Action needed in UK to attract investment for low-carbon steelmaking projects: ETC

Urgent action is needed over the next 24-month to create certainty for investors and financiers to make final investment decisions in near-zero emissions primary, or ore-based, steelmaking projects in the UK, according to the Energy Transitions Commission.

The ETC released a report, "Unlocking the first wave of breakthrough steel investments in the UK" Feb. 1 highlighting the key actions needed by industry and government to enable a first wave of these projects, which currently face a gap to a viable investment case.

The report was developed as part of a series of roundtables held by the ETC in the UK in the second-half of 2022 which were open to UK steel value chain stakeholders, including policymakers and financiers.

The UK's climate targets cannot be met without reducing emissions from steelmaking, the ETC said, forecasting demand to rise by 20% between 2020 and 2030, due to increased consumption from the energy transition and wider economy.

Steelmakers are aiming to make their steel low carbon by pairing direct reduced iron, or DRI, production technologies using green hydrogen with electric arc furnaces, or EAFs.

"Low-emissions primary steelmaking is not only desirable for the UK, but eminently possible, requiring only a few, strategic interventions by industry and government to enable a viable investment case," ETC Chair Adair Turner said.

He added that the ETC report provided a path for industry and government to rapidly decarbonize UK steel, while preserving the capability to produce domestically.

Actions

The actions the ETC report called for include the implementation of effective carbon pricing on steel imports and domestic production, lowering electricity prices to make scrap recycling more economical, premium forward offtake agreements and guarantees to manage technology risk.

According to the ETC, a progressive carbon price would act as a foundation for the low carbon steel investment case.

It noted that the UK government was reported to be considering support measures totaling GBP600 million ($739.75 million) to maintain and make production low-carbon at existing integrated steelmaking sites, which would be a good use of the funding, but not if the plants remained systematically uncompetitive while imports faced lower or zero carbon costs.

"Implementing a UK carbon border adjustment mechanism (or equivalent measure) to ensure both steel imports and domestic production face the same progressive carbon pricing would be essential," the ETC said.

High energy costs faced by UK steelmakers when processing scrap was one factor causing scrap to be underutilized, with exports reaching 8 million mt/year. This is caused by -- among other factors -- the high electricity costs faced by UK steelmakers. Lower electricity prices would, therefore, make scrap use more economical for EAF projects, the ETC said.

Forward purchase agreements from buyers would help the investment case for such projects, while financial guarantees, normally backed by governments, were also an effective tool to help financiers de-risk uncertainty surrounding investment in novel technologies.

Government support

The ETC said direct government support in the form of subsidies was also needed to strengthen the investment case, particularly for the high upfront costs of developing breakthrough projects.

Subsidies for operational expenditures, chiefly for green hydrogen, would also be very impactful but would involve a longer-term commitment on the part of government, according to the report.

"All these actions are feasible in the short term and could unlock a first wave of breakthrough steel investments in the UK," the ETC said, adding that the necessary breakthrough iron- and steelmaking technologies were already available, while the right conditions for encouraging project proposals and enabling FIDs were also within reach.

In addition to these actions, the report called for cross-value chain collaboration to advance the first wave of projects to achieve FIDs.

The most important condition for unlocking investment was the role of government, as well as switching away from an approach of moving from crisis to crisis and rather setting out a clear vision for the future of the industry.

Platts, part of S&P Global Commodity Insights, assessed the weekly UK hot-rolled coil price at GBP710/mt DDP West Midlands Jan. 26, down 14.5% from the start of 2022.