The steel industry's choice of technology path – the role of the state

The transition of the steel industry is expected to create an increasing electricity demand in Sweden in the coming decades as the industry is electrified. The aim of our analysis is to highlight the challenges for the technology choices that the steel industry has in the green transition and the role of the state in this transition.

Summary

Challenges Facing the Steel Industry

There are several technology pathways to significantly reduce GHG emissions from primary steel production, including traditional blast furnaces with carbon capture and storage (CCS) to more innovative direct reduction technologies using hydrogen from fossil-free electricity or syngas from fossil gas with CCS and/or gasified biomass. Each technology track has its own technical challenges and market risks.

Historically, primary and secondary steel production have taken place in separate technology tracks. However, the transition to direct reduction for primary steel production means that these technology tracks will converge as the product, sponge iron, produced by direct reduction can replace steel scrap in electric arc furnaces currently used for secondary steel production. A significant expansion of electric arc furnaces is thus expected in the EU and thus also greater competition for steel scrap. This may also mean that mining companies take more steps in the value chain and sell sponge iron instead of iron ore/iron pellets.

The main challenge is the significant costs associated with this transition, which include high initial investment and ongoing operating costs. The new technologies are considerably more expensive than traditional production methods and also require substantial investment in physical infrastructure. A key issue is how to share these costs and risks between companies, private investors and the state. For governments, it is crucial to design support schemes that promote innovation and the transition to sustainable production, without jeopardizing the economic stability of the industry or placing an undue burden on the public budget.

Sweden has several comparative advantages in the transition

Sweden has several comparative advantages that can be leveraged to lead the transition to more sustainable steel production methods. These include low electricity prices, access to biomass and proximity to iron ore sources, as well as a developed industrial cluster around steel production. These factors make Sweden an attractive location for investment in green steel production. At the same time, there are comparative disadvantages, such as long distances to customers and scrap, as well as geographical distances between industries in northern Sweden, which can increase transportation costs and complicate the supply of skills.

International competition in the steel industry is fierce, and Swedish steel producers must be able to compete both with traditional blast furnaces and with steel produced by direct reduction with fossil gas. The price of reduction gas, of electricity and the cost of emission allowances will be decisive factors for competitiveness in the future. A crucial element in this is the EU's ambitious climate policy, including that steel imports will be priced in the same way as within the EU through the border adjustment mechanism CBAM.

Comparative advantages may disappear by 2050

In the longer term, up to 2050, several of the comparative advantages that exist in northern Sweden will diminish or disappear completely. The trend towards a greater share of renewable electricity production globally means that both the price of electricity and the climate footprint of the electricity mix will converge. The Swedish state should therefore be more restrained in its support for the industry in the longer term, while at the same time there should be a planning framework for expansion in order to be able to adapt to new conditions and risks.

Government support can be justified, but socio-economic assessments and regular evaluation should guide the direction Support

In general, State aid can be justified in cases of market failure, i.e. when market mechanisms do not work efficiently. However, state investments should be carried out in a cost-effective manner and only where they are considered to be economically profitable. The focus should therefore be on managing Sweden's comparative advantages with the aim of strengthening Sweden's competitiveness and creating conditions for long-term growth, rather than on targeted support, which may be less effective.

To enable this, it is recommended:

• That an independent business assessment (“second opinion”) combined with socioeconomic analysis be considered for government support for large investments in sponge iron and steel production and in complementary infrastructure, such as electricity grids and hydrogen production.
• State provision of R&D support during the development phase of new technologies for green steel production.
• The government can, when socio-economically justified, support the development of complementary infrastructure, including electricity grids and hydrogen production, to enable large-scale transition to green steel production. This requires significant investment, but is deemed necessary to create the conditions for an effective transition.
• The government should promote a long-term stable and predictable regulatory framework for green steel production with clear rules, standards and mechanisms for pricing greenhouse gas emissions. This includes a continued ambitious climate policy within the EU to ensure coordinated and harmonized action. This promotes all member states working towards the same goals, creating a predictable and stable market for green steel production.
• The government should continue to engage in international cooperation to promote sustainable steel production globally, not least in the development of standards.
• The government should consider concentrating investments in a specific area in northern Sweden with the aim of streamlining permit processes, creating greater social support, which can lead to fewer appeals in permit processes and promote industrial clusters where physical infrastructure within a limited area can be shared between several basic industries. This creates a smaller need for investments in new physical infrastructure than if the investments are made over a larger geographical area. The costs for industry and/or government can thus be lower.
• To manage uncertainties and risks, the government is recommended to introduce requirements for transparency and accountability and to carry out continuous evaluations. Part of this should be analyses such as this, which together with other data can form the basis for a structured reassessment of the plans at regular intervals, which can also create predictability for industry. Policy needs to be flexible and adaptable to new conditions and information, not least in the expansion of the electricity system.