The political framework
The political goals at the level of the European Union (at least 55% reduction in CO2 emissions by 2030, climate neutrality by 2050) and in Austria (climate neutrality as early as 2040) were already established a while ago, but the specific key parameters for achieving these ambitious targets have not been spelled out: They are still being debated or prepared. Hence the detailed description of the political environment on page 36 of the voestalpine Group’s Corporate Responsibility Report 2021 applies unchanged.
No material progress was made in the business year 2021/22—neither with respect to the EU’s Fit for 55 legislative package for implementing the Green Deal (e.g., modification of the emissions trading scheme or introduction of an associated carbon border adjustment mechanism – CBAM), nor with respect to national legislation in Austria. The topics at issue in Austria concern the transformation fund for energy-intensive industries, which has been debated since the Northern fall of 2020, or even industrial hub strategies that link climate and industrial policies. At the time this Report was prepared, however, plans were in place to resolve these and other matters (such as a hydrogen strategy) soon.
As a result, the steel industry and other energy-intensive industries are demanding a coordinated master plan at the level of both the EU and its individual member states that supports achievement of climate neutrality and also answers the following questions that are essential to the affected industrial companies’ ability to prevail in the global competition:
- How can renewable energy be generated in the required quantities and be transported to consumers?
- Where will green electricity and green hydrogen come from—in the required quantities and at competitive prices?
- How will uninterrupted supplies of such energy be guaranteed? What kinds of infrastructure are needed and being put in place to provide, transport, and store such energy?
- What are the specific ways companies will be supported financially in connection with the transformation, given the investment costs and predictably higher operating costs? One way, for example, would be to distribute the proceeds of CO2 allowance auctions for earmarked purposes back to adequately endowed European and national decarbonization funds.
- How can carbon leakage—the offshoring of industries from the EU to regions where climate action requirements are less strict—be avoided?
EU Emissions trading
Previous CR Reports have already described both the approach and the aim of the EU Emissions Trading System (EU ETS) in detail. The voestalpine Group’s need to purchase additional emissions allowances arises from its total need for emissions allowances less the no-cost allowances allocated to it. Just as in previous business years on average, in the business year 2021/22 this need equated to about one third of the Group’s total carbon dioxide emissions. In the reporting period, the CO2 price just about doubled, leading to a concomitant increase in the voestalpine Group’s expenses. The EU Commission’s plans, which are supported by a sizeable majority of the EU Parliament, provide for yet another marked decrease from 2026 in both the number of emissions allowances per se and the number of allowances allocated free of charge that will occur simultaneously with the introduction of a carbon border adjustment mechanism. This will also trigger an exorbitant increase in the cost of allowances purchased. Unless these funds are returned to the companies for earmarked purposes so that they can use them to underwrite the technological shift to carbon neutral manufacturing in the long term, by definition they will not be available to the plants for investments in climate action either.
green steel: The voestalpine climate neutrality plan
In the business year ended, the voestalpine Group further fleshed out and pressed ahead with its strategies for bringing about climate neutrality.
greentec steel is an ambitious, step-by-step plan that voestalpine developed to make its contribution to achievement of the global climate goals.
In a first step, this approach provides for the incremental switch from the coal-based blast furnace route to electric arc furnace technology driven by green power—subject to considerations of economic feasibility. One electric arc furnace each may be installed at the Group’s steel facilities in Linz and Donawitz (both Austria) as early as at the start of 2027. The total planned production capacity will be about 2.5 million tons per year; Linz will account for 1.6 million tons of it, and Donawitz for 900,000 tons.
In March 2022, the Supervisory Board of voestalpine AG approved an amount in the three-digit millions to fund the initial implementation steps. Hence the work to clear the necessary construction sites along with the work to modify the infrastructure can begin immediately. In the Northern spring of 2023, the Supervisory Board will make a decision as to final approval of the investment required for the two electric arc furnaces so that construction of the facilities could start in 2024. The commissioning of a 220 kV power line in Linz no later than by the end of calendar year 2026 is one milestone required to this end.
By itself, this initial step in the transformation could achieve a roughly 30% reduction in the CO2 emissions that voestalpine’s steel production at its two aforementioned Austrian facilities generates. This would equate to a reduction by about three to four million tons of carbon dioxide annually—or close to 5% of Austria’s total current carbon emissions. Product quality will be as high as ever despite the technological transformation thanks to an innovative raw materials mix comprising liquid pig iron, scrap as well as automated process management. The greentec steel concept simultaneously provides the basis for hydrogen metallurgy in the long term.
Moreover, voestalpine has developed a scalable process for enabling carbon neutral steel production that does not rely on fossil carbon and has obtained a patent for it from the European Patent Office. This patent applies in all of Europe’s most important steelmaking countries and covers the manufacture of sponge iron via the direct reduction process using green hydrogen and biogas.
voestalpine plans to continue moving greentec steel in the direction of green hydrogen in order to achieve carbon neutral steel production by 2050. A number of extensive research and development projects are dedicated to this technology (also see the chapter, “Research and Development”). Among others, they include the Linz-based H2FUTURE hydrogen pilot plant; the SuSteel pilot plant in Donawitz that aims to enable sustainable steel production in a single process step based on iron ore using hydrogen plasma; as well as the Hyfor research project at the same facility concerning the use of hydrogen to reduce ultrafine ores.
Besides large investments, the fundamental shift from fossil-based technologies to those based on green electricity and, in the long term, those based on hydrogen technologies also requires a lot more renewable energy. In fact, the very first step in electric arc furnace technology lowers the proportion of coal and coking coal in the energy mix in favor of electrical energy. The operation of two electric furnaces would require additional, externally generated electricity of about 2 TWh per year. At this time, voestalpine only buys about 1.2 TWh of externally produced electricity. The largest portion by far of the relevant power supply is obtained by converting fossil process gases into electricity in the Group’s captive power plants (also see chapter “Energy”).
The envisioned, complete replacement of carbon with hydrogen in the long term would increase the need for electricity to some 33 TWh. Of this amount, 27 TWh are required for electrolyzing purposes and green steel production operations, and the remaining 6 TWh for the downstream processing chain and infrastructure.
Estimates as to the investments required for just this initial electrification step run to about EUR 1 billion. Increases in operating costs relative to current processes must be anticipated as well—at least in the introductory phase of CO2-reduced steelmaking. Hence voestalpine has submitted an application for the first step of its greentec steel concept to the EU ETS Innovation Fund, which financially supports select innovative, large-scale industrial transformation tools. The company has also been in talks with Austria’s government regarding national instruments for underwriting both investment and operating costs.
As already described, the actual feasibility of the technological transformation is predicated on the availability of green energy at prices that are competitive throughout the EU and globally; secure, stable supplies; and adequate investment options for the steel industry. voestalpine thus remains critical of the EU’s plans to let the benchmark-based, no-cost allocations expire. This would be counterproductive during precisely the period that is critical to decarbonization by 2030, because it would be carried out in tandem with the introduction of an experimental carbon border adjustment mechanism.
voestalpine took other, immediately effective steps related to climate action and resource efficiency in the business year 2021/22 while preparing the fundamental technological shift. Deliveries of the first CO2-reduced steel started at the end of calendar year 2021. The carbon footprint of this greentec steel edition is some 10% lower thanks to the increase in the share of green electricity and an innovative raw materials mix that is achieved by adjusting both the reducing agents and the crushed iron ore/chalk mix as well as by maximizing the amount of scrap used. This approach will be expanded to other Steel Division product groups in the future. The installation of PV units throughout the Group is yet another big step in the ongoing expansion of its captive green power generation. (In this respect, also see chapter “Environmental Investments”)