Hans Grünfeld and Frank Means on barriers in the energy transition

What is the situation with CO2 reduction in the Dutch industry?
Grünfeld: ‘The situation is a cause for concern. In 2030, according to the Dutch Climate Act, the Netherlands must emit 55 percent less CO2 than in 1990. A limit of 29.1 megatons in the year 2030 has been set for the industry. About two-thirds of this intended reduction has been achieved. Research from the Netherlands Enterprise Agency (RVO) indicates that achieving the remaining 30 percent will be challenging. Zooming in on the plans to further reduce CO2 emissions, some seem feasible, and companies are still in discussion with the government about implementation. There are, however, also plans that are hampered by practical problems, such as permits and nitrogen budgets. In addition, there are still four megatons for which there are no plans at all.'
Meens: 'All attention is on 2030 now. The industry will probably not reach that target, but from then on it should move swiftly. We are currently facing limits and obstacles that cannot be solved by tomorrow. A certain amount of time is required to expand the power grid, build wind farms and create a new infrastructure around hydrogen.'

What are the most significant obstacles for industry to become more sustainable?
Grünfeld: 'The high energy costs are hugely problematic. Electricity prices are too high and network tariffs are considerably higher in the Netherlands than in surrounding countries. Energy-intensive companies, specifically, are struggling. Not only traditional industry but also new, innovative producers of sustainable aviation fuels and electrolysers. In addition, companies are delaying major investments because of uncertainty about the required infrastructure. The power grid is overloaded. Hydrogen and CO2 networks are struggling to get off the ground. Unclear regulations and difficult permitting procedures also create uncertainty for investors. And lastly there are the unfavorable market conditions; for example, the price for green hydrogen is still too high.'

What role does Vattenfall want to play in the energy transition?Meens: 'Vattenfall’s goal is to have net zero CO2 emissions by 2040. By 2030 we want to have reduced around six megatons of our CO2 emissions, a reduction of almost 65 percent compared to 2023. This is not only our own emissions. A significant proportion, around 65 percent, are emissions from our customers burning natural gas. That is a challenging goal. On the one hand, we are going to reduce more than half of the gas activities; on the other hand, we want to ensure continuity in customer service and remain financially healthy ourselves.
We are therefore increasingly involved in guiding customers through this transition. We of course also play an important role in the production and supply of energy from renewable sources. We invest heavily in wind and solar farms; for example, we recently won the tender for the IJmuiden Ver windfarm, where the production of green hydrogen is an important component, as Hans mentioned earlier.'

Are corporations doing enough to become more sustainable?
Meens: ‘Yes, I do think so, but at the same time we maintain pressure on our clients. Balancing this is challenging. Some parties are motivated but cannot act because of capacity problems on the electricity grid. Nevertheless, Vattenfall sees opportunities. By 2030, we expect to achieve a CO2 reduction of 0.5 to 0.9 megatons in our customer portfolio through electrification of heat demand alone. Some customers do not yet have a sustainability plan, because they find the investment prohibitive or because they have other priorities. We try to convince these entrepreneurs that sustainability pays off. If entrepreneurs cannot get a higher capacity electricity connection, we search for possibilities behind the meter. Sometimes they can use their self-generated solar energy more efficiently in their business process and store the surplus electricity in batteries.'

Upgrading the power grid could take years. What can network operators do to assist companies in the meantime?
Meens: ‘We are in discussion with network operators to create solutions for the limited capacity on the grid. We do that, for example, with capacity-limiting contracts. This means that companies agree to utilize less or no electricity at certain times and are then financially rewarded for doing so. Network operators are sympathetic to this. As an energy company, we play an important role in the implementation of these contracts and their financial settlement. It already works for some of our large customers; we are now working hard to scale up these new services.'
Grünfeld: 'Network operators could improve their communication. If a company wants to enter into a capacity-limiting contract with a regional network operator, this network operator often has to coordinate this with TenneT, the Dutch national operator. That is difficult. I know companies that have invested in new installations to manage flexible electricity, but then have severe challenges getting a suitable contract. You should expect a more proactive attitude from network operators. Simply announcing that there is no capacity is unacceptable. Instead, deliberate together and search for tailor-made solutions, such as a capacity-limiting contract.'

What alternative options are available to the industry now that large scale electrification is proving to be difficult?
Grünfeld: 'The most realistic short-term solution is Carbon Capture Storage (CCS). This involves capturing greenhouse gases from smokestacks and storing it underground. The first carbon capture project, Porthos, is being developed. It is already sold out. It was relatively small. Next year an investment decision will be made on a larger project, Aramis. This will allow dozens of megatons of CO2 to be stored in empty gas fields under the North Sea. However, there is uncertainty among companies. Will there be an infrastructure connecting the big emitters to the storage sites? If so, how will that be regulated and under what conditions? Also important is risk hedging. A buyer must be sure that the CO2 is captured, transported and stored. If something goes wrong somewhere in the chain, the buyer should not be faced with immense costs for that high emission.'
Meens: ‘A problem with the Aramis project is that the first users will pay relatively high costs because this large-scale infrastructure will initially be underutilized. Government support should be available for these first movers to cover the start-up risks.’

The initial enthusiasm for a hydrogen economy seems to have faded. Why is that?
Grünfeld: ‘The standards that hydrogen must meet for use in industry are too strict. The focus is on green hydrogen, obtained from renewable energy. But that market is not there yet. High prices for renewable energy, extra connection costs at TenneT and expensive electrolysers currently make hydrogen production unattractive. There should be more room for alternatives. In the meantime, why can industry not use blue hydrogen, which is produced from natural gas, with the released CO2 captured and stored?’
Meens: 'Large-scale hydrogen production is expected to take off after 2030. There is currently a catch-22: electrolyser manufacturers are waiting for more orders to lower prices, while potential customers are waiting for lower prices before ordering. End users are also postponing contracts because they expect hydrogen to become less expensive at a later stage. Despite this, some parties are investing in hydrogen production. Vattenfall, for example, together with Danish investor CIP, has obtained a permit to build IJmuiden Ver Beta wind farm, which will have a 2 GW capacity. The project also includes a 50 MW floating solar farm. We will build a hydrogen plant in Rotterdam where the electricity generated will be converted into green hydrogen. But we attempt to have even more initiatives. For example, together with Shell and Swedish airline SAS, Vattenfall is investing in the production of synthetic jet fuel made from captured CO2. This is not yet a definitive solution for aviation, but it is a step in the right direction. When making innovative, large investments, it is essential that energy companies and industry join forces. Partnerships are crucial to the energy transition.'

Why did Vattenfall choose the German chemical company BASF to build the Hollandse Kust Zuid wind farm? This means that wind energy generated in the North Sea flows into the German market.
Meens: 'We approached many Dutch companies for investment in Hollandse Kust Zuid, the world's first wind farm built without subsidies. At the time, Dutch parties were not willing to take the step and enter into partnership, partly because of the then fluctuating energy market. BASF was willing to share the risks. The company wants to use renewable energy, among other things, for green hydrogen production at BASF's chemical plant in Antwerp. But BASF also has various operations in the Netherlands. Together with such capital-strong parties, Vattenfall will have more opportunities to make new investments. I am convinced that we will be able to attract Dutch parties in building our next wind farm, IJmuiden Ver. That electricity is explicitly earmarked for system integration projects in the Netherlands.'
Grünfeld: 'I understand Vattenfall's decision. But it is unfortunate that additional infrastructure has to be built for transporting the electricity. This is paid for by Dutch industry, by Dutch constituents. These companies do not reap the benefits. The government could impose stricter conditions in tenders for wind farms. For example, by requiring that at least part of the renewable energy from an offshore investment benefits the Dutch industrial transition.'

Since the Netherlands is far from meeting its 2030 climate targets, the government wants to introduce additional measures. What would industries’ expectations be?
Grünfeld: 'The path is clear. It is essential for the government to remove existing bottlenecks. In other words, invest significantly and swiftly in grid reinforcement, make network tariffs cheaper, and ensure that CCS becomes possible. The industry also needs clarity—for the benefit of the investment climate. What infrastructure is going to be built, under what conditions, and at what rates? Even if the government says no to certain plans, it assists companies. This will help to anticipate and figure out alternatives to reduce their CO2 emissions.'
Meens: 'To achieve real systemic change, the government should accept part of the credit risk for large investments in wind farms, electrolysers, and hydrogen networks. This makes it easier for companies and other investors to step in.'
Grünfeld: 'I would advise the government to reverse the veto on the proposal of former European Central Bank President Mario Draghi. He advocates for an EU investment fund similar to the U.S. Inflation Reduction Act to accelerate the green transition. With a large pool of money, he wants to strengthen European industry in crucial sectors such as battery production, hydrogen and renewable energy. The European scale is crucial to reduce costs.'

Is there a bottleneck which the government could swiftly address?  
Grünfeld: 'The Dutch coalition agreement stipulates that the investment climate will be improved and that a level playing field will be created in Europe. It has long been known that high network costs are an acute problem for large consumers. The rates are higher in the Netherlands because the government abolished a discount scheme while neighboring countries did not. High grid costs could be solved tomorrow. Unfortunately, we will have to wait until the spring cabinet session.'
Meens: ‘The spring session will be important, as the recommendations of the Interdepartmental Policy Survey (IBO) will be announced. This may include solutions for financing the electricity infrastructure and other bottlenecks.'

What happens if this government does not act adequately?
Grünfeld: ‘It is simple. Companies will leave our country. This will be detrimental not only for employment but will also undermine ambitions for a circular economy. You need local industry to close the loop. If companies fail or disappear, it affects an entire chain.'
Meens: 'In the end, the government cannot avoid acting. And this needs to be in the public interest. Ultimately, European legislation will also force the government to progress.'

How will the energy transition evolve in the coming years?
Grünfeld: 'We are at an important turning point. If we do not act now, we will fall further behind the targets, and the Netherlands will de-industrialize. An undesirable scenario. We can make much better use of our opportunities. The Netherlands is well-positioned to transform into a sustainable economy. We are well-situated, have the right knowledge, and are good at collaboration. This does, however, mean that we should remove the barriers as soon as possible. It would help if we, together, created a more positive image of the industry. The industry is often seen as part of the problem, whereas it in fact is part of the solution.'
Meens: 'I am convinced that we will achieve the transition in time and that the energy transition will be successful. In part due to the tightened European emissions trading system (ETS), which makes it increasingly expensive for companies to emit CO2, new sustainable business models will emerge. Some companies will adapt their production processes or make different products. The innovative capacity of the sector will only be truly revealed as the pressure increases.'

This interview was published in Management Scope 10 2024.