At a glance
Ironing Out the Way for Green Steel: Financing a Green Hydrogen-based Ironmaking Plant in an Emerging Market, by Hasan Muslemani, Stephen Craen, Paul Butterworth, Daniel Duma, and Martin Lambert. Oxford Institute for Energy Studies, Nov. 14, 2024.
Could setting up ironmaking plants powered by green hydrogen in developing countries support the transition to green steel in developed economies? This paper by the Oxford Institute for Energy Studies (OIES) explores the financial viability of an “Archetype Project” that would do just that. The proposed project would use renewable energy and hydrogen electrolysis to make hot briquetted iron (HBI), an essential material in steelmaking. The idea is to export this “green iron” to developed countries, which would then use it to make green steel — significantly reducing emissions in one of the most carbon-intensive industries.
The paper says the project would require an estimated US$9 billion in capital costs and produce green HBI at a cost of $690 per tonne. This is twice as expensive as conventional ironmaking due to the high costs of renewable energy and hydrogen production. The authors recommend improving the economics — and attracting investors — by securing long-term contracts with buyers, goverment subsidies and carbon-pricing mechanisms to help offset the “green premium.” Despite the financial hurdles, the authors conclude that relocating ironmaking to regions rich in renewable resources could transform the global steel industry.
Organizations
Topics
Key findings
Decarbonization potential: Using green hydrogen in the Direct Reduced Iron (DRI) process can nearly eliminate emissions, making it crucial for achieving carbon-neutral steel production.
High production costs: Producing green HBI costs twice as much as conventional methods, due to the expenses of renewable energy, hydrogen production, and storage.
Capital requirements: Of the $9-billion project budget, 35 per cent is allocated to energy storage and 23 per cent to hydrogen production, while the DRI plant itself accounts for just 12 per cent.
Policy reliance: Success depends on supportive measures like carbon pricing, carbon border adjustment mechanisms and long-term contracts.
Material supply risks: A limited global supply of high-grade iron ore (above 66 per cent Fe content) poses a significant challenge for ensuring availability of raw material.
Global opportunity: Building green HBI plants in developing countries with abundant renewable resources can overhaul the steel industry and drive economic growth in these regions.
Risk management: Securing long-term contracts for raw materials, renewable energy, and hydrogen, along with government support, is essential to reduce investor risk and secure funding.
Bigger picture
The global steel industry faces mounting pressure to align with global decarbonization targets under the Paris Agreement. As the second-largest industrial contributor to global greenhouse gas emissions (seven to nine per cent), the sector’s transformation is essential to curbing climate change. The Archetype Project offers a bold solution: decoupling ironmaking from reliance on fossil fuels and relocating it to regions with abundant renewable energy resources. This would both redefine industrial geography and also position emerging economies as pivotal players in the green steel supply chain.
Such a shift would require addressing critical systemic challenges. The project’s reliance on high-grade iron ore, a resource monopolized by a few global suppliers, underscores the importance of securing long-term, diversified supply agreements. The emphasis on standalone renewable energy infrastructure in developing nations also highlights the dual challenge of building capacity while ensuring energy security in often fragile grids. These challenges are compounded by market uncertainty around the green premium — a necessary component to make such projects financially viable.
There are also significant geopolitical implications. As developed countries implement policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM), the cost dynamics of global trade are being rewritten. The report highlights how CBAM could serve as a critical lever, favoring low-carbon imports like green HBI while protecting domestic industries from high-emission competition. By incentivizing the adoption of green technologies, CBAM could catalyze investment flows into developing countries rich in renewable resources.
Challenges and opportunities
Key barriers to financing a green hydrogen-based ironmaking plant include:
- High project costs: The project’s estimated $9 billion capital requirement is a major obstacle, driven by the need for renewable power generation (30 per cent of costs), hydrogen production (23 per cent), and energy storage solutions (35 per cent).
- Iron ore supply constraints: Direct Reduced Iron (DRI) production depends on iron ore with Fe content above 66 per cent. This high-grade material constitutes just four per cent of global seaborne trade and is controlled by a handful of producers.
- Energy infrastructure challenges: The reliance on intermittent renewable power requires substantial investment in storage systems and backup energy generation, increasing capital costs. In developing regions, weak grid infrastructure compounds these challenges, making self-contained energy systems necessary.
- Market risks and green premium uncertainty: The premium cost of green HBI raises concerns regarding market acceptance. Uncertainty about buyer willingness to pay this premium adds a revenue risk, impacting investor confidence.
To address these challenges, the study recommends:
- Leveraging financing mechanisms: DFIs can help provide concessional financing and guarantees to reduce costs, while blended finance models attract private investors.
- Securing reliable iron ore supply chains: Long-term contracts with high-grade iron ore suppliers are critical. Partnerships with mining firms or vertical integration — such as acquiring or developing mines, forming equity partnerships, or building beneficiation facilities that process lower-grade ore to meet required quality standards — can help reduce reliance on volatile markets by ensuring a stable and controlled supply of high-grade ore.
- Developing resilient renewable energy infrastructure: Standalone renewable systems, such as onsite solar and wind, can reduce grid dependency, with advanced energy storage ensuring reliability. Meanwhile, government partnerships can help upgrade grid infrastructure.
- Creating market stability for green HBI: CBAMs and carbon pricing can help stabilize demand for green HBI. Long-term offtake agreements and international green steel standards can further reduce revenue risks and build market confidence.
In their own words
Financing such an unprecedented, world-scale project would be a challenge but is not impossible. Key requirements include a robust commercial structure with long-term contracts that essentially fix the green premium for the product and lock in supply of the specialised iron ore required and support from the governments of both the host and offtaker’s countries. Carbon pricing, along with protective trade measures such as carbon border adjustments, will be critical to ensure economic viability over the long run. Access to low-cost, long-term agency financing will also be key to the project’s success while a suite of mechanisms also exists to leverage public support in the host and offtaker’s countries.
Ironing Out the Way for Green Steel: Financing a Green Hydrogen-based Ironmaking Plant in an Emerging Market, by Hasan Muslemani, Stephen Craen, Paul Butterworth, Daniel Duma, and Martin Lambert. Oxford Institute for Energy Studies. Nov. 14, 2024.
Final thoughts
The Archetype Project is a blueprint for the future of decarbonized ironmaking, but it is also a stark reminder of the complexities involved in transitioning heavy industries. Its success would depend on the smooth alignment of robust policy frameworks, innovative financing mechanisms and technological advancements. There is also a strong need for government-backed guarantees, such as blended finance models from development banks. These frameworks could bridge the financing gap, attract private sector investment and lower the perceived risks of operating in emerging markets.
This could do much more than reduce emissions. This approach has the potential to redefine the role of developing economies in global supply chains, enabling them to leapfrog fossil fuel-based industrialization. Questions remain about the scalability of this model. Would developed countries provide sufficient financial and technical support to make this shift sustainable? Could host nations ensure such large-scale projects do not cause social or environmental harms? The Archetype Project is a promising concept, but its success in advancing green steel production hinges on its scalability and replication.
Download the paper originally published by the Oxford Institute for Energy Studies on Nov. 14, 2024
