must therefore “be made at the beginning of the next legislative period,” says the study.

The Federal Ministry of Economics already mentioned the instrument of climate protection agreements in its “Steel Action Plan”, which was published last year; so far, however, no specific decisions have been made. The promotion of the production of climate-neutral steel has so far been based on pilot plants, a comprehensive concept that promotes the fundamental restructuring of production is missing.

The next federal government is therefore under pressure to act. The topic has made its way into the parties’ election manifestos. In its program, for example, the Union deals with the subject of contracts for differences. Green top candidate Annalena Baerbock had promised solutions based on the model of the difference agreements in the “industrial pact” she proposed – but with the requirement that the companies repay the aid from the public sector later.

Announcements for more climate protection are not enough

The industry is waiting for specific offers. Climate protection agreements are a key instrument to enable entry into the transformation, said Hans Jürgen Kerkhoff, President of the Steel Federation, the Handelsblatt. “Such climate protection agreements must be available from 2022, with sufficient financial resources, and go beyond a pilot program announced by the federal government,” said Kerkhoff.

Politicians know that time is of the essence. “The industry has been waiting too long for a viable funding program, announcements alone are not sufficient security,” said Dieter Janecek, spokesman for industrial policy of the Green parliamentary group, the Handelsblatt.

“Now it’s time to get out of the grand coalition’s sleeping car, we finally need a lot of steam in the boiler. That means: in terms of climate protection agreements, clarity and a concept, a schedule and the necessary implementation power. The election result holds a great chance for this, ”he said.

However, in the event that the Liberals participate in government, the subject is not free from the potential for conflict. When it comes to climate protection agreements, “the FDP is rather skeptical after its experience with the Renewable Energy Sources Act (EEG),” said Lukas Köhler, climate protection spokesman for the FDP parliamentary group, the Handelsblatt. “But it is good form among Democrats to first listen to specific proposals, if necessary,” he said. He is sure that in the event of government participation, good concepts can be developed so that Germany can become a climate-neutral industrialized country.

“European steel industry must start rapid transformation”

The steel manufacturers in Germany have announced extensive investments. However, the analysis by Agora Energiewende makes it clear that the announcements are not sufficient to completely replace the classic blast furnace route, which is based on the use of coal.

According to information from Agora Energiewende, 16 million tons of coal-based blast furnace capacity will reach the end of their service life by 2030. However, this is only offset by announcements of investments amounting to seven million tons of capacity for new, climate-friendly processes.

The new processes are based on the use of hydrogen. The iron ore is reduced in direct reduction plants. Only water vapor is produced as a process gas, no CO2. The end product of the so-called hydrogen route – in contrast to the coal-based blast furnace route – is directly reduced iron (DRI), which is melted into steel in an electric arc furnace.

Speed ​​is of the essence for change to take place in Europe: “There is a risk that the direct reduction of iron will not take place in Germany or elsewhere in Europe. The European steel industry must now start a rapid transformation so that this part of the value chain can be maintained, ”said Frank Peter from Agora Energiewende. Politicians will have to “massively support” this process.

Blue hydrogen will also be used

The climate-neutral hydrogen that steel companies rely on for the hydrogen route will be scarce and expensive for years to come. As an alternative, companies will initially have to use natural gas instead of hydrogen. “By operating with natural gas, a large part of the CO2 emissions is quickly reduced at moderate costs until natural gas is replaced by an increasing supply of renewable hydrogen,” says the analysis by Agora Energiewende.

The Agora experts also recommend flexibility when using the hydrogen itself: As long as there is not enough hydrogen available, which is produced using electricity from renewable sources through electrolysis (“green hydrogen”), the process can be “through the use of CCS-based Hydrogen can be accelerated ”.

CCS-based hydrogen, also known as “blue hydrogen”, is created when hydrogen is produced in the conventional way by means of steam reforming on the basis of natural gas and the released CO2 is permanently stored underground (Carbon Capture and Storage, CCS for short). The method is controversial.

The analysis is largely based on findings that Agora Energiewende has gained in workshops with business, science, ministries and subordinate authorities. The Wuppertal Institute, Futurecamp Climate and the Ecologic Institute contributed to the analysis.

More: Companies demand reliable investment conditions

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