Energy to Decarbonising Industry

The issue of industrial decarbonisation is a key one for European competitiveness, as highlighted by Draghi in his Report. Yet wide differences between sectors, regions and production methods call for very specific solutions, and this makes planning wide-ranging policies at national and EU level difficult. However, if we step back and look at the bigger picture, there are some common principles that hold true across the board.

Process emissions, which are highly specific to each sector, only represent around a third of industrial emissions, according to UNFCCC inventory data. Two-thirds of emissions come from combustion processes, which are very similar across the board. These are emissions relating to the production of heat at various temperatures which is then used in the manufacturing process.

In the context of decarbonisation, there are a few technological options for producing heat. The main ones are direct electrification, green hydrogen, e-methane (and in general syn gases), and biofuels. CCS can in theory also be used to capture emissions, however it works much better on pure CO₂ streams (for example from process emissions) than on post-combustion flue gasses where CO₂ concentration is low and capture costs prohibitive. In addition, CCS potential is limited and should be applied as a priority to process emissions which cannot be reduced in other ways, such as in cement production.

Of these technologies, the one that offers cheaper energy prices is undoubtedly electrification. This is because green hydrogen and synthetic fuels require electricity inputs for production, meaning that the energy efficiency will be lower as production, transport and storage costs will be added to those of electricity itself, and therefore the cost will always be higher than that for electricity.

For instance, according to ECCO’s calculations, in order to produce the same energy output from a last generation heat pump (COP4) powered with 1kWh of renewable electricity, you would roughly need 6kWh if you use hydrogen as a medium instead of the heat pump, and 11kWh for e-methane, meaning 6 or 11 times higher energy input costs compared to direct electrification.

Renewable electricity direct use in industry demand will expand and continue to grow, driven initially by the high efficiency of heat pump in producing low and medium heat for industrial uses and subsequently by any direct use resulting more competitive than synthetic fuels. The use of more expensive hydrogen and e-methane will be reserved for high-temperature processes where using electricity is either impossible or so inefficient to absorb all the price advantage.

The role of biofuels will be marginal, both because their sustainable production is limited, their climate neutrality is questionable and their price is linked to that of hydrogen and e-fuel for which they are direct substitutes in high-temperature processes.

In a context where energy prices are a significant factor for competitiveness, it is clear that direct electrification will be the go-to option for the vast majority of manufacturers, whenever this is technologically feasible (initially for low and medium temperature heat). So, from a policy point of view, focusing on removing barriers to electrification is a no-regrets option, which would enable Italian and European industry to take the decarbonisation option that grants the lowest operating costs.

In order to achieve this, the first step is to accelerate the installation rate of renewable energy sources at competitive prices. This is underway in Europe, and Italy has set a target of 69% of renewable gross electricity production by 2030, but is lagging behind as in 2023 it only installed 5,8GW of renewable generation and as of September only 5,2GW in 2024, against a target of 10GW of RES a year. In addition, cumbersome authorization processes, the market design and regulatory and legislative uncertainty increase generation costs limiting electricity competitiveness for industrial uses.

The second element is the expansion and modernisation of the electricity transmission and distribution networks so that they’re able to handle the increased demand. Connected to this is the complex issue of balancing a system with high penetration of intermittent generation – this will require the creation of short and long-term storage and the development of demand response mechanisms. These are both crucial to ensuring that industry can benefit from a reliable supply of electricity without fear of disconnection.

Finally, there is the key question, already identified by the Draghi Report, on how to ensure that cost savings due to cheaper energy production from renewables can be passed on to consumers. Changes to energy taxation and tariff parafiscal structures are a part of the solution, but a different energy market design is needed to ensure this happens. Only then can electrification deliver a cheaper operating price compared to current fossil alternatives.

There is one further consideration to be made. For combustion emissions the process of electrification can happen quickly once the blockers are removed – even though not everywhere this will happen at the same pace, or will be possible, as for example high-temperature processes might need to rely on hydrogen, e-fuels or biofuels. However, for process emissions, the picture is more complicated as fossil fuels are sometimes used as feedstock, as is the case for chemical industries, so they cannot be replaced by electricity. In all these cases, reliance on oil or natural gas will last longer – until a technological solution is available at accessible costs, a new production process created, or the investment in alternative fuels is made. In some cases, this replacement will not be possible and fossil fuels will continue to be used with CCS technology.

Finally, it is important to underline that while the majority of industry electrifies and leaves natural gas, those who are forced to rely on it for longer will have to bear a progressively larger share of this infrastructural cost. The price of gas is burdened by a number of costs that relate to paying-off of the investment for the infrastructure built in the past. Any new gas infrastructure built now will impose an even larger burden, as they will need to be paid off by a smaller and shrinking pool of users. Thus, infrastructure such as the floating LNG re-gasifiers, the SNAM Adriatic pipeline or the methanization of Sardinia should undergo a rigorous cost-benefit assessment, to avoid burdening hard-to-abate industries with unnecessary costs, making them uncompetitive for many years to come.

In conclusion, the energy policies that Italy and the EU will pursue in the next few months and years are an integral part of the path to industrial decarbonisation and competitiveness. And while the specifics of industrial decarbonisation require careful consideration and a sectoral approach, it is already clear that the energy system needs to change its bias from favouring gas to favouring electricity. And while alternative green fuels have an important role to play, these are not real alternatives to electrification, but more expensive solutions that will only be deployed where electrification is not an option.