Energy transition: mission (im)possible for industry?
October 2017 | Occo Roelofsen, Arnout de Pee, Eveline Speelman, and Maaike Witteveen
From 1990 to 2014, industrial companies in the Netherlands lowered their greenhouse gas (GHG) emissions from direct operations by 32 percent—three times as much as other sectors of the Dutch economy.
Were this trend to continue, the sector would reach the EU’s intermediate goal of cutting GHG emissions 40 percent by 2030 well before that year. Sustaining the recent rate of emissions reduction won’t be easy, though. Industrial companies have reduced their emissions of GHGs other than carbon dioxide by about 70 percent, yet their carbon dioxide emissions remain significant (67 million metric tons in 2014 or over 40 percent of Dutch CO2 emissions). Many of the new, or yet to be developed, technologies may be expensive or difficult to implement.
Exhibit 1: Majority (40 Mton) of industrial CO2 emissions are for heating
Source: Manufacturing Energy Consumption Survey (2013); National Inventory Report (2016); expert interviews; CE Delft Denktank energiemarkt Industrielewarmtemarkt 2013; expert interviews
When assessing decarbonization options, industry needs to understand their technical feasibility, effectiveness, costs, and benefits, including impacts further up and down the value chains—and do this amid uncertainty about factors like the future prices of different forms of energy. To provide some initial answers, we analyzed and compared the options likely available to Dutch industrial businesses. The results of our study point to a comprehensive program for implementing options in a manner that may create value for industrial companies, as well as for the Netherlands as a whole.
Our primary findings are as follows:
Decarbonizing industry 60 percent by 2040 will cost approximately EUR 23 billion
- The Dutch industrial sector can lower its carbon dioxide emissions by 60 percent by 2040 compared to 1990, and 80 percent by 2050, which would be consistent with the European Union’s goals of an 80 to 95 percent reduction by 2050. This reduction can be achieved without reducing industrial output.
- The total cost of decarbonizing the Dutch industrial sector would be approximately EUR 21 billion to 23 billion, between now and 2040, which is consistent with our previous findings. About EUR 6 billion would be spent on capital investments, and the remaining EUR 17 billion would cover increased operating costs (at current commodity prices).
- Under current commodity and technology prices, only about 20 percent of investments have a positive business case. This assumes that the cost of carbon emissions ranges between -10 and 300 EUR per ton avoided CO2.
Decarbonizing industry 95 percent is also possible but more costly
- It is technically feasible for the Dutch industrial sector to lower its carbon dioxide emissions by 95 percent by 2050 compared to 1990, also while keeping industrial outputs at current levels.
- The cost of decarbonizing the Dutch industrial sector by that much could be as high as EUR 71 billion between now and 2050. About EUR 24 billion comprises capital investments, and the remaining EUR 46 billion pays for higher operating costs (at current commodity prices). If energy prices fall from their current levels, the total cost could be closer to EUR 36 billion.
- Aiming for 95 percent reduction will see fewer investments with a positive business case (under current technology and commodity price outlooks). More investments become financially viable as the price of carbon increases.
Want to read the full research? Download the complimentary PDF below (56 pages).
A portfolio of different decarbonization measures will be needed
Industrial CO2 emissions (45 Mton direct and 22 Mton indirect) in the Netherlands now consist of ~10% process emissions, ~30% electricity-consumption related emissions, and ~60% of emissions related to heat production.
Reducing process and heat production emissions will require the application of multiple decarbonization options at once: efficiency improvements; electrification of heat production; change of feedstock (e.g. switch to bio-based); changes in demand by increasing reuse, remanufacturing, and recycling; changes in the steel production process; and carbon capture and storage or usage. Together the selected combination of options could reduce direct CO2 emissions by 20 million metric tons by 2040. Overall, this would lead to a reduction of CO2e of 60% by 2040 compared to 1990. Of course application of different combinations and contributions of the individual options is also possible and may turn out to be more economical over time.
Exhibit 2: Six ways to move industrial decarbonization forward – reaching 60% by 2040
Source: Centraal Bureau voor de Statistiek (2014), “Energiebalans” and “Energieverbruik” databases, National Inventory Report (1990-2014)
- Efficiency improvement (2 Mton or more)—Most ‘quick wins’ for energy efficiency have been captured. There is still further gain possible as some of the other options go hand-in-hand with efficiency improvement. For instance, electric heat-pumps for low temperature offer an efficiency increase of at least 50 percent.
- Electrification of medium-and high-temperature heat generation (11 Mtons by 2040, up to 17 Mton by 2050)—Electrification of heat production will play a major role in decarbonizing Dutch industry under any scenario. Some electrification measures are ready to implement such as hybrid or dual-fuel systems to generate medium temperature heat (100+ degrees Celsius). Other measures would benefit from targeted research and development or further commercialization. These include the development of heat-pumps capable of producing medium temperature heat and development of electric furnaces to provide high temperature heat (400+ degrees Celsius) for refining and ethylene production. Also production of hydrogen would benefit from innovation to bring down cost levels. In the longer run, the hybrid or dual-fuel systems could then switch to electricity and hydrogen instead of electricity and natural gas.
- Change of feedstock (0.5 Mton)—Through using bio-based feedstock for chemical production processes (e.g. ethylene and specialty chemicals production), both production and downstream emissions can be tackled. The first technologies to do so are around, but would benefit from further innovation and scale up to make them more economical. Likewise, for ammonia production, hydrogen produced from electricity and water can be used as feedstock, replacing natural gas. However, electrolysis technology (replacing the current steam methane reforming) is far from cost competitive and would thus benefit from innovation in combination with lower electricity prices.
- Change in demand by increasing reuse, remanufacturing or recycling (approximately 1 Mton)—Increasing reuse and recycling would reduce local, and perhaps global, demand for certain products (e.g. ethylene-based plastics, steel). This would directly lower the carbon emissions resulting from production of those goods. This option would thus reduce industrial output of e.g. virgin plastics as such.
- Change in the steel production process (approximately 3 Mton)—Steel production in the Netherlands could be decarbonized in several ways that resemble other options: changing the feedstock and fuel source (e.g. using charcoal fed blast furnaces, setting up a Direct Reducing Iron–Electric Arc Furnace process fed with iron ore and powered by biogas or hydrogen instead of coal, increasing recycling of steel by using scrap in Electric Arc Furnaces, or applying carbon capture and storage (which would require a switch to the so-called HIsarna process). These are all major decisions. For this report, we have assumed that by 2040 half of the Netherlands’ current steel production would switch to a low- or zero-carbon option, equivalent to the output of one of the 2 existing blast furnaces.
- Carbon capture and storage or usage (CCS/CCU) (approximately 3 Mton)—Carbon capture can be used to reduce any emissions that cannot be eliminated by other means. At the capital investment costs which are currently associated with many decarbonization measures, and more importantly with commodity prices (with electricity power being more expensive than gas), carbon capture and storage seems more economical than several alternatives for decarbonization.
The majority of the (indirect) emissions related to electricity consumption (resulting from using gas or coal for power generation in the power sector) will have to be reduced through installation of renewables. Theoretically, industry’s use of electricity generated from renewables (in the power sector) would lower CO2 emissions by 16 million metric tons. Given an ambitious penetration level of 80 percent for renewables - as per our previous report-, 10 million metric tons of emissions (60%) from current electricity use and 11 million metric tons of emissions (100%) from added electricity use would be abated. This means that ‘greening’ the Dutch electricity supply represents an impactful and necessary means of decarbonizing industrial emissions. All in all, this would reduce direct industrial CO2 emissions by 25 to 50 percent.
The cheaper route: 60 percent decarbonization by 2040
At current cost levels, the cheapest route to decarbonize industry by 60 percent by 2040 would involve a combination of energy efficiency, electrification, and CCS/U. We estimate that a capital investment of EUR 9 billion would be needed, along with an increase in operational expenses of EUR 12 billion. Overall, the additional cost would be approximately EUR ~20-25 billion over 20 years, though the actual cost would depend greatly on the pace of technological improvements that could reduce capex and commodity price differentials, potentially reducing operational expenditure.
The steeper route: 80 percent decarbonization by 2040 and 95 percent by 2050
Upping the ambition level to reach 80 percent reduction in 2040 and 95 percent by 2050, is possible even with current and expected near-term technology. It would, however, involve applying more expensive decarbonization options sooner, mainly in two areas: more extensive electrification, through application of electric furnaces in refining and ethylene production; and more extensive use of CCS in refining and chemicals. These methods would reduce emissions 80 percent by 2040 compared to 1990 (32 Mton of direct industry emissions). The estimated cost of this approach is EUR ~55 billion.
Exhibit 3: Under current commodity prices, it would cost EUR 55 billion to reduce industrial emissions with 80% compared to 1990
Source: McKinsey Energy Insights team analysis
Implications for the broader energy system
- A shift from fossil-based electricity generation to renewables is needed. This would lower current electricity-related industrial emissions of 16 million metric tons CO2e to 6 or even 0 million metric tons.
- Increasing the roll-out of renewables would be needed to enable proposed electrification of industry (electricity demand increases from 118 PJ (excl. cogen) in 2014 to 340 up to 560 PJ in 2040). Towards 2040 industry would account for about two thirds of the projected power demand increase. It would also have significant implications for utilities, for the power grid, and for other elements of the national energy infrastructure: 6 GW of renewable generation would be needed on top of the 58 GW calculated in our previous report.
- The electricity price will have a major influence on cost effectiveness and feasibility. The development of the Dutch power system over the coming years, and the resulting energy prices and changes in the availability of low-carbon energy sources, will have a major influence on the feasibility and cost effectiveness of industrial decarbonization. It will also determine further technology choices and affect industry’s international competitiveness.
- Many business cases hinge on these commodity price outlooks. De-risking is needed to make the investment choices required.
- Over time, a diversification of supply may be needed to meet baseload industrial renewable energy demand more effectively. Increased application of hydrogen can play a role here (either through use in hybrid or gas boilers, or for back up power generation).
A way forward:
Given these conditions, and the long horizons that most industrial companies use to plan their capital spending, it will be advantageous to develop a comprehensive (master) plan for decarbonization (incl. energy system design), and to begin developing and implementing each of the six decarbonization measures in the near term.
Getting a fast start will increase the likelihood that industrial companies will have effective decarbonization options to choose from as they adjust to changes in the energy system, and thereby stay on track to meet their long-term emissions reduction goals. Moreover, in some – if not all – areas advancing decarbonization more quickly can help ensure that industry remains competitive over the long term.
It is a delicate balance however, as the uncertainty about the future (costs) of the energy system is high (and those costs have an enormous impact on the operational cost development of many of the options), waiting might be economically beneficial. A plan for industrial decarbonization thus needs to be flexible enough to enable industry to pursue and invest in options according to the conditions and trends that actually unfold.
 In our previous report 'Accelerating the energy transition: cost or opportunity?', we estimated that the total cost of lowering GHG emissions from industry by less approximately 50 percent by 2040 would be in the order of EUR 20 billion. This is consistent with our current findings, where we use a slightly steeper decarbonization path (60% by 2040).
 These indirect emissions include 6 Mton of CO2 emissions from steel production. Application of renewable electricity supply would only partially reduce these emissions. Hence we here include 16 Mton of emissions.
About the authors
Occo Roelofsen is a Senior Partner, Arnout de Pee is a Partner, Eveline Speelman is an Engagement Manager, and Maaike Witteveen is a Specialist in McKinsey's Amsterdam office.
ENERGY DEMAND INSIGHTS