A Conversation with Lorenzo Carnelli, CEO, Board Member and Shareholder, FRIEM S.p.A.
Dr. IVO PEZZUTO ??
Professor and Author | Founder & Chairperson @ Ivo Pezzuto Forward-Thinking Lab | Member of the Board of Advisors @ ThoughtLab (New York)
Article written by Ivo Pezzuto
In this part of the “Forward Thinkers' Talks” series I discussed with Lorenzo Carnelli, CEO, member of the board of directors and shareholder of FRIEM S.p.A., what many consider a promising, scalable and sustainable energy source of the future, namely clean hydrogen.
FRIEM S.p.A. is an Italian company founded in 1950 and headquartered in Segrate (Milan), Italy, specialized in the design and production of electrical converters for special applications. It is among the top 4 players worldwide in its own niche market. This seventy-year-old family business is rapidly evolving and pursuing bold and environmentally friendly growth strategies in the global electric energy converter market.
The company has fully embraced the clean energy transition and is strategically committed to supporting decarbonization goals using its power converters for hydrogen electrolysis and fuel cells. In fact, it holds a central position in the green hydrogen supply chain between renewable energy producers and end users, both in the power-to-gas and gas-to-power processes.
The company is “de facto” a born-global firm with over 90% of its revenues made abroad and business operations spread out across five continents. As declared by the company, the world is its marketplace thanks to its international presence in 27 countries and its strategic subsidiaries located in geographical areas such as the US, Brazil, Chile, Germany, and Indonesia, where a commercial office is based.
The power converter market
The demand for power converters is driven by the global transition towards renewable energy sources like solar and wind energy and by increasing demand for energy efficiency (Business Research Insights, 2024). As the world transitions to renewable energy sources, there is a growing need for power converters that can convert energy from these sources efficiently (Business Research Insights, 2024).
Energy-efficient power converters contribute to reducing the overall carbon footprint by minimizing energy losses in the conversion process (Allied Market Research, 2024). The power converter market is also significantly influenced by favorable government legislation and by subsidies that encourage the use of renewable energy sources (Business Research Insights, 2024).
Renewable energy and electrification (i.e., electric vehicles and charging stations) will mainly drive market growth but even industrial automation and robotics will play an important role in this emerging global trend (Yole Group, 2023).
In addition, a consolidation of the energy converter market’s supply chain is redefining the competitive environment and affecting in particular the high-power converters segment of the market. A trend towards vertical and horizontal integration, driven by several mergers and acquisitions and by firms’ effort to create synergies between their different applications, is also contributing to reshaping the industry.
Furthermore, companies are also adopting horizontal integrations to expand their product portfolios and to leverage on existing know-how and organizational capabilities (Yole Group, 2023).
The entire supply chain is also aiming to reduce the CO? imprint to improve differentiation; comply with green transition regulation and get an additional advantage in the market against competitors (Yole Group, 2023).
FRIEM S.p.A. operates in a niche market which is strategically focused on the green hydrogen segment. As shown in the following figure, the projected growth trend of electrolysis capacity for the period 2020-2030, which is required for green hydrogen production, is quite impressive.
Recently, increases of more than 40% in the production volumes of low-carbon and renewable hydrogen have been announced for the period up to 2030 (McKinsey & Co., 2023a). Thus, if these estimated projections materialize there will be a very promising growth trend for the green hydrogen production capacity in the future and a very attractive growth opportunity for firms operating in this space, and in the global power converter market.
Cumulative Electrolysis Capacity
Direct Hydrogen Investments until 2030, $
Furthermore, the research findings of a study of 2021 undertaken by McKinsey & Co., titled “Hydrogen Insights” (McKinsey & Co., 2021) also support the growing attractiveness of the green hydrogen market.
In fact, they have estimated that falling renewable hydrogen production costs will lead to a break-even with grey hydrogen before 2030 in optimal regions for renewable energy sources.
This will be achievable thanks to lower electrolyzer CAPEX requirements by 2030; faster scale-up of electrolyzer supply chains; declining levelized cost of energy (LCOE), and by higher electrolyzer utilization levels. All these improvements may be achieved with the centralization of production; the use of a better mix of renewable energy sources, and with an integrated design optimization (e.g., oversizing renewables capacity versus electrolyzer capacity for optimized utilization) (McKinsey & Co., 2021).
Hydrogen Production Costs by Production Pathway
Electrolyzer Capex Learning Rate Scenarios
Recently, even the discovery of vast deposits of white hydrogen in multiple countries (i.e., natural, or “geologic” hydrogen) has sparked excitement for the potential pivotal role of this energy source in the pathway toward carbon neutrality targets. In fact, as a clean, affordable, and renewable energy source, white hydrogen is a potential “gamechanger” for the success of the global energy transition strategy (Symons, 2023).
The interview covers the following topics:
? The green hydrogen supply chain
? Green hydrogen production and the use of renewable energy for electrolysis
? The electrical converters industry
? Green hydrogen for the pursue of the 2050 climate neutrality goals
? Green hydrogen, decarbonization and energy independence
? Embracing green hydrogen as a “sustaining innovation” strategy
? Battery storage, electric mobility, and the renewable energy market
? Horizontal integration and the goal of seeking synergies in the production
process
? REPowerEU Plan, European Green Deal and energy transition
? Energy policies for the sustainable development of renewable energies
sources.
? Green finance, sustainable finance, socially responsible investing (SRI) and the role of institutional investors in green finance.
Q&A
Ivo Pezzuto: Lorenzo, your family business, FRIEM S.p.A., has been ranked among the top four global players in the business of current rectifiers for the large electrolytic industry and a relevant player in the green hydrogen supply chain. How did a medium-sized company manage to become an emerging international player in the electrical converter industry, and more recently, in the fast-growing green hydrogen market?
Lorenzo Carnelli: FRIEM has traditionally operated in international niche markets such as the power converter market for the big and mid-sized industrial companies and the global electrolyzer market. So, our core business today is still closely related to our firm’s heritage, core competences, and our extensive expertise in those niche markets. Our 70-year-old company developed, over the years, strong experience in electrolytic refining of non-ferrous-metals and special applications.
Today, we are progressing our growth strategy internationally in businesses and competences that are a natural evolution of our core competences and organizational capabilities. Thus, our niche markets’ specialization, paired with our constant investments in R&D and passionate attention to quality, accountability, and sustainability, allowed us to become a key player in the industry. In addition, our products are critical components of our clients’ production processes. The continuity of their production processes often depends on the reliability of our equipment.
Thus, the quality and reliability of our products and services became a differentiating factor in the market and a major source of competitive advantage for us. So, our leadership position in our niche markets today is the result of our corporate values and of our commitment, over the years, to a sustaining innovation model. Our company’s motto is: “Evolution through continuity.”
Regarding our strategic choice to be involved in the green hydrogen supply chain, I would say that it was a natural decision since we are committed to pursue the net zero goals.
Ivo Pezzuto: Lorenzo, what made you believe that green hydrogen would be one of the most promising renewable energy sources of the future?
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Lorenzo Carnelli: Back in late 2017 we decided that energy transition would be part of our corporate mission, vision, and strategy, in addition to our existing business lines. So, we began to invest in different business lines related to the energy transition supply chain such as, battery storage, electric mobility, and start-ups operating in the renewable energy sources’ market. We studied the projected market growth trends of these new business lines, and we realized the huge growth potential that these would have in the future. To optimize the use of our capital and generate a better impact with our resources for the 2050 climate neutrality goals, we have selected, among other attractive new ventures, green hydrogen as our main target business line for the future. This choice was also driven by the optimization of the synergies between our traditional businesses and green hydrogen since both require the use of electrolysis in the production process.
Ivo Pezzuto: Lorenzo, looking forward, what are your expectation about the future of the Italian and the European “green hydrogen” supply chain network? Will Europe be able to thrive in the renewable energy sector in the years to come and to withstand global competition? Are EU economies timely building adequate infrastructures (i.e., storage capacity) to support a rapid expansion of renewable energies; reduce carbon dioxide (CO?) and other greenhouse gas emissions, and achieve a leadership position in the global market? Many analysts argue that Italy is strategically located in the Mediterranean between central Europe, Southern Europe, and Africa and that this ideal location makes it a natural hub for the hydrogen trade (i.e., the so-called ‘SoutH2 Corridor’). Some analysts also argue that a decentralized power grid with flexible electrolyzes could provide a viable solution to scale up the system at European level. Sorry for the long question. What are your thoughts on these matters?
Lorenzo Carnelli: For countries like Italy, green hydrogen should be a strategic choice as a renewable energy vector of the future. This strategic orientation would improve the country’s competitiveness in energy supply and would contribute to providing sustainable energy sources to energy-intensive industries.
The same strategic orientation would be beneficial for the entire European union as green hydrogen might contribute significantly to the entire European decarbonization process. Of course, green hydrogen will not be the only source of clean energy of the future, but it would be an important one for the broader European energy mix strategy.
This is essential to ensure a resilient, affordable, and abundant energy supply for the competitiveness of the entire economic block in the global markets.
We have learned the hard way from last year’s energy prices’ spike, due to the geoeconomic and geopolitical consequences of the shortfall of Russian gas, how critical for an economy is to have affordable, adequate, and resilient energy supply to compete globally. It is very important that the European Union adopts energy policies that support in the future a sustainable development of renewable energies sources, such as green hydrogen, to make Europe the global leader in this space. I believe that Europe can be a major global player in the energy transition process and many key global players in the green hydrogen supply chain are today European.
Large investments are critical since this is an infant industry and requires important incentives and subsidies to become self-sufficient. But investments without adequate policies would not be enough. It is critical to also ensure the rapid implementation of the right policies in Europe to make this infant industry thrive.
On the positive side, we can recognize that last year’s shock in the energy market, at least, encouraged the UE bloc to diversify energy supplies, increase efficiency, and accelerate investments in renewable sources through its REPowerEU Plan and European Green Deal towards the 2050 climate neutrality goals.
Ivo Pezzuto: What role does green finance, sustainable finance, and socially responsible investing (SRI) play in firms’ growth strategy towards green hydrogen expansion goals and climate neutrality targets? How important is the contribution of government’s subsidies and investments and institutional investors’ funds (venture capital, equity funds, etc.) for the scalability and long-term growth plans of firms operating in the green hydrogen business?
Lorenzo Carnelli: There is no doubt that institutional investors and green finance play a critical role in supporting the scale up of green hydrogen startups and investments for the decarbonization targets. Even my company has sought financial support from an institutional partner, FITEC, a tech growth fund managed by Fondo Italiano d’Investimento SGR, which has taken a minority stake in FRIEM’s share capital in order to strengthen our firm’s growth opportunities pursuing internationalization and M&A projects. As a consequence, recently we have acquired DynAmp LLC, a leading US company in the measurement systems for high electric direct current. We have undertaken this acquisition to strengthen our industrial and commercial competitiveness in the US market. Moreover, we have also won the bid for two major European green hydrogen projects which allowed us to gain a stronger leadership position on the continent in the green hydrogen market.
So, there is no doubt that the government and institutional investors’ support is critical in the early stage of these businesses, but what we are not sure at this stage is when these ventures will be financially self-sufficient. We are optimistic that the green hydrogen market has a promising future, but we are also aware that it will probably take many years before firms will achieve an attractive return on investment or will be financially self-sufficient in this business.
For this reason, we think that green hydrogen ventures require “patient money”, that is, funds that can wait 7 to 10 years to earn a fair return.
This is not a business that may generate impressive returns in the short run. It will require large investments for a long time. Of course, market expectations are high for this infant and emerging industry, thus equity valuations might be attractive despite short-term negative or modest returns. Expectations, as usual, drive valuations and enthusiasm in the markets. It is normal to see these days firms in these businesses having strong valuations and high capitalizations while they are still generating losses. Thus, it takes a long-term orientation, a sense of “purpose”, and “patient money” to achieve a successful energy transition.
According to a recent study by McKinsey (2023b), clean hydrogen has the potential to decarbonize a whole host of industries (including aviation, fertilizer, long-haul trucking, maritime shipping, construction, petrochemicals, refining, and steel). These are some of the worst emitters of greenhouse gases, defined as “hard-to-abate industries.”
McKinsey analysis indicates that hydrogen could contribute to more than 20% of annual global emissions reductions by 2050. Also, they argue that green hydrogen production costs are expected to fall by approximately 50% by 2030 (McKinsey, 2023b).
This is an encouraging outlook, but its effectiveness will depend on the timely and appropriate deployment of huge investments and on progressing with forward-looking energy policies in the EU, and elsewhere, since achieving the 2050 net-zero emissions’ targets requires a concerted global effort.
The decarbonization process will likely occur at different speeds based on the type of sector and on the speed of technological innovation. For example, re-fineries, cement, and steel production, and other businesses that already use hydrogen today will probably have a faster decarbonization impact since they can substitute grey hydrogen with green hydrogen. Other productions will require more time to adopt green hydrogen since it will take longer and many additional investments to develop ad hoc processes and technologies. Green hydrogen will be essential for countries’ energy independence. A competitive cost of green hydrogen will depend on the availability of abundant renewable energy sources and on having competitive costs to produce electricity from renewable sources, since these costs represent the main OPEX component of green hydrogen production cost.
Ivo Pezzuto: Which of the following resources (i.e., solar energy, onshore and offshore wind energy, green hydrogen, geothermal energy, bioenergy, hydropower energy, ocean energy, energy from space mining, etc.) is more likely to become in the coming years scalable, abundant, storable, and more affordable? Can we expect multiple alternative energy sources to complement one another in a sort of optimal energy mix or do you expect a dominant one to emerge? The Small Modular Reactors (SMRs), seem to gain greater attention as viable and stable power sources for achieving global decarbonization. These new types of nuclear technology have recently been included within the perimeter of the EU Taxonomy of environmentally sustainable economic activities by the EU Commission, since they are expected to play an important role in securing global energy supply. So, does green hydrogen face potential competition from white hydrogen or pink hydrogen in the future (the latter being hydrogen produced via electrolysis of water using nuclear power), or are they all part of an optimal energy mix?
Lorenzo Carnelli: I believe that there will always be a mix of energy sources unless in 30, 40, or 50-years new technologies are available such as nuclear fusion. It is difficult today to predict the evolution of this highly uncertain scenario.
We expect that renewable energies such as solar, wind, and hydropower will continue to remain competitive for quite some time.
The use of an energy mix will optimize the use of available energy sources in terms of efficiency and cost-effectiveness of energy production. Since not all renewable energy sources can supply a continuous source of clean energy, the energy mix will allow the optimal use of the available ones.
As stated, today, we use an energy mix, and I believe in the future we will continue to use an energy mix, but it will be turbocharged by countries seeking to strengthen their energy security targets and to achieve their decarbonization goals.
Regarding pink hydrogen, I don’t want to comment whether pink hydrogen is better than green hydrogen or vice versa. I am not very good with “colors!”.
Jokes aside, I believe that it can become competitive in the future, but it will also depend on how energy policies will eventually play out.
Frankly, as previously stated, I am more concerned about whether the EU will adequately support, in the long run, bold infrastructure and R&D investments and, most of all, the right policies in order to enable all the European renewable energy supply chains to thrive and succeed, and Europe, to become the global leader of the green transition. The risk, otherwise, is that Europe might fall behind the US and China on investments for the green energy transition, and ultimately, it might weaken its global competitiveness and the one of its firms.
Ivo Pezzuto: To conclude, it is worth mentioning that the European Commission has approved clean hydrogen projects since July 2022 for the Hydrogen Value chain, which are part of the so-called Important Project of Common European Interest (IPCEI). These projects include: “IPCEI Hy2Tech” (July 2022); “IPCEI Hy2Use” (September 2022), and “IPCEI Hy2Infra” (February 2024).”
The first set of clean hydrogen projects (i.e., IPCEI Hy2Tech) will provide up to €5.4 bn in public funding, which is expected to unlock an additional €8.8 bn in private investments. The second set of clean hydrogen projects (i.e., IPCEI Hy2Use) will provide up to €5.2 bn in public funding, which is expected to unlock an additional €7 bn in private investments. The third set of clean hydrogen projects (i.e., IPCEI Hy2Infra) will provide up to €6.9 bn in public funding, which is expected to unlock an additional €5.4 bn in private investments (European Commission, 2022; Meillaud, 2024).
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References
Allied Market Research (2024). Power Converter Market Research, 2032.? Allied Market Research. Available online at https://www.alliedmarketresearch.com/power-converter-market-A127392
Business Research Insights (2024). Power Converter and Inverter Market Report Overview. Business Research Insights. Available online at https://www.businessresearchinsights.com/market-reports/power-converter-and-inverter-market-106503
European Commission (2022). IPCEIs on Hydrogen. European Commission web site. Available online at https://single-market-economy.ec.europa.eu/industry/strategy/hydrogen/ipceis-hydrogen_en
McKinsey & Co. (2021). Hydrogen Insights Report 2021. A Perspective on Hydrogen Investment, Market Development and Cost Competitiveness. ?Hydrogen Council, McKinsey & Company. Available online at https://hydrogencouncil.com/wp-content/uploads/2021/02/Hydrogen-Insights-2021.pdf
McKinsey & Co. (2023a). Hydrogen Insights Report 2023. A Perspective on Hydrogen Investment, Market Development and Cost Competitiveness.? Hydrogen Council, McKinsey & Company. Available online at https://hydrogencouncil.com/wp-content/uploads/2023/05/Hydrogen-Insights-2023.pdf
McKinsey & Co. (2023b). What is Hydrogen Energy? McKinsey & Company. Available online at https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-hydrogen-energy
Meillaud. L. (2024). Europe Approves €6.9 Billions in State Aid for a Third Hydrogen PCEI. HydrogenToday.info.? Available online at? https://hydrogentoday.info/en/europe-hydrogen-ipcei/
Symons, A. (2023). What is ‘White Hydrogen’? The Pros and Cons of Europe’s Latest Clean Energy Source. Euronews.com. Available online at https://www.euronews.com/green/2023/11/05/what-is-white-hydrogen-the-pros-and-cons-of-europes-latest-clean-energy-source
Yole Group (2023). Power Converter Industry: the Race to Horizontal Integration. Yole Group. Available online at https://www.yolegroup.com/press-release/power-converter-industry-the-race-to-horizontal-integration/
The above article originally appeared in The Global Analyst, April 2024 issue. You can read the full article (free of charge) at the following link:
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