GAVIN MAGUIRE: Industry buy-in needed for global energy transition

Littleton — Most energy-transition discussions focus on electrifying car fleets and using more renewable energy in power production, overlooking how a key engine of the global economy — industry — can shift away from fossil fuels.

If a rapid and lasting global cut in fossil-fuel emissions is to occur, it’s critical such a major source of employment, tax revenues and national wealth not only comes along for the ride, but plays a leading role in accelerating the shift to a lower-carbon economy.

Industry accounts for close to 29% of worldwide energy consumption and a quarter of emissions, according to the International Energy Agency (IEA), making it an important potential lever for global energy-transition efforts.

However, due to the cut-throat nature of manufacturing and in the production of energy-intensive intermediate goods like cement, chemicals and metals, industry also has a vested interest in resisting any change that may undermine profit.

Further complicating the picture is the uneven developmental stages of industries within countries and around the world, which makes it nearly impossible to generalise if and when the sector as a whole may finally be ready to make the leap away from fossil fuels.

Three key industrial economies, though — China, Germany and the US — are each embarking on dramatic power-sector overhauls that will reshape the profile of their own industrial landscapes and in turn likely trigger wider transformations across the rest of the world.

Coal-powered factory floor

Any discussion about industry has to include China, by far the world’s largest manufacturer and goods exporter.

The top manufacturer of myriad staples, from cars, steel and electronics to ceramics, batteries and toys, has representatives of every type of industry at every level of sophistication.

Industry is also the bedrock of China’s economy, accounting for nearly half of total annual energy use and roughly a quarter of employment, according to IEA and World Bank statistics.

As such, other economies with aspirations to develop manufacturing bases will look to China for guidance, especially on how to reduce energy use and emissions.

Coal remains the primary source of industrial power in China, accounting for around 43% of total energy supply to the sector in 2019, IEA data showed.

That’s down from over 60% in 2010, however, and coal’s share is expected to shrink further as Beijing pursues an aggressive pollution-cutting drive.

A third of China’s industry is powered off the electrical grid, up from 22% in 2010, and rapid electrification of manufacturers and factories is planned.

Natural gas accounted for 9% of industrial power in 2019, up from 4% in 2015, and had been expected to grow rapidly until Russia’s invasion of Ukraine this year sent global gas prices soaring and undermined the fuel’s appeal as a power source.

China is still expected to increase overall gas use for power generation, but cost-sensitive industry may slow gas adoption in favour of coal unless Beijing intervenes via subsidies or fuel-use quotas it has used in the past.

Most significantly for industry, Beijing is expected to rapidly expand renewable-energy supply, both to cement its status as the world’s green-energy leader and to ensure the long-term competitiveness of its businesses.

In conjunction with planned pioneering use of hydrogen as an industrial power fuel, this should benefit China-based manufacturers and help China emerge as a leader in industrial decarbonisation capabilities that could be deployed widely across Asia.

Rebooting Europe’s economic engine

Germany also has aspirations to be a leader in the decarbonisation space, or did until the Russia-Ukraine war decimated the country’s manufacturing base by pushing power prices to record highs this year.

But the energy shock also mobilised the country’s government and industry leaders to fast-track a multipronged energy-transition strategy that has seen the country build liquefied-natural-gas (LNG) import terminals in record time and massively boost domestic renewable-energy supplies.

As a result, Germany’s industry — which accounted for 25% of total German power use in 2019 — is likely to undergo a rapid transformation from being roughly evenly powered by natural gas and off the grid to being primarily electricity based.

If the country’s famed carmakers and industrial leaders can sustain technological and cost-competitive edges throughout, other European manufacturers are likely to follow suit.

American dream

Charged up by the newly-passed Inflation Reduction Act (IRA), US companies will be motivated to embrace energy-saving technologies en masse in the coming years just as the country’s power producers roll out more renewable options.

If both trends unfold as hoped by authorities, then US manufacturers will benefit from lower energy costs and the buildout of additional industries tied to the broader global energy transition, which is another central component of the IRA.

Industry only accounted for 17% of total energy use in the service-heavy US economy in 2019.

But the potent mix of large government funding and generous incentives for businesses to decarbonise could help the US emerge as a global leader in helping more industry-dependent economies chart a path towards lower emissions.

Reuters