Decarbonising heavy industry

The green transition will not succeed unless industrial sectors also manage to decarbonise production processes. Sweden has experienced problems with long-term power purchase deals, with many companies facing a very tough financial environment amid price volatility and oversupply. Listen to a discussion on the lessons learnt for Europe and one company’s ambitious plans to massively reduce its carbon footprint.  

Host: Snjólfur Richard Sverrisson, Editor-in-Chief, Montel

Guest: Mia Bodin, Partner, Bodecker Partners; Arne Österlind, Energy Portfolio Director, H2 Green Steel. 

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello, listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. This week we turn our attention to Sweden. In some ways, the country's a microcosm of the challenges as well as the opportunities of the path to decarbonization. Many wind parks in the north of Sweden have faced a very tough financial environment amid low wholesale prices and oversupply. However, the country is taking major steps to clean up the production of steel, and the rest of Europe is watching closely. My name is Richard Sverrisson and joining me today are Mia Bodin of Bodecker Partners. A warm welcome to you, Mia.

Mia Bodin, Partner, Bodecker Partners: 0:42

Thank you very much. Very nice to be here.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:44

Welcome back to the pod and Arne Österlind of H2 Green Steel. A warm welcome to you Arne.

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 0:48

Thank you very much.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:49

I think I'll start with you Mia, to give us a bit of the context and the background. What's happening in Sweden? What's the current state of renewables expansion in the country?

Mia Bodin, Partner, Bodecker Partners: 0:58

We have had a very healthy investment environment in Sweden for quite a long time now, I would say for renewables. So if we start with the onshore wind development, it's been healthy. Think we have currently around 35 Tet hours of renewable protection or of wind energy production. And the next three years, we have another 20 terawatt come hours around coming only based on turbine what's actually been ordered to turbines been ordered, and an investment decision. So it's looking quite good the next three years. Solar definitely coming rapidly as well. Offshore. Nothing so far as we know we have some old ones but new, no new ones so far, but but definitely starting to see at least an interest in investing in those as well and lots of projects out there. But of course after these next three years regarding onshore wind power, there are challenges. And we have seen permitting per permission times lead times being longer and longer. And I think we are among the worst in Europe. Now, when it comes to how long it takes to get your permission for a wind power we have the immune. Bel Vito, that has of course created quite a lot of problems for many wind farms.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:03

Tell me a bit about that. What, you know, what, if our listeners aren't aware of that Yes. What does that mean in, in effect?

Mia Bodin, Partner, Bodecker Partners: 2:08

Well, it, in, in, in effect, it means that the municipalities have a final right to reduce or to reduc reject a wind farm. And that's of course good. They should have that. But the problem is that they have had the right to change their minds throughout the whole process. So the wind farm can have invested a lot of money. They can even have had a, an acceptance from the municipality and the permission of course, the environmental prop and all that. And started even to come close to construction. Maybe I even have ordered the wind turbines. And then there's a new. Municipality or the new steer of the, on the mutuality and they get a no.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:42

And they pull the rug from,

Mia Bodin, Partner, Bodecker Partners: 2:43

and they just pull the rug completely. So that's, of course, has caused a lot of hesitance among the investors because you don't want to invest in something that. Where you know that the rug can become, be pulled anytime. So that, that is a big problem. And let, going forward.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:57

Sorry to interrupt them here, but it's also, it's for, we've often talked on the podcast about these red Tape Bureau bureaucracy issues, permitting and it's become, you know, very much in southern Europe. But, so for some listeners, it'd be quite interesting to hear that there's also an issue in the Nordics and particularly in Sweden.

Mia Bodin, Partner, Bodecker Partners: 3:12

Yeah, absolutely. Absolutely. That has been an issue for the last years and increasing issue. But it's not only the permitting, then of course it's also lack of grid capacity. It's harder and harder to receive enough grid capacity to build out. So I would say it's the investment interest is definitely there. There's, lots of potential. There are projects out there ready to be built and constructed. But it takes time. And we need to have more clearance, so to say, on both on the political side and the grid capacity side for it to happen. And that, that's for onshore. And I think solar is about the same as well. So that's kinda the setting.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 3:44

Would it be fair to say that it's an oversupply situation at the moment? Prices have been very low, haven't they?

Mia Bodin, Partner, Bodecker Partners: 3:49

Yeah, absolutely. Both low and high, I would say. But the high prices we've had is probably not because of the renewables. That was other courses for that. But yes, we have had an oversupply or we do have a net oversupply in Sweden, so that's for sure. But prices that we've seen have been stable enough for wind power producers. So I think they, the problems that we have seen. In the newspapers and so on. It's not the sign of the business being in trouble. There's still healthy healthy economics in building wind power today. Especially for the ones that have already been built that had lower costs when building it. Now costs have gone up a bit for newer wind farms to be built, but, so it's, the financials are healthy. That's not the main problem here. Then of course, we've come into that later. We've had some problems with.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:29

We'll touch upon those later 'cause there's been some instances that have, created some media coverage or, some ripples out there. But we're also here to talk to you, Arne, about this very exciting project in the north of Sweden. H two Green Steel. It tells, it, sort says itself what it is. It's self-explanatory in a way, but could you explain what the project is and why in Sweden?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 4:48

Right now we are about halfway through our Greenfield product in Bodan. It'll be the first big steel plant built in the last 50 years in Europe. Actually, our mission within H Green Steel is a decarbonize, the heart ba industry. And we used to say that we start with steel and the Boan steel plant is our first physical asset to. Aiming to produce about 5 million tons steel per year once we are in full production. So right now we have about two years left in the billing process. So we will ramp up during mid 2026 and we will have around one year ramp up and we will reach two and a half million ton production in 2027. But that is our first project. We are parallel looking at other sites globally. So we are already looking in port in Canada, in Brazil, for example,

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:37

is a project that, that, that's here for the long term. I mean, so you are looking at you know, long term deals to secure that green energy, whether it be hydro, solar or wind, or?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 5:47

Yeah. We need to reduce the risk in the project to, to balance the downside risk for electricity, price, meaning that like we saw in 2022 when we have electricity prices about 100 euro in the Nordics that will be a very hard situation to face if it come to reality, if you're not having hedging done in the portfolio. So that's why we are working with, 10 year he portfolio to even out the price and to be able to achieve low electric prices ongoing.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:15

Because for the financing to get the, the banks on board to such a project, you have to have, you have to prove you have. Hedged out some of the production, but also have secured long-term deals for electricity.

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 6:25

Yeah. It is different phases. Actually. We have one phase, it's until 2032 or something. It's the first phase for the it green steel when we are dependent on the the financing from the banks, and we need to fulfill their demands regarding the securing of the downside risk in the product. And, electricity, for example, is about one third of our cost for producing steel. So that is very important to, to hedge that in a proper way.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:53

Can you tell us a little bit about the production process? Because the clues in the name H two green Steel, so hydrogen's obviously very important you're having is it. Correct me if I'm wrong, but one of maybe the world's largest electrolyzer being constructed in Sweden. Yeah. That, so the hydrogen is green hydrogen particularly is a very important part of this industrial process, isn't it?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 7:12

Yeah. Green hydrogen is one of our key elements. We'll use hydrogen to reduce iron ore instead of using coal and Cox. And by that, we will save about two tons of carbon emission per ton steels produced. And, in our case, we'll produce about 5 million tons steel per year. So that will mean that we'll save about 10 million tons of carbon emission.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 7:32

And that's not in insignificant anyway. That's, yeah, it's absolutely, but Mia, this kind of project's obviously quite important for Sweden and the Nordics. We've seen, the paper and Pul industry has been struggling for years and years. Given everything, the move to digital one of the main regions. Reasons but what does this mean a project like this for Sweden and the Nordic region?

Mia Bodin, Partner, Bodecker Partners: 7:52

I think all these industry projects that we see are extremely important for the competitiveness of Sweden as a country. We have H two green steel, of course decarbonizing steel sector, not just in Sweden, but in all of Europe. And if it's not gonna be done here, it's gonna be done somewhere else. And of course, we want it to be done in Sweden. For obvious reasons. And we have L-K-A-B-S-S-A-B, we have all the. In Sweden that is now relying on fossil fuel that will need to. Transfer into something else. They will be part of, they are part of the UETS system. First of all, they won't be able to, they will be very expensive, first of all to receive the allowances. And soon they won't even allow the, they won't even be allowed the allowances at all, so to say. So they have to do something. And that can be, that has to be done here or they will. Be moved somewhere else. It's, it is just something that we have to do. And we have extremely good conditions in the Nordics compared to many of the other countries. We have, of course, we have had for a long time low electricity prices and definitely have the potential to have that in the future as well. We have. As we said, all these new projects ongoing, that, that can provide this electricity. We have a big source of biogenic, CO2 that is needed for several of these processes as well when they're gonna produce ammonia for fertilizers or e methanol for shipping fuel or aviation fuel. So we have lots of forest simply in Sweden and also in Finland, in the Nordics, and that's important. We have a long coastline with ports being able to ship. The final products down to Europe. So we have the potential here to do something. So it would be a very big waste and frustrating if we are not gonna cope with that here with these good conditions that we have. And we have lots of projects ongoing now, but it's important to, to remember that it's only a few of these that. Have actually started or that have taken their final investment decision. So it's enormous amount of projects out there with with, very good projects, but they are not decided yet. So we will make sure they need to make sure that we will, we make, have to make sure that they have the grid capacity, that we have the low enough electricity prices and access to renewable power. So in, in order for those to actually happen, it's just not gonna happen by itself.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 10:05

Absolutely. And I think, a lot of these projects get announced with big fanfare. And but when maybe before the final investment decision is reached, then they get dropped, yeah, yeah. And that's a risk of course. Yeah. That's a risk of course. But what is the outlook for. Demand or consumption of electricity in, in Sweden? Is that what are your sort of predictions going forward?

Mia Bodin, Partner, Bodecker Partners: 10:23

It's extremely hard to say as well. I'm not the one deciding on these projects. But the plan, of course of what we read in all these scenarios is, of course, a doubling or even more of the electricity consumption. I am a bit skeptical that will happen at least in that. Time period. Simply because of what we've discussed there are delays because of grid connection capacity. We are seeing a reduction in pace for new new renewable production coming online and fossil free production. That will take longer. I think, all agree on that. We're not gonna see any new. Nuclear either before 2035 and probably later than that. And investment decisions need to be taken a lot sooner than that. I'm a bit worried that it, we won't get that consumption increase because consumption increase is good in this case, because it is the industry that we need to keep in Sweden. But it's hard to say whether it'll be half of that or I dunno, very hard to say, but

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:15

there's a lot of talk of data centers isn't there, and AI and. Stuff as well. And in Sweden,

Mia Bodin, Partner, Bodecker Partners: 11:19

that's definitely something that could that, that could come and maybe compensate for even if the all the power checks sector does not come as fast as we think than data centers and ai, that can come quicker. So that's lots of uncertainties.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:30

Because I think with hydrogen as well, if I turn to you Arne you know, I hear, I talk to people in the market a lot and they, the concept of generating hydrogen, transporting it then burning it for potentially in hydrogen ready gas plants seems very say wasteful or not the best use of money in terms of,

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 11:48

I think that in mind actually.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:51

So that's the, that's, but that's with your project, you're producing the hydrogen on site and it's, there's none of it being transport transported? No, we are using, sitting ourself in our process. Yeah. So that's a different kind of use case if you like. And I think that's a very positive case for hydrogen or that's what that basically, some of the experts will tell me. But for you, obviously key is. Or Yeah. Low prices and to maintain those.

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 12:14

Yeah. Regarding the production of hydrogen, I would say that low electricity prices is key. To be able to get the cost you need to have the case bankable.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 12:22

But, as we said, securing competitive electricity prices is important. How do you go about doing it? You don't need to go into any sort of details or give away any secrets here on it, but is it spot day ahead markets? Is it forward markets on exchange? Or is it PPAs or power purchase deals, which are long term or a combination of all three?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 12:38

It's a combination of everything. Yeah. So I will say that most part of it is long-term ppa a contracts from existing power, especially for us in the North Nordics. But if you look at the sites in like in the us you be. Very much reliant on new built wind power, solar power. And and the challenge there is not to be too exposed to the grid power because you get exposed to the grid mix with a lot of carbon emission footprints. So that's why what we are trying to avoid in our production well.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:08

Yeah, of course that's important. Otherwise it's not so green anymore, is it? So that's, no, it's not. Yeah, absolutely. Mia, and if I stick on the topic of PPAs and talk a little bit there, there's been a lot of, in the news in Sweden how some companies or some wind parks came close to bankruptcy. Maybe we were even bankrupt. What was the reason for that?

Mia Bodin, Partner, Bodecker Partners: 13:26

The reason for that was a hedging strategy that is based on a very high amount of base load PPAs, meaning that the wind farms have promised to deliver a specific amount of electricity to an offtaker every hour. And of course, as we know, the wind power doesn't produce that evenly. So in some hours it would produce less than promised and than the wind park would have to purchase that from the market to be able to deliver it to the customer. And in other hours it would produce more and it can deliver what it produces and then sell the rest. At market prices, and that's in itself has not really been a big problem before. When the market prices were more stable because the lack of electricity that it produced, you can produce, you could purchase from the market at about the same price as you had agreed to sell to the customer. So not making a big loss there, and then you would get some of that back when you could sell the excess to the market. But with the volatile prices that we have seen, the difference between high prices and low prices have been. A lot higher. And at the same time we have had some years also where the wind production was lower than forecasted. So those two in combination has of course meant that there have been more hours where the wind farm would have to purchase something from the market at one price and then sell it back to the customer at another price and another. Problem there is what we in, in, in the business call cannibalization that that in those hours where you produce too little is also the same hours where everyone else is producing too little. There's simply not enough wind in the system, which means that they. Power prices are generally a lot higher in those hours. So during the hours where you have to purchase from the market, you would have to purchase at very high prices and sell at your lower agreed PPA price. And in the hours where you could be happy and you produce a lot, the power prices would be very low. So you would not gain that difference there. You would have to sell it back to the market at lower prices. So all those things in combination. Has created problems. And the reason why you entered into these baseload PPAs was really that a lot of of the investors in these wind farms in order to have their financing secured, to have depth financing you would need to have. Secured your power prices. And many of the banks are also European banks. They are used to feed in tariffs. They wanted to see the price risk completely covered, and the price risk is covered in the base load. PPA. It's just that the profile risk and the volume risk was. Somehow forgotten in the equation. And the quite important elements there. Exactly. And the share was too high. So Baseload PPAs in itself is not a problem. If it's but it needs to be to a reasonable share where you can actually say this, we know that we will always use this at least. And then it's fine. It's just you can't over promise.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:11

Do you have a view here Arne?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 16:12

Yeah, I would say that until early 2022, the high volatility was not the problem, especially not for the wind power industry. You can live with selling base contracts from wind power farms. But as we see now, the partly cannibalization effect is really large. And also the high volatility in spot prices make it almost impossible to sell wind power PPAs as base load than you are after business. Sooner or later. Or you need to have a huge premium on top and that's not affordable for the consumers.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:41

Do you work with developers sometimes as well?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 16:44

Yeah we are working really close to developers and we trying to, like I say, become the perfect offtake for wind power or solar power for that matter. Meaning that we are able to take on as produced power because we have a huge portfolio and it could cope with some, variation in, in delivery from wind power.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:03

Yep. No, that makes sense. Absolutely. And so what's the answer here then? Base load, does that base load, those base load PPAs? Do they not are they not really fit for purpose anymore in the current shape of the market?

Mia Bodin, Partner, Bodecker Partners: 17:13

Not in that. Oh, in that amount that it has been before. Definitely not for renewable power production. But I think, I mean, PPA is in itself is a very good thing. It's a power purchase agreement between an offtaker and and a power producer. So that, that's really good. And the problem here is that the offtaker would want base load and the producer wants pay is produced. And it's not impossible to close that gap, but it needs to be done. There needs to be some kind of risk sharing in it. And we are getting closer to that as, as honestly as well, they are trying to find solutions. We all want the same thing here. The wind industry and the solar industry. They want the steel industry and the cement industry and to grow. And the cement industry, the steel industry, they need the renewable power industry to grow. We all want the same thing here.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:57

So there is a symbiosis there.

Mia Bodin, Partner, Bodecker Partners: 17:59

Absolutely. And there are rev, there are ways in PPAs you can structure a PPA the way you want it, and there are versions where you could share that, that risk in different type of contracts and combinations between pays, produced and a base load. And there are other revenue streams on ancillary services. If you can add some flexibility, some storage to that, and you can share the revenues on that side. So I'm sure we'll be able to find. Ways to to mitigate that risk and to close that gap. But but it's both a price gap and it's a gap of what kind of risks you want to take. And it's. Probably gonna take a little while before we find the good, the best solution on this. The best balance, absolutely. But we do have a very good system in, in Sweden for that. And we have a renewable grid also talks about an in innovation, trying to find time to place your industry closer to a wind farm to avoid maybe the being, having to connect to the grid until the grid is there. So I think lots of different solutions that we will see. It's just. Maybe not tomorrow.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 18:58

Of course as well the policy and the regulatory environment is very important. And if I maybe as a, as a closing question, Arne, could I ask you about, if you had one wish for policy makers, either Sweden or the European level what would that be?

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 19:12

I would say make up your minds regarding this because, since election, we have turned from wind power into nuclear power. I don't think it's good for the future actually, because we end up in a wait and see situation. So I think it's good if you can balance this discussion a bit and see what is best for the country in the long run. Not only to the next election.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:35

Yeah it's a, it is a challenge. Is it, when you have that sort of, see that sort of pendulum swings, pronuclear, pro wind, pronuclear, again, that's obviously for investors such as yourselves and others it's, it creates that level of uncertainty, which is not always very welcome if I'm, if I understand you correctly. Absolutely. So certainty and stick to what you, stick to your guns in a way that's maybe

Arne Österlind, Energy Portfolio Director, H2 Green Steel: 19:54

that's very important.'cause it's a, it is a long term decisions that everybody has to make.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:59

Exactly. And if you don't wanna shy away or scare off of the investors in this very important energy transition we have, what would your wish be? Mia?

Mia Bodin, Partner, Bodecker Partners: 20:06

I think it would be exactly the same. Nothing really. Okay. Yeah. We actually had an event last year with lots of investors and project developers of large scale wind and solar farms. And I think we asked them what would potentially stop your willingness to invest whether it be in power to X or whether it be in wind farms or solar or storage. And it all said political uncertainty and grid not power.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:28

Access, power to, hydrogen.

Mia Bodin, Partner, Bodecker Partners: 20:29

Yes, exactly. Power to hydrogen, to ammonia or methanol. So I think political stability and knowing, and it's. It's a bit sad that, the whole both industry and the energy sector when, and the renewable energy sector are not trying to get rid of nuclear in any way. We are all four. It's that's a good part of the mix. So why should the politicians be either or? It's we need it all to, to have a Swedish country that will be competitive.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:57

Absolutely. It's a need need. It's not black and white. This in Sweden, certainly, at least. And that's important to bear in mind. But thank you both very much for being guests on the Montel Weekly podcast. We are at Montel Swedish Energy Day. There's been some hubbub in the corridor. So I hope that hasn't put you off and I hope it doesn't put the listeners off. But thank you once again, Arne and Mia.