UK Energy Transitions Committee report offers net zero solutions

Currently, says the ETC, such projects face a gap to a viable investment case, so urgent action is needed to create certainty for investors and financiers to make final investment decisions (FIDs) and take this vital step in the net-zero transition. 

According to the ETC, putting the global steel industry on a 1.5^oC-aligned pathway to net zero requires a rapid scale-up of near-zero emissions primary steelmaking. The necessary breakthrough iron- and steelmaking technologies are available today, and the UK can join countries around the world in pioneering their deployment.

The right conditions for encouraging project proposals and enabling FIDs in the UK are within reach, claims the ETC. Crucial actions include implementing effective carbon pricing on steel imports as well as domestic production, lowering electricity prices to make scrap recycling more economical, premium forward off-take agreements, guarantees to manage technology risk, and direct government support, particularly for the high upfront costs of developing breakthrough projects. All these actions are feasible in the short term, claims the ETC, and could unlock a first wave of breakthrough steel investments in the UK.

“Low-emissions primary steelmaking is not only desirable for the UK, but eminently possible, requiring only a few, strategic interventions by industry and government to enable a viable investment case. Both industry and government have acknowledged the need to rapidly decarbonise UK steel while preserving the capability to produce this important material domestically. This report charts a path for them to accomplish just that.” Adair Turner, chair, ETC.

Breakthrough technology can future-proof the UK steel industry

National climate targets cannot be met without reducing emissions from steel, while the importance of steel to the UK energy transition and wider economy is driving up consumption of the material, with demand expected to rise by 20% between 2020 and 2030. Breakthrough steelmaking, where direct reduced iron (DRI) production technologies using green hydrogen are paired with electric arc furnaces (EAFs) for steelmaking, offers a solution to the challenges currently faced by the UK steel industry.

According to the report, investing in breakthrough steel projects would preserve domestic production capacity for an increasingly important resource and retain highly skilled jobs, all while helping the UK to meet its climate goals. Breakthrough steel offers a better option than the other choices that government and industry could make. Renovating existing emissions-intensive steel plants would preserve domestic production and jobs at the expense of the UK’s carbon budget. Closing those plants could cut domestic emissions but incur thousands of job losses while increasing the UK’s already high dependence on imported steel for a range of applications, from wind turbines to construction.

Key conditions outlined in the report for a viable investment case

A final investment decision (FID) represents a critical point in the steel investment process, signaling a firm financial commitment upon which contractors can proceed with procurement, construction, design, and engineering works. FID status, therefore, represents a vital step to realising a steel project in the real world.

The ETC's new report demonstrates that progressing UK breakthrough steel projects to FID is possible. Creating the conditions to enable this will rely on the following interventions by government, industry, buyers, and financial institutions:

Effective carbon pricing – A progressive carbon price, applied to both domestic steel production and imports from abroad (similar to the planned EU carbon border adjustment mechanism), would act as a foundation for the breakthrough steel investment case. The UK government is reported to be considering support measures totalling £600 million to maintain and transition to green production at existing integrated steelmaking sites. Investing in low-emissions technologies would be a good use of this funding, claims the ETC, but not if the resulting plants remain systematically uncompetitive with steel imports that face lower or zero carbon costs. Implementing a UK carbon border adjustment mechanism (CBAM) – or equivalent measure – to ensure both steel imports and domestic production face the same progressive carbon pricing would be essential.

Lower electricity prices to enable scrap recycling – According to the report, scrap is currently underutilised in the UK, with exports reaching 8Mt annually. This is caused by – among other factors – the high electricity costs faced by UK steelmakers when processing scrap into new crude steel using EAFs. Measures to lower electricity prices for steelmakers would make scrap use more economical for breakthrough projects.

Premium forward off-take agreements – Forward purchase agreements from steel buyers will be important for underpinning the investment case for the first breakthrough projects. Moreover, these agreements will likely require buyers to accept a price premium on purchased steel that is commensurate with the higher costs faced by breakthrough technologies compared to conventional ones. However, this price premium will be most relevant early in the lifetime of a breakthrough project, as factors such as declining hydrogen prices will reduce production costs overtime, meaning off-take agreements can be designed such that the premium faced by buyers declines over time in parallel.

Guarantees for technology risk – Financial guarantees, normally backed by governments, are an effective tool to help financiers de-risk uncertainty surrounding investment in novel technologies. As breakthrough technologies have begun to reach commercial readiness relatively recently, government guarantees would help address potential technology risks.

Government funding – Direct government support would likely be needed to strengthen the investment case for breakthrough projects that preserve domestic ironmaking in the UK. Subsidies for these projects' high upfront capital expenditures would allow government to provide adequate support in a one-off mechanism. Subsidies for operational expenditures, chiefly for green hydrogen, would also be very impactful, but would involve a longer-term commitment on the part of government.

Cross-value chain collaboration is needed

Proposing a first wave of breakthrough steel projects in the UK and advancing them to achieve FIDs will involve collaboration along the length of the steel value chain, including iron miners, energy suppliers, original equipment manufacturers, steelmakers, buyers, policymakers and financiers.

Although a variety of actors will be needed, the most important conditions for unlocking investment highlight the indispensable role of government in enabling FIDs. Action on carbon pricing, electricity prices, financial guarantees, and potentially also on public procurement and direct funding support, would require a clear shift in government strategy towards steel. It would require switching away from an approach of moving from crisis to crisis and instead setting out a clear vision for the future of the industry.

“The pathway to manufacture, from R&D to commercialization, for breakthrough technologies relies on a healthy investment environment. This report is, therefore, essential reading for researchers looking to make a positive economic and environmental impact on UK society, like those in the SUSTAIN Steel hub,” said professor Cameron Pleydell-Pearce of Swansea University & SUSTAIN Steel Hub.

The ETC report is underpinned by a financial model, developed by the ETC, that simulates the financial performance of different breakthrough steel project configurations in the UK. The financial model has been made open-access for public use. To read the insight report and access the model visit: https://www.energy-transitions.org/publications/breakthrough-steel/

Unlocking the first wave of breakthrough steel investments in the United Kingdom was developed as part of a series of roundtables in the UK, convened by the ETC between July – November 2022 with the support of Breakthrough Energy. The roundtables were open to UK steel value chain stakeholders, including policymakers and financiers, and saw participation from a variety of organisations.