By Tayler Amatto, March 8, 2024
The notion of achieving seamless energy transition through widespread electrification appears enticing at first glance. Replacing fossil fuels with “green” electricity produced from renewable sources, including wind or solar, seems like a panacea for soaring carbon emissions.
There is no doubt that electrification offers undeniable advantages, such as enhanced efficiency. In fact, Saul Griffith, a prominent author in the field of widespread electrification, says that simply introducing electrification, without any additional efficiency measures, could potentially slash energy consumption in the United States by more than half (Griffith, Saul 2022).
However, electrification is not applicable to all industries and therefore should not be strictly viewed as the only route to decarbonization.
While electric alternatives exist for specific sectors such as passenger and light-duty vehicles, and residential and commercial heating, there are other sectors where electrification is not as practical. These “difficult to decarbonize” sectors encompass heavy industry (i.e., cement, steel, and chemicals manufacture) and heavy-duty transportation (i.e., trucking, marine shipping, and aviation).
These sectors contribute to approximately 30 percent of global emissions – a level that’s expected to double by 2050 under business-as-usual scenarios (Energy Transition Commission 2018). For instance, in heavy industries such as chemicals, reliance on fossil fuel feedstocks (such as coal, oil, and natural gas) presents an obstacle to electrification. Cement kilns and glass manufacturers often need temperatures of more than 1371 degrees Celsius; generating this through electricity would be significantly more expensive than generating heat by burning natural gas. In heavy-duty transportation, meanwhile, the batteries required for such applications are prohibitively large and heavy, posing significant challenges in terms of efficiency and practicality.
An alternative solution for these industries lies in embracing low-carbon fuels, which should be recognized as a critical component of the overall energy transition.
Low-carbon fuels can include biofuels, synthetic fuels, and hydrogen. Biofuels are fuels derived from renewable biological sources such as crops, agricultural residue, and organic waste, while synthetic fuels are manufactured through chemical reactions that convert carbon dioxide and water into liquid hydrocarbons using renewable energy sources like solar or wind power. Meanwhile, Hydrogen is becoming a frequently discussed component of the energy transition given its large-scale potential in numerous applications.
As a clean-energy investor, I am looking for opportunities that can achieve decarbonization at scale – therefore, low-carbon fuels are a significant portion of my work. For example, in the aviation industry, aircrafts travel much further than ground vehicles, and thus require much more energy than an average road trip. However, an aircraft’s energy use is directly proportional to its mass. This means that using a heavy energy source, such as a large-scale battery to meet required ranges, would further increase the amount of energy needed for the flight (Verstraete, Dries 2019). Batteries today are therefore not an efficient use of energy to power an aircraft.
However, the solution may lie in Sustainable Aviation Fuels (SAF): biofuels or synthetic fuels that can leverage existing infrastructure such as engines, storage, and transport lines.
Today, pursuant to the American Society for Testing Materials standards, SAF can be blended to a maximum of 50 percent with conventional jet fuel without any aircraft modifications. As per its name, when produced from sources with low carbon intensity scores, such as from waste, agricultural residues, or captured CO2, the carbon mitigation benefits for aviation are significant, even at a 50 percent blend rate. As a result, SAF presents a solid alternative to electrifying the aviation sector.
As for hydrogen, its wide range of applications makes it an attractive investment opportunity. When hydrogen is produced alongside carbon capture, utilization, and storage, or created by electrolysis combined with clean electricity, its use as a fuel offers an effective decarbonization method across multiple sectors.
Today, hydrogen is produced relatively inexpensively and is used in industrial processes, primarily in petrochemical feedstock refining or in the production of ammonia as a fertilizer. However, there are multiple emerging important uses of decarbonized hydrogen such as in blending in existing natural gas systems to offset natural gas requirements and as a reducing agent in steel and cement manufacturing.
Hydrogen combustion can achieve heat intensity of up to 2000 degrees Celsius, sufficient for a variety of industries including cement production (Anderson and McBride 2019). Furthermore, hydrogen fuel cells can be used to generate electricity, offering a much higher specific energy and lighter weight than batteries, solving critical range and payload problems in applications such as heavy-duty trucking, where both the issues of specific energy and weight must be considered.
These examples underscore the significant potential of low-carbon fuels in addressing challenges within the “difficult to decarbonize” sectors much more efficiently than through electrification.
However, despite its potential promise, the adoption of these fuels is not without challenges. Cost stands out as a major barrier, as the production of low-carbon fuels tends to be more expensive compared to traditional fossil fuels, primarily due to emerging technologies and constraints related to feedstock availability.
To overcome this barrier and ensure the widespread adoption of low-carbon fuels, policy intervention is essential. As an investor, it is crucial to recognize the inherent risks associated with relying heavily on policy incentives. However, governmental policies will remain a critical component of advancing the energy transition and must be factored into economic models and investment strategies.
Governments can utilize a combination of incentives and regulations to encourage the transition to low-carbon alternatives. From an incentive standpoint, policies such as production subsidies – as exemplified by initiatives such as the US Inflation Reduction Act – can aid in offsetting the higher production costs of low-carbon fuels, making them more competitive in the global market.
These subsidies provide direct financial support to producers, stimulating investment and innovation in the low-carbon fuel sector. By imposing a price on carbon emissions or mandating the use of low-carbon fuels, governments can incentivize the adoption of cleaner energy sources while penalizing carbon-intensive practices.
Electrification is often touted as a key solution due to the potential for cleaner energy sources like renewables to power electric technologies. However, it is not always the most practical or effective option in every context.
Instead, the emphasis should be placed on investing capital in decarbonization opportunities that are most appropriate and effective for specific situations, which includes the adoption of low-carbon fuels. This balanced approach ensures that the energy transition is both effective and inclusive – addressing the unique challenges posed by different industries in specific situations, while advancing the overarching goal of sustainability.
Personally, I will continue to focus my investing efforts on low-carbon fuels given the potential they bring to the overall energy transition and the ability to achieve decarbonization at scale.
References
Anderson, Lauren and Jameson McBride. 2019. “Don’t Electrify Everything.” The Breakthrough Institute, October 2019. Available at https://thebreakthrough.org/issues/energy/dont-electrify-everything.
Energy Transmissions Commission. 2018. “Mission Possible: Reaching Net-Zero Carbon Emissions from Harder-to-Abate Sectors.” November 2018. Available at https://www.energy-transitions.org/publications/mission-possible/#download-form.
Griffith, Saul. 2022. Electrify: An Optimist’s Playbook for our Clean Energy Future. October 2022. Available at https://mitpress.mit.edu/9780262545044/electrify/.
Verstraete, Dries. 2019. “Climate Explained: Why Don’t We have Electric Aircraft?” September 2019. Available at https://theconversation.com/climate-explained-why-dont-we-have-electric-aircraft-123910.
