Over the coming decades, the energy transition will drive the substitution of fossil energy sources by renewable ones. The material transition will inevitably follow, aiming to replace fossil-feedstocks for sustainable (carbon) feedstocks. In the first article of a larger series, we discuss the impact of the energy transition on industrial hubs.
By: Niels van Buuren, Lucas Prat, Peter Daemen, Rowan Huisman
17 November 2022
Across the globe, manufacturing activities that produce, transport, and/or consume large amounts of energy are typically concentrated in major industrial hubs. These industrial hubs represent the main source of CO2 emissions and play a key role in decarbonizing our energy system. For example, in Germany, the six largest industrial hubs emit nearly 40% of the country’s total industrial emissions. The energy and feedstock transition – to achieve climate and energy security goals – presents a major transformation challenge for industrial hubs in the decades to come. In this article, we discuss the impact on industrial hubs associated with the energy transition specifically. We will outline potential responses to key threats and opportunities, as well as the characteristics of successful industrial hubs of the future.
This discussion will help inform decisions to retain a vital industry in a global competitive market during the transition. Maximizing scale and integration will be key to reduce the overall cost of energy and increase the resilience of the system. Companies need to look beyond the boundaries of their current production sites, technology, and value chain flows. Master planning and collaboration on a hub level is essential to justify large scale and long-term investment decisions in new energy infrastructure and assets.
We distinguish three archetypal functions for industrial hubs in the energy system. A hub will in reality represent a combination of these functions, with one function often being dominant.
Energy supply hubs: hubs that are located where energy is produced (where production is cheapest) and then exported to other locations. For example, the Middle East features many supply hubs due to the large volumes of low-cost crude oil production.
Energy trading and distribution hubs: hubs that import, store, convert, and distribute energy to other locations. These hubs are often located in ports with deep sea access, large tank storage facilities, and excellent pipeline, rail, and road connections to other hubs. The Rotterdam hub, for example, is predominantly a trading and distribution hub, since around three quarters of crude oil volumes that pass through are transhipped to other locations (globally and mainland Europe).
Energy demand hubs: hubs that have energy intensive manufacturing activities that require vast amounts of energy to produce fuels, chemicals, and other materials (e.g., steel, cement, fertilizers, etc.). For example, the Ruhr area in Germany.
The energy transition is already having a major impact on industrial hubs.
1. Fossil energy will be phased-out, reducing the demand for export, import, storage, and distribution of cryogenic and solid bulk materials, with solar and wind displacing coal and natural gas for power generation purposes. This leaves power generation and storage sites underutilized in major industrial hubs.
2. Energy demand will electrify, structurally reducing the demand for transport and heating fuels. While there is growth in other liquid bulks (e.g., chemicals, bio- or e-fuels), this will not fully offset the effect of electrification. As a result, this structurally affects supply hubs that export crude, distribution hubs that transport (and convert) crude oil and fuels, and demand hubs that produce fuels.
3. Supply competitiveness will shift from locations that have cost advantaged production of oil and gas (e.g., Middle East, Russia, North America) to locations that have most favourable conditions for renewable energy (e.g., Africa, Middle East, US, Australia, Chile).
4. ‘Distance disadvantage’ increases as the cost of long-distance transport of energy is higher for hydrogen (and derivatives) compared to crude oil and natural gas. To illustrate, the cost to transport crude oil typically represents less than 10% of the product price vs. more than 25% to transport hydrogen derivatives (depending on modality and distance).
5. System complexity increases, moving away from a energy value chain that is dominated by crude oil and natural gas, which are highly efficient and versatile inputs for fuels and chemicals production. In the future, these will need to be replaced by a mix of sustainable feedstocks (bio-oil, pyrolysis oil, green methanol, green hydrogen and derivatives) that are less efficient to convert into end-products and require more spaceand energy.
Major industrial manufacturers who consume large amounts of energy and in particular need hydrogen to decarbonize (e.g., fertilizer, refining, chemicals, and steel companies) will consider relocating (part of) their value chains to locations with lower energy cost. Recently, the world’s biggest chemicals company, Germany-based BASF, announced that it will have to downsize “permanently” in Europe, with high energy costs making the region increasingly uncompetitive.
Winning locations will have – a combination of – lowest cost energy from renewable sources, established energy infrastructure, and supply of sustainable carbon and/or other feedstocks (e.g., iron ore for DRI sponge iron or green steel production and biogenic CO2 for sustainable aviation fuels or green methanol production). For example, the greater Houston area in the US, Middle East, Northern and Southern Europe, Australia, Africa and South America are likely candidates for relocation and expansion of industrial activities.
Companies active in industrial hubs may adopt different strategies.
Energy supply hubs built on competitive crude oil and natural gas production, can deploy carbon capture and storage (CCS) to decarbonize local energy. It can serve the increasing demand for low-carbon products, which is driven by climate goals, policies, mandates, and subsidies globally. These hubs can use nearby storage in mature exploration and production assets (e.g., empty gas fields, caverns, etc.) such as for example, the Porthos and Northern Lights projects in the North Sea for subsurface CO2 storage. Low-carbon products such as blue hydrogen and blue ammonia can serve as a cost-effective mid-term solution, until green alternatives become available at large scale. Subsidy support, such as the Dutch SDE++ and the United States’ IRA measures create a head-start in implementing this strategy.
Energy supply hubs near lowest-cost wind and solar resources can expand their role and export green hydrogen and/or derivatives (e.g., ammonia and/or methanol in case a source of biogenic CO2 is available). In addition, they can use local energy intensive industrial activities as a launching pad for growth (early hydrogen off-take) and attract new activities. For example, in Mejillones, Chile, competitive green hydrogen will be produced from world class solar resources to decarbonize copper mining (e.g. hydrogen haul-trucks) and to convert to green ammonia and green methanol for export. The port of Sines in Portugal is another example of an industrial hub that is taking steps to build a green energy supply position. Power2X, for example, is currently co-developing a 500MW green hydrogen and ammonia project (currently in pre-FEED) here, with a target commercial operation date in the mid 2020s.
Energy trading and distribution hubs. These hubs will be severely impacted by the energy transition in case they are not located near low-cost renewables resources due to their ‘distance disadvantage’ (i.e., most major industrial hubs across Western Europe). While bunkering fuels and sustainable aviation fuels may represent growth areas to mitigate part of the decline in demand for other liquid fuels, further action is still required. These hubs will need to position themselves strategically in new (green and blue) molecule value chains: Short-term they should secure green and blue hydrogen and ammonia. Longer-term, they should secure access to sustainable carbon molecules to maintain their position as trading hubs for low/biobased/circular carbon to be used for local processing and conversion to high-value end-products. New energy infrastructure for green electrons and hydrogen, biogenic CO2, green ammonia, green methanol will be essential for local use as well as for connecting to other hubs they currently serve with crude and other products. Existing industrial sites e.g., storage sites for coal and crude oil, could be repurposed for other activities as they become less and less utilized. For example, Power2X is currently working on the conversion of major industrial brownfield sites for the potential large-scale production of blue hydrogen.
Energy demand hubs. These hubs are typically more inland and likely disadvantaged to produce green and blue molecules due to lack of access to competitive renewable resources and carbon capture options. For these hubs, it is critical to repurpose existing infrastructure or build new infra to secure low cost access to green electrons, green hydrogen and derivatives, and to sustainable carbon molecules. When repurposing successfully, the additional cost of the pipeline infrastructure can be kept under control, limiting the aforementioned ’distance disadvantage’. For example, the Ruhr can repurpose existing natural gas pipelines to reduce transport costs from Rotterdam Nevertheless, hubs with a relatively singular demand focus will likely have to resolve their decreasing competitiveness to avoid local manufacturing industries leaving. Large-scale and integration remains key: Industrial off-takers will only convert their assets towards the new energy transition fuels if they have certainty of baseload hydrogen/ammonia at a defined price. For example, Power2X is currently working on a project to produce green and/or blue methanol at world scale size. This project integrates waste flows from nearby sites as feedstock and combines it with green/blue hydrogen and biogenic CO2 to create optionality and increase competitiveness.
The key take-ways for industrial hubs to thrive in the energy transition:
Scale matters: scale has been a key driver for the historic success of industrial hubs and is expected to remain so in the future. Alternatives to oil and gas (beyond wind and solar power) are likely to remain cost disadvantaged in the years to come. Building world scale plants will be essential to realize lowest possible cost throughout the value chain. Large hubs can pool sufficient demand use their existing infrastructure and position themselves in international commodity flows to gain a ‘head start’ in shaping the new energy system to their advantage. For example, accessible financing in offshore wind during early 2000’s enabled large capacity additions, lowering cost of capital from double to single digits and ultimately roughly halving wind LCOE.
Integration is key as the future will be more complex. The transition gives rise to different options that win in different scenarios of commodity prices, regulatory developments and demand volumes. Creating the optionality between grey, blue and green feedstocks, fuels, and production output will be key to creating value and de-risking investments. This typically requires integration with neighboring sites for feedstock and energy supply (e.g., from waste heat and residual gas flows). Integration will also reduce operational cost and capital investments. For example, RWE’s recent win of the Dutch offshore wind tender is an example of how system integration is becoming the norm for new energy projects: maximizing the potential from green electrons through electrification, storage and molecule production (green hydrogen).
Master planning is essential: a proactive approach to the energy transition is essential for making the right timely decisions, and for securing access to scarce commodities at large scale and competitive prices. New energy flows require more space, infrastructure, energy and more fragmented processing. It is therefore essential that we collaborate to prioritize the highest value industrial activities, coordinate investments to maximize value of advantaged locations, and align on timelines to optimize the future energy and feedstock system.
New winners will emerge: new greenfield hubs will emerge in locations where the sun and the wind generate lowest cost green electrons and hydrogen, biogenic CO2, green ammonia and green methanol. These greenfield hubs will either export such lowest cost green fuels and feedstocks or attract energy-intensive manufacturing. Hence opportunities exist in North and South Europe and North Africa to attract new industries that can compete in the global market whilst securing supply for Europe. In the earlier-mentioned example, Germany-based BASF seems to have concluded Europe’s high energy costs will make the region increasingly uncompetitive. Will European steel conclude the same?
So a question for the reader: “What will be the winning play: reinventing the established, or bolstering the new?”