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Power-to-Gas as an Emerging Profitable Business Through Creating an Integrated Value Chain
Available online at www.sciencedirect.com
ScienceDirect Energy Procedia 73 (2015) 182 – 189
9th International Renewable Energy Storage Conference, IRES 2015
Power-to-Gas as an Emerging Profitable Business through Creating an Integrated Value Chain Christian Breyera,*, Eemeli Tsuparib, Ville Tikkaa, Pasi Vainikkac a
Lappeenranta University of Technology, Skinnarilankatu 34, 53850 Lappeenranta, Finland VTT Technical Research Centre of Finland Ltd, Koivurannantie 1, 40400 Jyväskylä, Finland c VTT Technical Research Centre of Finland Ltd, Skinnarilankatu 34, 53850 Lappeenranta, Finland b
Abstract Power-to-gas (PtG) technology has received considerable attention in recent years. However, it has been rather difficult to find profitable business models and niche markets so far. PtG systems can be applied in a broad variety of input and output conditions, mainly determined by prices for electricity, hydrogen, oxygen, heat, natural gas, bio-methane, fossil CO2 emissions, bio-CO2 and grid services, but also full load hours and industrial scaling. Optimized business models are based on an integrated value chain approach for a most beneficial combination of input and output parameters. The financial success is evaluated by a standard annualized profit and loss calculation and a subsequent return on equity consideration. Two cases of PtG integration into an existing pulp mill as well as a nearby bio-diesel plant are taken into account. Commercially available PtG technology is found to be profitable in case of a flexible operation mode offering electricity grid services. Next generation technology, available at the end of the 2010s, in combination with renewables certificates for the transportation sector could generate a return on equity of up to 100% for optimized conditions in an integrated value chain approach. This outstanding high profitability clearly indicates the potential for major PtG markets to be developed rather in the transportation sector and chemical industry than in the electricity sector as seasonal storage option as often proposed. © 2015 2015 The byby Elsevier Ltd.Ltd. This is an open access article under the CC BY-NC-ND license © TheAuthors. Authors.Published Published Elsevier (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy. Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy
Keywords:power-to-gas; business model: grid services; chemical industry; forestry
* Corresponding author. Tel.: +358 50 441 1929. E-mail address:[email protected]
1876-6102 © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy doi:10.1016/j.egypro.2015.07.668
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1. Introduction In recent years many researchers have performed studies about power-to-gas (PtG) and its beneficial role in the energy system, in particular for reaching very high shares of renewables [1-16]. PtG technology can be used in several ways: seasonal storage of energy, production of hydrogen (H2) and methane (CH4) based on renewable electricity (RE) to be used for mobility [17], heating purposes, the chemical industry [15] or providing valuable balancing capacities. In addition, further benefits could come into consideration, such as using the by-products O2 and heat, as well as upgrading of sustainable biomass-based CO2 to various hydrocarbons (Fig. 1).
Fig. 1. Schematic diagram of a power-to-gas plant. The major inputs are electricity, water (H2O) and CO2 to get the major products: methane (CH4), hydrogen (H2), oxygen (O2) and heat.
Until now, it has been challenging to proceed from the demonstration phase of PtG technology to the commercialization phase with optimized balance of plant [15]. This article presents a comprehensive view on an integrated value chain for the input sources, output products and related services, enabling a profitable business model for the special conditions of a kraft pulp mill. 2. Methodology The effects of an integrated value chain for a beneficial PtG business case are illustrated for a pulp mill and the respective local demands, opportunities and special requirements. For PtG a kraft pulp mill provides an advantageous process integration environment. This is because a pulp mill is a large point source of wood-based CO2, since such a pulp process consumes some 20 kg of oxygen per ton air dry (AD) pulp, and there is possibility to use recovered process heat for a CO2 capture process. In greenfield pulp mill investments it is also possible to consider utilizing oxygen at an activated sludge waste water treatment facility. By rule of thumb a 1 Mt AD/a kraft pulp mill produces enough CO2 to generate 11 TWhth synthetic methane per year. This is because half of the carbon in the wood entering a pulp mill ends up in the recovery boiler for combustion forming CO 2. The flue gas composition from a recovery boiler and flue gas impurities are shown in Table 1. Table 1. Recovery boiler flue gas composition after standard flue gas cleaning. Abbreviation: Total Reduced Sulphur (TRS).
Recovery boiler
CO
CO2
H2O
SO2
TRS
O2
NOx
Particles
dry
dry
wet
dry
dry
dry
Dry
dry
(mg/Nm3)
vol%
vol%
(mg/Nm3)
(mg/Nm3)
vol-%
(mg/Nm3)
(mg/Nm3)
50
15
20
5-9
5
5-7
150-200
10-15
UPM’s Kaukas pulp mill, located in Lappeenranta in Finland, has a capacity of 0.74 Mt AD/a pulp. It is also connected to the natural gas grid close to the Russian border wherefrom the gas flows to the main consumption areas
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in Finland. Due to this location and connection point to the main pipeline all bio-CO2 emitted from the pulp mill could be converted to methane and it could still be accepted to the current gas grid without any technical limitations. The total natural gas consumption in Finland was 33 TWh in 2013. The mill also produces deionized water suitable for electrolysis makeup water, and offers access to the 110 kV electricity transmission grid. The financial evaluation of current PtG technology integrated in an existing pulp and paper mill is performed according to standard annualized profit and loss considerations (Eq. 1) based on the physical energy and mass flows of a commercially available PtG plant [19] and the constraints of the aforementioned pulp and paper mill. ܽ݁ ൌ σ݅ ሺ ݅ݏെ ܿ݅ ሻ
(1a)
݅ݏൌ ݅ή ݅ݍ
(1b)
ܿ݅ ൌ ܿܽ ݅ݔ݁ή ܿ ݂݅ݎ ݅ݔ݁ ܿ ݂݅ݎൌ
ܹ ܥܥܣήሺͳܹܥܥܣ
ሻܰ ݅
(1d)
ሺͳܹ ܥܥܣሻܰ ݅ െͳ
ܹ ܥܥܣൌ
ܧ ܧܦ
݇ ܧ
ܦ ܧܦ
(1c)
݇ܦ
(1e)
Equation 1: Annualised earnings of an investment. Abbreviations: annualized earnings (ae), component (i), annual sales/ reduced cost of a component (si), annualized cost of a component (ci), specific price of a sold product/ reduced cost of a component (pi), quantity of a product/ cost of a component (qi), capital expenditures for an investment (capexi), capital recovery factor of an investment (crfi), annual operational expenditures for a component (opexi), weighted average cost of capital (WACC), lifetime of a component (Ni), equity (E), debt (D), return on equity (kE) and cost of debt (kD).
Two plant designs are regarded: Case A, 9.6 MW el electrolysis and methanation capacity, and case B, 9.6 MW el electrolysis capacity and 1.2 MWel equivalent methanation capacity. Baseload operation occurs in case A of 9.6 MWel and in case B of 4.8 MWel, and ±4.8 MWel are offered as grid services (frequency containment regulation). The electricity is purchased from hydro power plants but might be shifted later to a broader renewable energy mix. The produced H2 is used in case A for the methanation process and in case B mainly in a nearby bio-diesel plant, but also partly for methanation. The bio-diesel is produced on basis of by-products of the pulp and paper industry. The process is based on catalytic hydrogenation of tall oil [20], i.e. the synthetic diesel belongs to the family of hydrogen treated vegetable oils (HVO). Tall oil is a by-product of pulping coniferous trees and it is generated some 40 kg/t AD pulp. The Lappeenranta bio-diesel plant produces 100,000 t/a diesel. In the current set-up a substantial amount of H2, based on steam reformed natural gas, is needed in the process leading to an about 80% renewable bio-diesel. The favoured renewable power based H2 leads to a higher renewable energy content in the final bio-diesel and therefore increases its economic value. The O2 from PtG process is used in the nearby pulp and paper mill, replacing the production of an existing O2 production facility. The pulp mill also provides the possibility to utilise bio-CO2 for methanation which is based on wood being the natural raw material source for the pulp mill. Overall, about 21 Mt bio-CO2 would be annually available from large point sources (suitable for CO 2 capture and utilization on site) in Finland, mostly from pulp and paper mills [21]. The fossil CO 2 emissions in Finland are some 60 Mt/a, however there is a net sink of some -20 Mt/a in the forestry sector, i.e. the Finnish forests are building a net carbon stock [22]. Therefore, the forests in Finland show a net annual growth and can be denoted as a sustainable source. The produced bio-SNG (CH4) is sold to the mobility market. Grid services may represent an important source of income for PtG plants, in particular in the coming years. Modern electrolyzer units show ramp rates of up to 20% of their nameplate capacity per second. This flexibility can be utilized for valuable grid services, called frequency containment reserve (FCR). The FCR market in Finland is separated in two segments for special disturbance (FCR-D) and normal continuous operation (FCR-N). There exist also other grid service products, e.g. the frequency restoration reserve (FRR-A, FRR-M) and replacement reserve (RR), but participating on those markets is financially not interesting or even not feasible.
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For frequencies higher than 50.05 Hz down regulation is used, equal to increasing the load of electrolyzers of a PtG plant and vice versa for frequencies below 49.95 Hz. In operation zone steepness of the reaction is defined by the plant dependent function that is set to fulfill requirements of the Finnish Transmission System Operator (TSO). This fundamental function of the FCR-N service is exemplarily visualized in Figure 2.
Fig. 2: Frequency data for Finland for 1st of October 2011. Outside the dead band limit of ± 0.05 Hz around 50.0 Hz frequency containment regulation (FCR) is applied.
On the FCR-N market the capacities can be offered on an annual basis and on an hourly basis. Therefore, PtG plant operators can offer at an annual, but also hourly market for regulation capacities. The hourly averaged regulation price in the Finnish regulation zone of the Nord Pool spot market has been 14.9 €/MW (2011), 30.4 €/MW (2012) and 36.3 €/MW (2013) compared to regulation prices for the annual contracts of 9.97 €/MW (2011), 11.97 €/MW (2012) and 14.36 €/MW (2013). The prices reveal that the hourly market price, which is set by a day ahead auction, is more attractive for PtG operators, however the market volume for annual contracts is significantly higher than for the hourly FCR-N spot market. The very first PtG operators may not interfere with the market, so that they should opt for the higher prices. The trend for the last 20 years shows a steady increase in demand for grid services [23]. Data on the further technical requirements, which can be fulfilled by PtG operators, and market figures are provided by the Finnish Transmission System Operator (TSO), Fingrid Oyi [24]. The key assumptions for the two cases can be found in Table 2. Table 2: Overview on the cases A and B and key assumptions. *The methanation capacities are accounted in equivalent power input electrolyzer capacities. Case A
Case B
electrolyzer capacity
9.6 MWel
9.6 MWel
methanation capacity*
9.6 MWel
1.2 MWel
grid services offered
no
yes
capital expenditures 2015
17.9 M€
15.5 M€
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operational expenditures
40 k€/ MWel/a
30 k€/ MWel/a
Further assumptions for the business cases are: economic lifetime of electrolyzer and methanation units of 20 years, value of O2 of 80 €/tO2, market price for electricity of 40 €/MWhel, price of bio-SNG sold in the transport market of 75 €/MWhth, CO2 capture and utilization cost of 10 €/tCO2 for fossil steam reforming source in the beginning and 70 €/tCO2 for capturing from recovery boiler flue gases , fossil CH4 purchasing price at site of 35 €/MWhth, additional variable costs for reforming CH4 to H2 of 20% of CH4 purchasing price, average price of CO2 emission allowances of 20 €/tCO2, feedwater price of 0.25 €/m3, efficiency of electrolysis (LHV) of 66%, efficiency of electrolysis (LHV) in frequency containment regulation (FCR) operation mode of 71% (due to better part load efficiency), efficiency of methanation (LHV) of 84%, FCR hourly market price of 35 €/MW el, extra expenses for personnel and administration in FCR market of 50 k€/a, renewable electricity fuel quota value of 50 €/MWh th (as discussed currently on the European level [25,26] and if applied to sub-cases), H2 storage of 40 MWhth,LHV at 10 bar, capex of H2 storage of 1300 €/m3, opex of H2 storage of 2% of capex, no efficiency loss of storage in operation and the PtG plant is operated in base load conditions for 8000 full load hours per year (4000 h/a in the case of grid services). 3. Results The mass flows of the PtG plant are defined, based on the technical but also financial constraints of the PtG plant. The relevant mass flow numbers are given in Figure 3 for the defined cases A and B. Case A requires about 15% more capex but sales are increased by about 24%. Nevertheless, case A cannot earn a positive return, whereas in case B a weighted average cost of capital (WACC) of 5.4% can be achieved (Fig. 3), translating to a 11.0% return on equity (RoE) for assumed 80% debt financing and 4% interest rate. The key reason for the higher profitability of case B is mainly the high profitability of the offered grid services, but furthermore less capex is required and the cost of electricity accounts only for 55% of total annualized costs compared to 69% for case A. This points out the sensitivity to electricity prices, leading to identical operating profits of both cases for an electricity price of 17.6 €/MWhel.
Fig. 3: Profit and loss consideration on an annualized basis of a PtG plant embedded into a pulp and paper mill plus bio-diesel plant on site, taking an integrated value chain into account for case A (top) and case B (bottom). Assumptions of Table 2 are applied.
The income for O2 on the variable cost of replaced production basis reaches 23% (case A) and 16% (case B) and is indispensable for a profitable business case. If there were a demand for heat at the site, then the profitability would be considerably improved. Assuming a heat price of about 30 €/MWh th (less than 50% of variable heat prices in Finnish district heating networks) for 50% of annual heat production would lead to an income increase of 10% (case
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A) and 5% (case B), improving profitability further. The grid services represent 40% of total income of case B, emphasising the high relevance as a potential income. The operation mode of the PtG plant could be modified in case B to increase the profitability as follows: the daily bid at the hourly FCR market is set to a minimum, guaranteeing that the operating profit is higher than running the electrolyzers on full load instead of 50% part load. The financial impact of the wholesale price is also taken into account, i.e. too high electricity prices leading to operational losses on a marginal cost basis are avoided and the electrolyzers are shut down or used as minimum load. Such an optimized financial operation mode could further increase the incomes on an annual basis by about 20% if price levels of previous years are used. The cases can be further varied in two ways. Firstly, the industrial scaling might lead to reductions in capital expenditures (capex) of the PtG plant of about 50% in five years. This would lead in case A to a positive WACC of 3.1% but still negative RoE, however case B could achieve a WACC of 15.7%, equivalent to a RoE of about 62%. Secondly, to increase the share of renewables in the transport sector, certificates might be introduced, valued twice for renewable power-based bio-SNG and accounting for about 50 €/MWhth. The impact on the cases would be as follows: case A would generate still a negative WACC (current technology) but a WACC of 24.5% (technology available in 5+ years), leading to a RoE of 106% (technology available in 5+ years). The outcome for case B would be a WACC of 7.2% and 18.5%, leading to a RoE of 20% and 76%, respectively. For the specific parameter variation of a capex reduction of 50% and a renewables certificate value of 50 €/MWh th, case A would be more profitable than case B; however, both cases would generate comparably high profits of a RoE of 106% (case A) and 76% (case B). 4. Discussion The two cases for a PtG plant integrated in a pulp mill plus bio-diesel plant show clearly that on the one hand it is still very difficult to find a profitable standardized business case for PtG. On the other hand it is possible to achieve profitable business cases with currently available commercial PtG technology, at all. However, it is crucial that all possible income options are utilized: selling of H2 or CH4 in the highest priced markets (mainly in the transport sector), getting revenues for O2, merchandising the heat and offering value add services, such as grid services, while not forgetting that attention will need to be paid to long-term low cost electricity prices and high full load hours of the PtG plant. Interestingly, the parameter variation revealed that it should be significantly easier to achieve profitable business models for the next PtG generation, to be expected at the end of the 2010s. The consequences of the emerging profitable business models are, x x x
firstly, investors can start PtG investments on a purely financial basis, secondly, more and more niche markets create a growing annual market demand for PtG technology providers, which would in turn immediately reduce the PtG capex according to the assumed 13% learning rate [15] as a consequence of industrial scaling and standard learning patterns, thirdly, governments and public authorities should take PtG more seriously into account in policy-making as a real option to be supported for the energy transformation ahead – now needed earlier and more profitable – than in energy scenarios recommended.
It is expected to be rather difficult to reach the required climate change mitigation induced decarbonisation in the transport sector in the time needed, in particular for those segments which cannot be easily shifted towards direct electrification. For those segments PtG offers a fully sustainable option and provides in turn for PtG plant operators the highest priced CH4 markets, in particular including renewables certificates. The pulp mill case indicates furthermore the high potential of PtG as a valuable emerging technology for the chemical industry, since the H 2 obtained by natural gas steam reforming for bio-diesel production can be substituted. This is only one example of profitable niche markets in the chemical industry which needs to be identified. The chemical industry has a large potential for transferring to renewables in all those processes using hydrogen as raw material. Current global use of industrial hydrogen is 500 billion Nm3 which converts to 1500 TWhLHV on lower heating value basis [27].Taking
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into account the efficiency of steam reforming process some 2000 TWh LHV methane could be immediately replaced by hydrogen from electrolysis. The transportation sector and the chemical industry may represent the largest markets for PtG, as recently also concluded by the storage report of Agora Energiewende [15]. The market volume for seasonal energy storage for PtG has been the reason to implement PtG in many energy scenarios, however other markets, such as the transportation sector and chemical industry, might be finally significantly more relevant. 5. Conclusion Current PtG technology needs to utilize the value of all products and services to establish sustainable business models, but as shown it is feasible by integrating the full value chain. Based on such niche markets, growth has to be used to decrease PtG capex considerably in the years to come, which will lead to financially highly attractive investments. In case of attractive biofuel certificates, a highly profitable business would guarantee the final market breakthrough of PtG technology, which would create new market segments, like the often discussed seasonal storage or balancing function for intermittent solar PV and wind energy production, since only considerably lower annual PtG plant utilization could be realized leading to higher output cost. However, it is not unlikely that PtG technology is more relevant for supporting the decarbonization of the transportation sector and the chemical industry. Acknowledgements The authors gratefully acknowledge the public co-financing of Tekes, the Finnish Funding Agency for Innovation, for the ‘Neo-Carbon Energy’ project under the number 40101/14. The authors would like to thank Heikki Ilvespaa, Sari Siitonen, Sebastian Johansen, Laura Laitinen, Matthias Erdmann and Roland Doll for valuable discussions and Michael Child for proofreading. References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10]
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Christian Breyer et al. / Energy Procedia 73 (2015) 182 – 189 30.01.2015] [16] Gahleitner G., 2013. Hydrogen from renewable electricity: An international review of power-to-gas pilot plants for stationary applications, International Journal of Hydrogen Energy, 38, 2039-2061 [17] Audi AG, 2013. World premiere: Audi opens power-to-gas facility, press release, June 25 [18] [BMVI] – Federal Ministry of Transport and Digital Infrastructure, 2014. Power-to-Gas (PtG) in transport – Status quo and perspectives for development, study performed by DLR, ifeu, LBST and DBFZ on behalf of BMVI, Berlin [19] ETOGAS, 2013. Power to Gas: Intelligente Konvertierung und Speicherung von Energie in der industriellen Umsetzung, Viktor KaplanLectures, Wien, October 29 [20] UPM, 2014. Advanced biofuel production. Helsinki, available at: www.upmbiofuels.com/biofuel-production/advanced-biofuelproduction/Pages/Default.aspx [accessed: 30.01.2015] [21] Teir S., Tsupari E., Arasto A., Koljonen T., Kärki J., Lehtilä A., Kujanpää L., Aatos S., Nieminen M., 2011. Prospects for application of CCS in Finland, Energy Procedia, 4, 6174-6181 [22] Statistics Finland, 2014. Finland's greenhouse gas emissions, Helsinki, available at: http://tilastokeskus.fi/til/khki/2013/khki_2013_201405-22_tie_001_en.html [accessed: 30.01.2015] [23] Christer B., 2012. Introduction in Automatic FRR, ENTSO-E, October 17, available at: www.svk.se/PageFiles/52463/Bilaga-1-LFCChrister-Back.pdf [accessed: 30.01.2015] [24] Fingrid Oyj, 2015. Finnish Transmission Service Operator, Helsinki, www.fingrid.fi [25] [EC] – European Commission, 2009. Promotion of the use of energy from renewable sources, EC, Brussels, directive 2009/28/EC, available at: http://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:32009L0028 [accessed: 30.01.2015] [26] performing energy, 2014. Proposal for supplementing the draft EU directive 2009/28/EC and 98/70/EC, Berlin, available at: www.performing-energy.de/fileadmin/user_upload/Downloads/Dokumente/20140826_pe_Proposal-EU_directive.pdf [accessed: 30.01.2015] [27] Ausfelder F., 2013. Hydrogen in the Chemical Industry - Market options and challenges, IEA Hydrogen Roadmap Europe Workshop, Paris, July 10, available at: www.iea.org/media/workshops/2013/hydrogenroadmap/IEA_Ausfelder.pdf [accessed: 30.01.2015]
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ScienceDirect Energy Procedia 73 (2015) 182 – 189
9th International Renewable Energy Storage Conference, IRES 2015
Power-to-Gas as an Emerging Profitable Business through Creating an Integrated Value Chain Christian Breyera,*, Eemeli Tsuparib, Ville Tikkaa, Pasi Vainikkac a
Lappeenranta University of Technology, Skinnarilankatu 34, 53850 Lappeenranta, Finland VTT Technical Research Centre of Finland Ltd, Koivurannantie 1, 40400 Jyväskylä, Finland c VTT Technical Research Centre of Finland Ltd, Skinnarilankatu 34, 53850 Lappeenranta, Finland b
Abstract Power-to-gas (PtG) technology has received considerable attention in recent years. However, it has been rather difficult to find profitable business models and niche markets so far. PtG systems can be applied in a broad variety of input and output conditions, mainly determined by prices for electricity, hydrogen, oxygen, heat, natural gas, bio-methane, fossil CO2 emissions, bio-CO2 and grid services, but also full load hours and industrial scaling. Optimized business models are based on an integrated value chain approach for a most beneficial combination of input and output parameters. The financial success is evaluated by a standard annualized profit and loss calculation and a subsequent return on equity consideration. Two cases of PtG integration into an existing pulp mill as well as a nearby bio-diesel plant are taken into account. Commercially available PtG technology is found to be profitable in case of a flexible operation mode offering electricity grid services. Next generation technology, available at the end of the 2010s, in combination with renewables certificates for the transportation sector could generate a return on equity of up to 100% for optimized conditions in an integrated value chain approach. This outstanding high profitability clearly indicates the potential for major PtG markets to be developed rather in the transportation sector and chemical industry than in the electricity sector as seasonal storage option as often proposed. © 2015 2015 The byby Elsevier Ltd.Ltd. This is an open access article under the CC BY-NC-ND license © TheAuthors. Authors.Published Published Elsevier (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy. Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy
Keywords:power-to-gas; business model: grid services; chemical industry; forestry
* Corresponding author. Tel.: +358 50 441 1929. E-mail address:[email protected]
1876-6102 © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of EUROSOLAR - The European Association for Renewable Energy doi:10.1016/j.egypro.2015.07.668
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Christian Breyer et al. / Energy Procedia 73 (2015) 182 – 189
1. Introduction In recent years many researchers have performed studies about power-to-gas (PtG) and its beneficial role in the energy system, in particular for reaching very high shares of renewables [1-16]. PtG technology can be used in several ways: seasonal storage of energy, production of hydrogen (H2) and methane (CH4) based on renewable electricity (RE) to be used for mobility [17], heating purposes, the chemical industry [15] or providing valuable balancing capacities. In addition, further benefits could come into consideration, such as using the by-products O2 and heat, as well as upgrading of sustainable biomass-based CO2 to various hydrocarbons (Fig. 1).
Fig. 1. Schematic diagram of a power-to-gas plant. The major inputs are electricity, water (H2O) and CO2 to get the major products: methane (CH4), hydrogen (H2), oxygen (O2) and heat.
Until now, it has been challenging to proceed from the demonstration phase of PtG technology to the commercialization phase with optimized balance of plant [15]. This article presents a comprehensive view on an integrated value chain for the input sources, output products and related services, enabling a profitable business model for the special conditions of a kraft pulp mill. 2. Methodology The effects of an integrated value chain for a beneficial PtG business case are illustrated for a pulp mill and the respective local demands, opportunities and special requirements. For PtG a kraft pulp mill provides an advantageous process integration environment. This is because a pulp mill is a large point source of wood-based CO2, since such a pulp process consumes some 20 kg of oxygen per ton air dry (AD) pulp, and there is possibility to use recovered process heat for a CO2 capture process. In greenfield pulp mill investments it is also possible to consider utilizing oxygen at an activated sludge waste water treatment facility. By rule of thumb a 1 Mt AD/a kraft pulp mill produces enough CO2 to generate 11 TWhth synthetic methane per year. This is because half of the carbon in the wood entering a pulp mill ends up in the recovery boiler for combustion forming CO 2. The flue gas composition from a recovery boiler and flue gas impurities are shown in Table 1. Table 1. Recovery boiler flue gas composition after standard flue gas cleaning. Abbreviation: Total Reduced Sulphur (TRS).
Recovery boiler
CO
CO2
H2O
SO2
TRS
O2
NOx
Particles
dry
dry
wet
dry
dry
dry
Dry
dry
(mg/Nm3)
vol%
vol%
(mg/Nm3)
(mg/Nm3)
vol-%
(mg/Nm3)
(mg/Nm3)
50
15
20
5-9
5
5-7
150-200
10-15
UPM’s Kaukas pulp mill, located in Lappeenranta in Finland, has a capacity of 0.74 Mt AD/a pulp. It is also connected to the natural gas grid close to the Russian border wherefrom the gas flows to the main consumption areas
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in Finland. Due to this location and connection point to the main pipeline all bio-CO2 emitted from the pulp mill could be converted to methane and it could still be accepted to the current gas grid without any technical limitations. The total natural gas consumption in Finland was 33 TWh in 2013. The mill also produces deionized water suitable for electrolysis makeup water, and offers access to the 110 kV electricity transmission grid. The financial evaluation of current PtG technology integrated in an existing pulp and paper mill is performed according to standard annualized profit and loss considerations (Eq. 1) based on the physical energy and mass flows of a commercially available PtG plant [19] and the constraints of the aforementioned pulp and paper mill. ܽ݁ ൌ σ݅ ሺ ݅ݏെ ܿ݅ ሻ
(1a)
݅ݏൌ ݅ή ݅ݍ
(1b)
ܿ݅ ൌ ܿܽ ݅ݔ݁ή ܿ ݂݅ݎ ݅ݔ݁ ܿ ݂݅ݎൌ
ܹ ܥܥܣήሺͳܹܥܥܣ
ሻܰ ݅
(1d)
ሺͳܹ ܥܥܣሻܰ ݅ െͳ
ܹ ܥܥܣൌ
ܧ ܧܦ
݇ ܧ
ܦ ܧܦ
(1c)
݇ܦ
(1e)
Equation 1: Annualised earnings of an investment. Abbreviations: annualized earnings (ae), component (i), annual sales/ reduced cost of a component (si), annualized cost of a component (ci), specific price of a sold product/ reduced cost of a component (pi), quantity of a product/ cost of a component (qi), capital expenditures for an investment (capexi), capital recovery factor of an investment (crfi), annual operational expenditures for a component (opexi), weighted average cost of capital (WACC), lifetime of a component (Ni), equity (E), debt (D), return on equity (kE) and cost of debt (kD).
Two plant designs are regarded: Case A, 9.6 MW el electrolysis and methanation capacity, and case B, 9.6 MW el electrolysis capacity and 1.2 MWel equivalent methanation capacity. Baseload operation occurs in case A of 9.6 MWel and in case B of 4.8 MWel, and ±4.8 MWel are offered as grid services (frequency containment regulation). The electricity is purchased from hydro power plants but might be shifted later to a broader renewable energy mix. The produced H2 is used in case A for the methanation process and in case B mainly in a nearby bio-diesel plant, but also partly for methanation. The bio-diesel is produced on basis of by-products of the pulp and paper industry. The process is based on catalytic hydrogenation of tall oil [20], i.e. the synthetic diesel belongs to the family of hydrogen treated vegetable oils (HVO). Tall oil is a by-product of pulping coniferous trees and it is generated some 40 kg/t AD pulp. The Lappeenranta bio-diesel plant produces 100,000 t/a diesel. In the current set-up a substantial amount of H2, based on steam reformed natural gas, is needed in the process leading to an about 80% renewable bio-diesel. The favoured renewable power based H2 leads to a higher renewable energy content in the final bio-diesel and therefore increases its economic value. The O2 from PtG process is used in the nearby pulp and paper mill, replacing the production of an existing O2 production facility. The pulp mill also provides the possibility to utilise bio-CO2 for methanation which is based on wood being the natural raw material source for the pulp mill. Overall, about 21 Mt bio-CO2 would be annually available from large point sources (suitable for CO 2 capture and utilization on site) in Finland, mostly from pulp and paper mills [21]. The fossil CO 2 emissions in Finland are some 60 Mt/a, however there is a net sink of some -20 Mt/a in the forestry sector, i.e. the Finnish forests are building a net carbon stock [22]. Therefore, the forests in Finland show a net annual growth and can be denoted as a sustainable source. The produced bio-SNG (CH4) is sold to the mobility market. Grid services may represent an important source of income for PtG plants, in particular in the coming years. Modern electrolyzer units show ramp rates of up to 20% of their nameplate capacity per second. This flexibility can be utilized for valuable grid services, called frequency containment reserve (FCR). The FCR market in Finland is separated in two segments for special disturbance (FCR-D) and normal continuous operation (FCR-N). There exist also other grid service products, e.g. the frequency restoration reserve (FRR-A, FRR-M) and replacement reserve (RR), but participating on those markets is financially not interesting or even not feasible.
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For frequencies higher than 50.05 Hz down regulation is used, equal to increasing the load of electrolyzers of a PtG plant and vice versa for frequencies below 49.95 Hz. In operation zone steepness of the reaction is defined by the plant dependent function that is set to fulfill requirements of the Finnish Transmission System Operator (TSO). This fundamental function of the FCR-N service is exemplarily visualized in Figure 2.
Fig. 2: Frequency data for Finland for 1st of October 2011. Outside the dead band limit of ± 0.05 Hz around 50.0 Hz frequency containment regulation (FCR) is applied.
On the FCR-N market the capacities can be offered on an annual basis and on an hourly basis. Therefore, PtG plant operators can offer at an annual, but also hourly market for regulation capacities. The hourly averaged regulation price in the Finnish regulation zone of the Nord Pool spot market has been 14.9 €/MW (2011), 30.4 €/MW (2012) and 36.3 €/MW (2013) compared to regulation prices for the annual contracts of 9.97 €/MW (2011), 11.97 €/MW (2012) and 14.36 €/MW (2013). The prices reveal that the hourly market price, which is set by a day ahead auction, is more attractive for PtG operators, however the market volume for annual contracts is significantly higher than for the hourly FCR-N spot market. The very first PtG operators may not interfere with the market, so that they should opt for the higher prices. The trend for the last 20 years shows a steady increase in demand for grid services [23]. Data on the further technical requirements, which can be fulfilled by PtG operators, and market figures are provided by the Finnish Transmission System Operator (TSO), Fingrid Oyi [24]. The key assumptions for the two cases can be found in Table 2. Table 2: Overview on the cases A and B and key assumptions. *The methanation capacities are accounted in equivalent power input electrolyzer capacities. Case A
Case B
electrolyzer capacity
9.6 MWel
9.6 MWel
methanation capacity*
9.6 MWel
1.2 MWel
grid services offered
no
yes
capital expenditures 2015
17.9 M€
15.5 M€
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operational expenditures
40 k€/ MWel/a
30 k€/ MWel/a
Further assumptions for the business cases are: economic lifetime of electrolyzer and methanation units of 20 years, value of O2 of 80 €/tO2, market price for electricity of 40 €/MWhel, price of bio-SNG sold in the transport market of 75 €/MWhth, CO2 capture and utilization cost of 10 €/tCO2 for fossil steam reforming source in the beginning and 70 €/tCO2 for capturing from recovery boiler flue gases , fossil CH4 purchasing price at site of 35 €/MWhth, additional variable costs for reforming CH4 to H2 of 20% of CH4 purchasing price, average price of CO2 emission allowances of 20 €/tCO2, feedwater price of 0.25 €/m3, efficiency of electrolysis (LHV) of 66%, efficiency of electrolysis (LHV) in frequency containment regulation (FCR) operation mode of 71% (due to better part load efficiency), efficiency of methanation (LHV) of 84%, FCR hourly market price of 35 €/MW el, extra expenses for personnel and administration in FCR market of 50 k€/a, renewable electricity fuel quota value of 50 €/MWh th (as discussed currently on the European level [25,26] and if applied to sub-cases), H2 storage of 40 MWhth,LHV at 10 bar, capex of H2 storage of 1300 €/m3, opex of H2 storage of 2% of capex, no efficiency loss of storage in operation and the PtG plant is operated in base load conditions for 8000 full load hours per year (4000 h/a in the case of grid services). 3. Results The mass flows of the PtG plant are defined, based on the technical but also financial constraints of the PtG plant. The relevant mass flow numbers are given in Figure 3 for the defined cases A and B. Case A requires about 15% more capex but sales are increased by about 24%. Nevertheless, case A cannot earn a positive return, whereas in case B a weighted average cost of capital (WACC) of 5.4% can be achieved (Fig. 3), translating to a 11.0% return on equity (RoE) for assumed 80% debt financing and 4% interest rate. The key reason for the higher profitability of case B is mainly the high profitability of the offered grid services, but furthermore less capex is required and the cost of electricity accounts only for 55% of total annualized costs compared to 69% for case A. This points out the sensitivity to electricity prices, leading to identical operating profits of both cases for an electricity price of 17.6 €/MWhel.
Fig. 3: Profit and loss consideration on an annualized basis of a PtG plant embedded into a pulp and paper mill plus bio-diesel plant on site, taking an integrated value chain into account for case A (top) and case B (bottom). Assumptions of Table 2 are applied.
The income for O2 on the variable cost of replaced production basis reaches 23% (case A) and 16% (case B) and is indispensable for a profitable business case. If there were a demand for heat at the site, then the profitability would be considerably improved. Assuming a heat price of about 30 €/MWh th (less than 50% of variable heat prices in Finnish district heating networks) for 50% of annual heat production would lead to an income increase of 10% (case
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A) and 5% (case B), improving profitability further. The grid services represent 40% of total income of case B, emphasising the high relevance as a potential income. The operation mode of the PtG plant could be modified in case B to increase the profitability as follows: the daily bid at the hourly FCR market is set to a minimum, guaranteeing that the operating profit is higher than running the electrolyzers on full load instead of 50% part load. The financial impact of the wholesale price is also taken into account, i.e. too high electricity prices leading to operational losses on a marginal cost basis are avoided and the electrolyzers are shut down or used as minimum load. Such an optimized financial operation mode could further increase the incomes on an annual basis by about 20% if price levels of previous years are used. The cases can be further varied in two ways. Firstly, the industrial scaling might lead to reductions in capital expenditures (capex) of the PtG plant of about 50% in five years. This would lead in case A to a positive WACC of 3.1% but still negative RoE, however case B could achieve a WACC of 15.7%, equivalent to a RoE of about 62%. Secondly, to increase the share of renewables in the transport sector, certificates might be introduced, valued twice for renewable power-based bio-SNG and accounting for about 50 €/MWhth. The impact on the cases would be as follows: case A would generate still a negative WACC (current technology) but a WACC of 24.5% (technology available in 5+ years), leading to a RoE of 106% (technology available in 5+ years). The outcome for case B would be a WACC of 7.2% and 18.5%, leading to a RoE of 20% and 76%, respectively. For the specific parameter variation of a capex reduction of 50% and a renewables certificate value of 50 €/MWh th, case A would be more profitable than case B; however, both cases would generate comparably high profits of a RoE of 106% (case A) and 76% (case B). 4. Discussion The two cases for a PtG plant integrated in a pulp mill plus bio-diesel plant show clearly that on the one hand it is still very difficult to find a profitable standardized business case for PtG. On the other hand it is possible to achieve profitable business cases with currently available commercial PtG technology, at all. However, it is crucial that all possible income options are utilized: selling of H2 or CH4 in the highest priced markets (mainly in the transport sector), getting revenues for O2, merchandising the heat and offering value add services, such as grid services, while not forgetting that attention will need to be paid to long-term low cost electricity prices and high full load hours of the PtG plant. Interestingly, the parameter variation revealed that it should be significantly easier to achieve profitable business models for the next PtG generation, to be expected at the end of the 2010s. The consequences of the emerging profitable business models are, x x x
firstly, investors can start PtG investments on a purely financial basis, secondly, more and more niche markets create a growing annual market demand for PtG technology providers, which would in turn immediately reduce the PtG capex according to the assumed 13% learning rate [15] as a consequence of industrial scaling and standard learning patterns, thirdly, governments and public authorities should take PtG more seriously into account in policy-making as a real option to be supported for the energy transformation ahead – now needed earlier and more profitable – than in energy scenarios recommended.
It is expected to be rather difficult to reach the required climate change mitigation induced decarbonisation in the transport sector in the time needed, in particular for those segments which cannot be easily shifted towards direct electrification. For those segments PtG offers a fully sustainable option and provides in turn for PtG plant operators the highest priced CH4 markets, in particular including renewables certificates. The pulp mill case indicates furthermore the high potential of PtG as a valuable emerging technology for the chemical industry, since the H 2 obtained by natural gas steam reforming for bio-diesel production can be substituted. This is only one example of profitable niche markets in the chemical industry which needs to be identified. The chemical industry has a large potential for transferring to renewables in all those processes using hydrogen as raw material. Current global use of industrial hydrogen is 500 billion Nm3 which converts to 1500 TWhLHV on lower heating value basis [27].Taking
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into account the efficiency of steam reforming process some 2000 TWh LHV methane could be immediately replaced by hydrogen from electrolysis. The transportation sector and the chemical industry may represent the largest markets for PtG, as recently also concluded by the storage report of Agora Energiewende [15]. The market volume for seasonal energy storage for PtG has been the reason to implement PtG in many energy scenarios, however other markets, such as the transportation sector and chemical industry, might be finally significantly more relevant. 5. Conclusion Current PtG technology needs to utilize the value of all products and services to establish sustainable business models, but as shown it is feasible by integrating the full value chain. Based on such niche markets, growth has to be used to decrease PtG capex considerably in the years to come, which will lead to financially highly attractive investments. In case of attractive biofuel certificates, a highly profitable business would guarantee the final market breakthrough of PtG technology, which would create new market segments, like the often discussed seasonal storage or balancing function for intermittent solar PV and wind energy production, since only considerably lower annual PtG plant utilization could be realized leading to higher output cost. However, it is not unlikely that PtG technology is more relevant for supporting the decarbonization of the transportation sector and the chemical industry. Acknowledgements The authors gratefully acknowledge the public co-financing of Tekes, the Finnish Funding Agency for Innovation, for the ‘Neo-Carbon Energy’ project under the number 40101/14. The authors would like to thank Heikki Ilvespaa, Sari Siitonen, Sebastian Johansen, Laura Laitinen, Matthias Erdmann and Roland Doll for valuable discussions and Michael Child for proofreading. References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10]
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