Priority industrial processes for using hydrogen

The processes that appear to hold the greatest benefits for more immediate ‘no regrets’ planning and investment in hydrogen include iron, ammonia, methanol, alumina and other high temperature applications. This is because each of these sectors is more dependent on hydrogen for decarbonisation and can also drive large sources of demand. These are scalable markets and support both direct and indirect growth in jobs.??

• Iron: Direct reduced iron (DRI) is produced by removing oxygen from the iron ore. This makes metallic iron without melting it. Currently, natural gas is used to produce reduced iron; however, steelmakers are considering the use of hydrogen for DRI manufacturing to make the steelmaking process CO2-free, and several projects are in train. While Australia is not a first mover on DRI with hydrogen, we are the largest exporter of iron ore, and so there is a market opportunity. This is particularly as decarbonisation policies start to bite and we can produce hydrogen cleanly.
• Ammonia and methanol: Ammonia holds great promise because we have an existing industry to decarbonise, ammonia is a vector for hydrogen export, and there is also a new export opportunity because Japan and Korea anticipate using clean ammonia in power stations. Unlike hydrogen, ammonia has been traded globally for decades and has well developed technologies for large scale storage and transport. Hydrogen is used for both fuel and feedstock to make methanol, and clean hydrogen is a good prospect to decarbonise the sector’s high temperature processes. There is an established global market, with extensive experience in handling. Both ammonia and methanol are considered logical replacements for the bunker fuel used for shipping. Researchers from the Grattan Institute (Wood, Dundas & Ha, 2020: 36) state that if Australia was to produce 6.5 per cent of the world’s ammonia with green hydrogen by 2050, there would be a further 5,000 ongoing jobs. This number rises by a further 15,000 jobs if global shipping moved exclusively to ammonia and Australia maintained 6.5 per cent market share.
• High temperature processes: Experts consider that electrification will be more cost effective than hydrogen and other alternatives to decarbonise many heating applications. However, technological constraints make electrification challenging for processes requiring more than 800°C. We discussed these processes in more detail in our White Paper (AHC, 2021), and have also recently completed a report with Australian Alliance for Energy Productivity (2023) on decarbonisation options for different high temperature heating applications. Alumina will likely require hydrogen to decarbonise the calcination process. Australia is the second largest producer of alumina in the world, and the largest exporter. Primary aluminium is made from bauxite, which is refined to make alumina before being smelted to make aluminium. Refining bauxite to produce alumina has four stages: digestion, clarification, precipitation, and calcination. Digestion takes place at 150-270°C and calcination at temperatures above 1000°C. There are also large-scale opportunities in other high temperature processes, such as in cement and bricks. Achieving scale in hydrogen production for these sectors can then pave the way for relatively smaller scale industries, such as food and meat processing. While there are many more food processing plants than refineries, the scale is much smaller. For example, a large alumina refinery uses around 30,000 to 40,000TJ/year, and a modest sized factory in the food sector might use 20TJ/year (see ITP, 2019: xiv).

As discussed by the Grattan Institute, new clean energy industries can “plausibly create new jobs at a scale comparable to existing carbon-intensive industries” (Wood, Dundas & Ha, 2020: 26). Many of these new and replacement jobs are likely to be located in carbon-intensive locations, because these locations have key infrastructure such as ports and electricity transmission, as well as access to natural gas networks. Such jobs are also likely to be created in other regional areas where renewable energy resources are most favourable.

Transition finance

The barriers faced by parties seeking to integrate hydrogen into their heating and chemical processes are largely the same as for transport and any other use; that is, the significant cost required to convert assets, and the uncertainty about the total asset life costs of doing so given lack of current experience. For industrial processes there is also the complication of hydrogen being more expensive than the natural gas it is (often) replacing.

If we look at steel for example, a modern blast furnace can have a lifecycle of 50 years or more, with major overhauls or ‘relines’ every 15-20 years to stay operational. The capital cost for a 4.0 Mt/year integrated steelmaking facility is around US$4 billion, compared with relining a blast furnace at between US$50 million and US$200 million, depending on the jurisdiction (BHP, 2020).

Long-lived industrial assets like blast furnaces need long term planning for major renewals. This planning needs to occur in the environment of changing social acceptance and uncertain technological choices, where the asset owner needs to maintain production while not locking in choices that in the future might be found to be poor. And the risk is particularly high with companies (and sectors) with few facilities, such as steel and ammonia.

Regarding ammonia, Advisian (2021: 77) advises: “A large portion of Australia’s ammonia manufacturing capacity is beyond the initial design life of the facility and survives through judicious asset management and favourable domestic gas pricing”. Where there isn’t the option to further sweat assets or take assets offline, companies may need to consider closures (with associated job losses), or it could mean “a like-for-like replacement of an old facility, or shift to a proven but still relatively emissions-intensive process, locking in emissions for another 30 years or more” (Wood, Reeve & Ha, 2021: 37). This is all the more likely while producers cannot recover the additional costs of greener technology via green premium prices.

Support for smaller industrial players

With hydrogen industry development still in a nascent stage, end users are understandably cautious.

Even for the sectors more likely to need hydrogen as replacement fuel, the high cost and long life of industrial processes – such as alumina refineries, cement kilns, brick kilns, and large boiler rooms – require this cautious approach given that investments within this decade can determine carbon footprint of those applications for decades to come.

Hydrogen also has different heating characteristics from natural gas, requiring more hydrogen to have the same heat outcome, and a change to equipment to manage matters such as flame speed. In work undertaken for AHC by A2EP (2023), study participants noted that blending hydrogen into natural gas is an option, but the impact of any inconsistent gas ratios on burner performance must be understood and managed. The current lack of regulations relating to burning pure hydrogen fuel was also considered to be a risk.

There is a need for government support for early adopters of decarbonised industrial heat so they can start to develop business cases for change and manage financial and/or technology risks.

Key recommendations on priority industrial processes from our paper are:

Recommendation 49: Attract private investment for hard-to-abate industrial processes.

The Australian Government should:

·?????? Fund a hydrogen readiness programme of at least A$1 billion for capital expenditure on industrial processes that cannot readily be electrified, including (and not exclusively) for the production of iron/steel, ammonia, methanol, and alumina/aluminium.

·?????? Continue to use ARENA (and CEFC where possible) to underwrite demand through a revenue support mechanism (such as contract for difference) intended to incentivise domestic production of critical chemicals and metals, including (and not exclusively) for the production of iron/steel, ammonia, methanol, and alumina/aluminium. Funding should be aligned with funding from state/territory governments.

Funding should be prioritised for projects that protect or create local jobs and have a detailed plan for skilling and re-skilling. Applicants should be required to share non-commercially sensitive information to support industry knowledge development – this could be assisted by engaging with industry associations to support delivery.

To mitigate and reduce the costs associated with project development (such as transmission costs), the Australian and state governments could collaborate to further incentivise co-location of chemical production within Hydrogen Economic Zones, and within proximity to other industrial infrastructure such as ports.

Recommendation 50: Develop bespoke packages for other early adopters in high temperature process heating.

Target government support packages for early adopters who need to switch to hydrogen for high temperature heating but cannot access support under Recommendation 49. This should include:

·?????? Financial support through tax and/or targeted market mechanisms.

·?????? Increased ARENA funding for trials and demonstrations.

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Read the full report on our website: https://h2council.com.au/ahc-publications/ .

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References

Advisian (2021) Australian hydrogen market study: Sector analysis summary, 24 May, for the Clean Energy Finance Corporation, https://www.cefc.com.au/media/nhnhwlxu/australian-hydrogen-market-study.pdf .

Australian Alliance for Energy Productivity (2023) Bringing the heat: Hydrogen’s role in decarbonising Australian industrial process heat, AHC, August, https://h2council.com.au/wp-content/uploads/2023/08/Bringing-the-heat-report-for-AHC-25-August-2023.pdf .

Australian Hydrogen Council (2021) Unlocking Australia’s hydrogen opportunity, September, https://h2council.com.au/wp-content/uploads/2022/10/AHC_White_Paper_FINAL_28-Sep-21_2021-09-30-012757.pdf .

BHP (2020) Pathways to decarbonisation episode two: steelmaking technology, 5 November 2020, https://www.bhp.com/media-and-insights/prospects/2020/11/pathways-to-decarbonisation-episode-two-steelmaking-technology/ .

ITP Thermal (2019) Renewable Energy Options for Industrial Process Heat, prepared for Australian Renewable Energy Agency, August, https://arena.gov.au/assets/2019/11/renewable-energy-options-for-industrial-process-heat.pdf .

Wood, T., Dundas, G., and J. Ha (2020) Start with steel, Grattan Institute, Report No. 2021-07, July https://grattan.edu.au/wp-content/uploads/2021/04/Towards-net-zero-Practical-policies-to-reduce-transport-emissions-Grattan-Report.pdf .

Wood, T., Reeve, A., and J. Ha (2021) Towards net zero: Practical policies to reduce industrial emissions, Grattan Institute, Report No. 2021-10, August, https://grattan.edu.au/report/towards-net-zero-practical-policies-to-reduce-industrial-emissions/ ??