McKinsey experts offer their views on how the electrification of energy use can play a bigger role in industrial decarbonisation
Electrification has been widely discussed in the push to decarbonise emission-intensive industrial processes. Here, experts Occo Roelofsen, Ken Somers, Eveline Speelman, and Maaike Witteveen from consultancy McKinsey offer their insights into how this technology could be integrated at scale.
Industry consumed 149 million terajoules of energy in 2017 – more than any other sector. Of this, fuel accounts for almost 45% of consumption. Electrifying this fuel has several benefits and the time has come for industrial companies to plan for the adoption of electric technologies.
Generally, electrically-driven equipment is slightly more energy efficient than conventional options, has lower maintenance costs, and, in the case of the industrial boiler, the investment cost of the electrical equipment is lower.
And, if zero-carbon electricity is consumed, sites’ greenhouse gas (GHG) emissions lower significantly. Of all the fuel that industrial companies use for energy, we estimate that almost 50% could be replaced with electricity, using available technologies.
This includes all the energy required to generate heat for industrial processes up to approximately 1,000°C. In fact, up to approximately 400°C, electric alternatives to conventional equipment are already commercially available.
Hybrid setups could be a practical step towards full industrial electrification
In many industrial applications, however, equipment powered by electricity offers no efficiency advantage over equipment powered by fossil fuels. Where gas and coal prices are at the global average, the price of electricity must be well below $70 per megawatt hour to make a complete switch economical.
But for applications that require low or medium temperature heat it, is possible to partially electrify heat demand, which allows for flexible switching between electricity and fossil fuels.
There are various reasons why a dual or hybrid setup could be attractive for industrial sites, even though up-front investments are higher than a single setup:
Lower fuel costs: In some regions the electricity price is increasingly fluctuating. Full electrification might not be attractive given a high average electricity price, but hybrid or dual setups can allow industrial sites to take advantage of lower prices when renewable sources are at peak production.
Additional revenue sources: Industrial companies should also account for the payments they might collect as a result of “grid balancing” practices, whereby grid operators reward customers for consuming the excess electricity that is generated during peak periods of renewable generation.
Enable direct use of electricity from a nearby intermittent renewable production site: Such an off-grid setup could lower electricity costs significantly, as grid connection costs, taxes, and other levies are avoided. It could be a first step toward complete electrification, enabling industrial companies to gradually shift their energy mix.
The sooner that site owners assess the potential to electrify, the more likely it is that they can choose the optimal moment to invest in electric equipment. The decision should consider the expected price development of electricity and conventional fuels.
Industrial equipment can last for more than 50 years, and it costs so much that it is seldom economical to replace before its useful life has ended.
For that reason, purchasing electrical or hybrid equipment is most financially sensible when a company replaces expired equipment or builds a new facility. Installing hybrid equipment in the near term could make electrification more economical than installing conventional equipment now and switching to electric equipment later.
Policymakers can play a role as well, as supporting regulation can greatly improve the attractiveness of electrification. The right moment to start electrifying might depend on the expected local power-generation mix. Hence, electricity companies are an important factor.
Now is the time for action
Electrification only reduces industry’s GHG emissions if enough renewable-generation capacity is added to meet demand. Electricity producers could add renewable-generation capacity to the grid that delivers electricity to industrial sites.
Alternatively, developers of renewable electricity generation could devote any new capacity to their industrial customers by means of power purchase agreement. The maturity of electrical equipment determines what processes can be electrified. The pace at which electric technologies for very-high-temperature industrial processes are developed and proven at scale will dictate when they can be applied on industrial sites.
Current technologies already allow industrial companies to replace a significant share of their fossil-fuel intake with electricity, and prices are low enough in certain regions that companies could lower their energy costs by switching from fossil fuels to electric power.
Opportunities to adopt electric technology should continue to expand as electricity prices fall and technologies improve. To capitalise on these opportunities in the near term, industrial companies should begin factoring electrification into their capital spending plans.
Utilities and policymakers, too, can benefit from considering how industrial electrification might influence the pace at which renewable-generation capacity is added to the power system.
Given that large-scale electrification in industry would require major changes to the world’s electricity system and industrial sites, now is the time for greater co-ordination of efforts to devise these changes.