Decarbonizing the industrial sector is one of the most difficult problems in climate technology today.

First, this sector accounts for a significant portion of global emissions — “industry” (aka industrial heat) alone accounts for ~25% of global emissions, with electricity use in the industry adding another 11%.

Second, unlike many sectors today (e.g. transportation, electricity, residential heating), industrial heat does not yet have a clear pathway to decarbonize. Instead, there are numerous potential alternatives, but none have reached a meaningful scale. Fossil fuels provide 90%+ of industrial heat, and sustainable options have, to date, not been cost-effective substitutes.

So, let’s take a look at this market — what is the state of industrial heat today? What are the competing sustainable options? And, how do they stack up against the status quo?

How is industrial heat delivered today?

Although industrial processes vary widely, they tend to use similar mechanisms to deliver heat.

1. Direct combustion of fossil fuels (65% of heat): Facilities burn coal or gas and use the resulting hot air to heat their process.
2. Steam (~30% of heat): Boilers, usually using natural gas as an energy source, heat water into steam, which is then injected into a process.
3. Electricity (~5% of heat): This 5% is primarily electric arc furnaces in the steel industry. These furnaces apply electricity directly to scrap metal to melt it.

Which of the two major heating mechanisms (steam or fossil fuel combustion) is used in a certain process will come down to two primary factors.

First, is the temperature needed, also referred to as the “quality” of heat. Steam is commonly used for low-temperature processes, <200°C (although ‘supercritical’ steam can reach temperatures of 600°C). Conversely, fossil fuels are used for higher temperature processes, as natural gas and coal combust at around 2,000°C.

Second is whether the fuel is used as feedstock, in addition to a heat source. For example, in steel production, coal is both a source of heat and a chemical reactant in reducing iron ore to pure iron. So, decarbonizing steel will require not only a new source of heat but also a new reactant for iron ore.

So, this is a summary of industrial heat today. And, as you might expect, the needs of different industries vary widely. Below, you can find a directional view of the quality of heat used by major industries, globally.

~1/2 of industrial heat use is <400°C, with higher heat needs coming from industries like steel, cement, fertilizer, and refining/chemicals.

What are the sustainable alternatives?

There are quite a few pathways to decarbonize the industrial sector. I will summarize four below, but these are not the only options!

Carbon Capture: Carbon capture would not replace fossil fuel heat, but rather capture the emissions such that they can be sequestered.

This approach has pros and cons. On the positive side, it relies on (relatively) mature technology, and is the least disruptive approach to “business as usual” — the industrial process can largely remain the same, with additional equipment at the end.

However, on the negative side, carbon capture is not a good fit for every industrial process. Many industrial facilities have multiple disparate sources of emissions, which compounds the cost of carbon capture. Additionally, although carbon capture will likely become cheaper over time, it will always be an added cost on top of the facility’s base operating costs. How will industrial owners account for this certainty of incremental cost in their planning, when it is possible that other sustainable alternatives may continue down a cost curve to fossil fuel parity?

Hydrogen: The combustion of hydrogen, while not a drop-in replacement for the combustion of natural gas and coal, at least has some similarities. It generates heat at ~2,000°C and can be (and is today) used as an industrial feedstock. For example, there is potential to use hydrogen to replace coal in the reduction of iron ore (discussed above). So, there is significant interest in the use of hydrogen as a source of industrial heat. The main hurdle today is cost — green hydrogen (produced with renewable electricity via an electrolyzer) remains more expensive than natural gas.

Advanced Electric (Thermal Storage): Electricity is our answer to many other decarbonization challenges — why not in the industrial sector as well? Well, again, the challenge has always been cost. Natural gas at $4 / mmBTU (a 10-year average in the US) would be equivalent $0.01 / kwh of electricity. However, the industrial electricity price is more like $0.07–0.12, if delivered consistently.

This is the key bet of thermal storage — leveraging intermittent electricity (which can be very cheap) + storage to deliver a consistent source of cheap heat, as required by most industrial processes. Essentially, you can think of these as “heat batteries”. Solutions in this space use electricity to heat storage media (sand, brick, graphite, ceramics, molten metal, etc.) with electricity when it is cheap, and then discharge the resulting heat consistently.

Biomass: Biomass is used today to provide heat in sectors like pulp and paper, where excess bark and wood waste is burned to produce steam. In sectors outside of “forest products” (paper, lumber), though, biomass has limited penetration.

Biomass is a relatively versatile fuel, as different forms of biomass can produce varying types of heat. Still, biomass is not cost-competitive today, and would likely require a subsidy or other incentive to make it a part of the industrial decarbonization story. Even then, it would have to surmount scalability issues (most notably in land use) to play a major role in industrial decarbonization.

How do sustainable options compare?

The natural next question to ask is — how do these (and other) sustainable options compare to their fossil fuel competitors? To demonstrate this, I built the following graphic, which compares my best view of the current cost structure of various industrial heating alternatives.

You can take a lot from this graph, but a few observations on my end.

First, natural gas (in the US) is a very cost-effective fuel. Although it is currently at the far right of its cost bar above, it has historically been closer to the far left. This is a difficult fuel to compete with! Still, natural gas is more volatile than electricity — companies looking to reduce volatility in their business could be intrigued by electric options, even at a slight premium.

Second, natural gas (in Europe) is today a very expensive fuel! Sustainable options may pencil in Europe more easily given this context.

Finally, incentives do not appear on the above chart, but incentives are a significant piece of the story in the near term. In the recently passed IRA in the US, there are 3 incentives worth discussing.

Hydrogen: The IRA contains a subsidy of $3 / kg for hydrogen, which would move hydrogen from the most expensive sustainable option to one of the cheapest. With this subsidy, green hydrogen will likely be competitive with gray hydrogen, which is a massive tailwind for electrolyzer providers.

Carbon Capture: The IRA increased the incentive for carbon capture from $50 / ton to $85 / ton, which will increase the number of facilities for which carbon capture is a viable project.

Other: Finally, the IRA has $6B allocated (50/50 cost share) for the deployment of advanced industrial technology driving decarbonization. This can be a boon for almost every technology we have discussed today!

Conclusion

Industrial heat is one of the thorniest problems in decarbonization. This sector is built around very cheap fossil fuels and has invested significant capital into optimizing these processes.

Sustainable options will have to navigate heterogeneous customer needs (in both heat and in process inputs) and deliver heat at a low cost to win. Additionally, they will have to smartly incorporate project finance, as often the facility owner will not be well positioned to fund the deployment of new equipment themselves.

However, quite a few of these pathways will likely ultimately be successful, and we at G2 would be interested to speak with any entrepreneur pursuing solutions to this problem!