Governments could be the gateway to industrial electrification and a sustainable future

"ELECTRICITY AND STATE CAPITALISM EQUAL SOCIALISM"

V.I.LENIN

Apr 29, 2024

Technological development could help overcome the barriers to industrial electrification.
Image: Unsplash/Thomas Despeyroux

Jan RosenowDirector of European Programmes, Regulatory Assistance Project

Cristina OyónDirector of Technology, Innovation and Sustainability, The Basque Business Development Agency

Natalia ZabolotnikovaAccenture Fellow , World Economic Forum

Xabier Mugarza ZorriquetaProject Fellow, Clean Power and Electrification, World Economic Forum Geneva

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This article is part of:Special Meeting on Global Collaboration, Growth and Energy for Development

Governments are key gateways to a sustainable future by effectively taxing and subsidizing energy and influencing industrial electrification.
Rebalancing taxes and levies on electricity will tackle the “spark gap” or electricity-gas ratio that will bring down operating costs after electrification.
Technology development will help overcome some of the barriers to industrial electrification, requiring innovation policies oriented towards solutions for decarbonizing industrial activity.


Within the challenge of achieving industrial electrification at speed and scale, governments stand as major stakeholders, holding substantial influence in guiding industries towards a sustainable future.


At the forefront is the imperative for governments to reassess the energy taxation framework. High and volatile electricity costs represent a primary barrier for industries electrifying their processes and require a recalibration. Maintaining an equitable electricity-to-gas price ratio is crucial, prompting governments to review electricity taxes.


Additionally, governments play a central role in establishing a level playing field by introducing subsidy structures and employing “technology-forcing” policies to make electrification technologies competitive.

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Tackling barriers to industrial electrification


Industry electrification faces many barriers:
Low fossil fuel prices compared with electricity.
High upfront costs.
The expectation of very short payback periods.
Unfamiliarity with technologies.
Concerns about disruption.
Potential reconfiguration of industrial processes.


The diverse nature of these obstacles warrants a policy mix that combines different, complementary types of instruments and drives industry electrification at the needed pace.


Unfortunately, current policy approaches lack a coordinated and strategic focus. Recent reviews of the US policy landscape failed to find any known programmes or policies that explicitly support industry electrification. In some cases, energy efficiency programmes even lock in polluting fuels by incentivizing replacing fossil fuel technologies with more efficient ones. However, there are opportunities to overcome these barriers.


First, the price ratio of electricity to gas, the so-called spark gap, is critical for the economic viability of electric industrial heat technologies such as heat pumps. As long as it is more expensive to run a factory after electrifying it, many businesses will not want to invest in these technologies.


Policymakers have implemented rebalancing electricity taxes and levies as a tool to tackle the spark gap. Finland, Norway and Sweden recognized this issue and addressed it early, which is why businesses in Nordic countries install so many industrial heat pumps.


Second, to kick-start the market, government grants and tax rebate programmes can help build demonstration projects in different industrial sectors to show the viability of the technology and scale. Options for achieving this could include reorienting existing industry energy efficiency programmes to give a premium to electrification and to exclude fossil fuel technologies from government funding.


Third, spreading information and offering implementation assistance through various programmes is crucial for success. This can take the form of industry networks, such as those established in Germany, where businesses can exchange ideas and learn about the technology or engineering assistance to help guide companies through the process.


Furthermore, emissions or efficiency standards for industrial processes are a powerful tool to ensure new equipment is compatible with net zero. Appliance, equipment and vehicle standards have proven among the most effective policy strategies to reduce energy use and emissions. In the industry sector, however, processes are often complex and it may be more appropriate to set system-wide rather than component standards to support further electrification technology development and deployment.


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Fuelling technology innovation


Technology development will help overcome some of the barriers to industry electrification. Innovation policies oriented towards solutions for decarbonizing industrial activity are key. These policies should put into practice mechanisms that support closing the gaps between demand requirements and technological solutions, as well as between research and development and the scaling of research results.


In the first case, governments can facilitate the relationship between the demand for energy-intensive industries and carbon dioxide emissions and the technology providers that offer solutions for electrification. To that end, several initiatives could be led by governments, for example:
Development of sectoral roadmaps and strategies in private-public collaboration with scenarios for decarbonization through electrification, allowing the understanding of what the measures are, especially of a technological nature, to facilitate the transition.
Identification of technological challenges and trends and alignment of funding programmes for the creation of technical capabilities to address those challenges and trends.
Economic support mechanisms at the service of electrification strategies and available to companies for the development of collaborative research projects, such as subsidies and tax incentives.


Mechanisms for scaling up are required for rapid implementation of research results. Again, subsidies and tax incentives are the key mechanisms governments can provide to promote investments.


Demonstration facilities become vital assets that require relevant capital investment and support for operational expenses because they present difficult business cases in an uncertain operational environment, such as validating research results. Joint initiatives with public and private funds involve different industries with common needs.


Governments can also facilitate the creation of new value chains that address the manufacturing and exploitation of solutions to overcome electrification challenges. Cluster policies have a proven track record in that sense.


While governments may not always be perceived as central players, they are indispensable in advancing industrial electrification through policies such as tax reforms, subsidies and incentives. Recognizing their critical role is essential for creating a greener and more sustainable future.