Federal support for projects aimed at decarbonizing industrial processes could help to open a new investment landscape in the green economy. But a complex web of interrelated questions about financing, liability, and scalability remain to be addressed, even as technologies to eliminate greenhouse gas (GHG) emissions from industrial processes achieve viability, experts tell Infralogic.

The industrial sector accounts for roughly 30% of US GHG emissions, according to the Department of Energy. And as momentum to transition the heavy emitting power and transportation sectors toward renewables, many see industry as the next great mountain to climb in the broader effort to stem the tide of climate change.

That clear need, and strong signals of policy support, has stoked interest within the investment community. But due to the complexity of replacing fossil fuel sources across a broad spectrum of industrial processes, the investment landscape is expected to develop slowly, Eli Hinckley who advises developers, technology vendors and investors in the clean energy sector as a partner with Baker Botts’ Washington DC office tells Infralogic.

The US Department of Energy in March announced USD 6bn in funding for demonstration projects that could showcase the viability of such reduced-emissions alternatives to current industrial heat sources. High temperature processes for industrial activities like steel production that can’t simply be replaced by wind or solar power generation, could figure among the roughly 65 projects expected to receive funding.

A funding opportunity announcement for the program does not specify what kind of technologies will be considered for funding. But green hydrogen and conventional natural gas paired with carbon capture facilities are all frequently discussed as potentially viable sources of low-emission process heat.

Emerging technologies

Asset owners in carbon-intensive industries have already signaled their interest in pushing forward on emissions reduction strategies. Ohio-based steel producer Cleveland-Cliffs Inc. has said it could replace up to 30% of the natural gas used by its Toledo direct reduction plant with hydrogen “when it becomes commercially available in quantities sufficient to support our facility.”

Cliffs is a partner in the Great Lakes Clean Hydrogen Coalition, one of 33 partnerships currently in the running to receive federal funding to develop a hydrogen hub that would pair clean hydrogen production with transport infrastructure and off-takers. Other partners in the coalition include chemical producer Linde and retail energy supplier, Energy Harbor.

US Steel, Equinor and Shell last year also jumped into the hydrogen hubs competition, proposing a regional hub across Ohio, Pennsylvania and West Virginia that would focus on opportunities to reduce carbon emissions through both hydrogen and carbon capture projects.

Both clean hydrogen and carbon capture are poised to reap significant federal support in the coming years in the form of new production tax credits (PTC) created under last year’s Inflation Reduction Act (IRA). But challenges to applying either to heavy industrial uses exist, experts tell Infralogic.

Existing natural gas pipelines cannot carry pure hydrogen, raising questions for how industrial consumers can ensure reliable delivery of the gas as a fuel source for process heat.

Carbon capture, meanwhile, also requires transportation and permanent sequestration to keep emissions out of the atmosphere, and current technologies are more efficient when applied to direct emissions sources like gas or coal-fired generation facilities.

Despite posing a heavier lift than other carbon reduction strategies, a number of big names have already begun staking out positions in the nascent industrial decarbonization landscape.

In August of last year, Brookfield’s Global Transmission Fund committed USD 500m to a joint venture with California Resources Corporation (CRC) to develop carbon “storage vaults” to sequester up to 46 million metric tons of carbon dioxide emissions industrial sources.

As technologies to replace or decarbonize process heat mature and scale, says Hinckley, the pool of potential investors in such projects will also grow.

“In this particular sector of investment, focused on reducing integrated industrial heat, there aren’t that many investors yet. They’re waiting for the ecosystem to advance, and then they’ll figure out where they fit within the sector,” Hinckley said.

But even as technologies to decarbonize process heat advance, developers and investors will face challenges to deployment, says Blaine Collison, executive director at the Renewable Thermal Collaborative, an advocacy group focused on advancing renewable heating and cooling solutions.

Unlike with electricity generation, industrial facilities cannot simply swap out one energy source for another across their operations. A single facility might have dozens of product lines, each with a different use profile for process heat, and a number of other factors could affect which heat source works best at a given site, Collison says.

A challenge at any temperature

While substitutes for high temperature combustible sources of process heat are still in the development stage, says Collison, a big chunk of current industrial GHG sources could be replaced through electrification. But that doesn’t mean the transition will be easy, or cheap, even with renewable energy costs at historic lows.

Making key changes to a built industrial environment is inherently difficult for reasons that are both technical and logistical.

Industrial sites looking to electrify fossil fuel processes, for example, might face hefty infrastructure expenses to facilitate more electricity consumption from the grid.

Changing up the fuel mix in an industrial drier could void the warranty on a particular type of paint formulated to dry under gas-fired equipment, Collison says.

Best practices for assigning liability in contracts between facility-owners and operators of third-party heating equipment will also take time to develop, adding an additional layer of complexity to project finance.

All of these challenges inject uncertainty into the process of decarbonizing industrial heat beyond questions of technical aspects of replicating or replacing fossil fuel processes, Collision says.

Those questions will take time to resolve. And only then are we likely to see private capital come off of the sidelines at the scale necessary to finance a wholesale decarbonization of industry, says Collison.

“Private money is going to be critical for this,” he says.

Collison points to the influx of investment dollars into the renewable energy sector over the last decade as a model.

“It’s when capital markets got used to wind and solar and could learn to invest within tolerable areas of risk that we saw private money really begin flowing into the sector. Industrial decarbonization is going to be the same way,” he said.

This article is just one example of the many articles published daily by Infralogic’s global news and analysis team. For more information and to request a trial of our full news service – including our extensive databases of transactions, funds, investors, advisors, lenders and industry rankings – visit Infralogic.com.