Stimulating demand is key to scaling UK green molecule production

Green molecules, like green hydrogen and biofuels, could play a major role in decarbonising hard-to-abate sectors but current costs are prohibitive.

At a glance
 

• The UK has made significant progress in greening its electricity supply, but electrification is not currently an economically viable decarbonisation route for all industries
• Green hydrogen and biofuels could enable an energy transition for high-emitting sectors, but the market needs scaling to support this
• Government has a key role to play in stimulating early demand for green molecules

There is no denying that the UK has made impressive progress in green power generation over the past two decades. By 2022, nearly 60 per cent of UK electricity came from low-carbon sources, and emissions from power generation had fallen by nearly three-quarters since 1990.

This progress is enabling more households and businesses to reduce their emissions when they install heat pumps and switch from combustion engines to electric vehicles. With ready access to greener electricity, electrification is the main pathway to decarbonising the UK economy.

But what about for hard-to-abate sectors? Iron and steel, cement, chemicals, heavy-duty transport, shipping and aviation represent around a quarter of global energy demand, but due to physical and cost constraints their mass electrification is often not currently feasible. These sectors must, nonetheless, find a way to reach net zero by 2050 to meet the Paris Agreement.

Further, small-to-medium enterprises in hard-to-abate sectors are hit particularly hard by the cost of the energy transition, and where electrification is possible it often comes with a need for capital-intensive infrastructure and assets.

Where electrification is not possible, options are limited to fossil fuels paired with carbon capture and storage — which still remains largely uneconomic despite promising progress — or green molecules.

Green molecules, like green hydrogen and biofuels, have energy-generating characteristics comparable to fossil fuels, and can be a more viable decarbonisation option than electrification for several hard-to-abate sectors. However, they are still early in their economic lifecycle and consequently significantly more expensive.

Without clear market demand, prices will not come down any time soon. But demand for new energy solutions is frequently stifled by a vicious cycle of perceived high costs, which often leads to limited investment and slow progress in improving the economics.

Deloitte research shows that, depending on the scenario, synthetic fuels can be as much as double to 10 times more expensive than fossil fuel alternatives. Their availability is also limited by a lack of low-cost, climate-neutral and biodiversity-friendly carbon dioxide feedstocks, inefficient production processes and intersectoral competition for clean hydrogen.

To break this interconnected cycle of high costs, limited demand and weak investor appetite, governments will need to play a clear role.

The role of government
 

The UK government has previously played a crucial role in early support of emerging energy technologies including offshore wind, nuclear and hydro power.

This role of driving industry participation, de-risking projects, reducing financing costs and attracting investment has been central to the uptake of new energy technologies, and must also be considered with green molecules. Hard-to-abate sectors are earlier on the cost curve and will require greater support.

The government could provide support in three main ways:

• Industrial policy. The UK government’s forthcoming industrial strategy should include clear green molecule transition pathways, along with timelines for industrial decarbonisation. Long-term, high-level targets will not provide industry with sufficient clarity. With Great British Energy and the National Wealth Fund established, industry is eager to understand how they will operate in practice.
• A stable, long-term energy policy framework. Deloitte’s recent energy transition survey found that 68 per cent of oil and gas companies want to see a clear, long-term energy policy as a priority, to enable investment in new industries.
• Supporting the development of low-carbon energy supply chains. Our survey found that around a third of energy providers and business consumers said they do not have access to the low-carbon energy supply chains needed to deliver their net zero ambitions. Government intervention can help support the creation of end-to-end energy supply chains.

The private sector
 

While government support is vital, there is also a material role for buyers and suppliers of green molecules in addressing the market economics.

Industry forums and market collaboration can be powerful mechanisms in providing visibility of demand and attracting financing, but closer collaboration is needed, domestically and across international markets.

Additionally, suppliers securing offtake agreements across the value chain in key industries could rapidly give a confidence boost to the supply-and-demand side of the market.

A small number of large offtake agreements can have a material impact on project economics and unlock investment on the supply side. There are already examples of this in the EU.

Setting a path
 

It is vital that a path is established to scale and reduce costs in the green molecules market, creating a viable economy around it. This will break the deadlock of supply and demand and open up decarbonisation options for businesses in all industries.

Green molecules are an essential part of the decarbonisation journey.

By working together, across all sectors of industry and government, the UK can harness its legacy infrastructure and existing workforce skills to scale the development of green molecules.

With this will come export potential for technologies, tax income, UK jobs and services that enable the UK to meet domestic and international market demand for green molecules.

This blog was originally published on FT Sustainable Views