I see much debate on whether we can economically scale clean energy ➡️ green hydrogen ➡️ hydrocarbon conversion projects and then I see large integrated projects like this one in Inner Mongolia aiming to produce 350k tonnes of e-kerosene p.a. using wind.
rechargenews.com
rechargenews.com
Project economics:
▪️ Input: ¥10.7B ($1.48B) total project cost including 1 GW of wind power
▪️ Output: ~350k tonnes e-kerosene. @ $824/tonne this equates to $288M of annual revenue*
▪️ Revenue payback of ~5.1 years on investment cost
* Note: article mentions ¥4.2B ($583M) of revenue but may be based on higher kerosene price assumptions.
▪️ Input: ¥10.7B ($1.48B) total project cost including 1 GW of wind power
▪️ Output: ~350k tonnes e-kerosene. @ $824/tonne this equates to $288M of annual revenue*
▪️ Revenue payback of ~5.1 years on investment cost
* Note: article mentions ¥4.2B ($583M) of revenue but may be based on higher kerosene price assumptions.
The output, e-kerosene or green aviation fuel, is produced by combining green hydrogen derived using electricity from the integrated 1 GW wind turbine farm with captured CO2.
It is "chemically identical to fossil-based jet fuel".
It is "chemically identical to fossil-based jet fuel".
Last year, China used 39.3M tonnes of kerosene, almost all for its airline industry, which equates to 5-6% of the country's total petroleum consumption.
This particular project in Inner Mongolia would represent a little less than 1% of national kerosene demand.
This particular project in Inner Mongolia would represent a little less than 1% of national kerosene demand.
To replace all current kerosene demand, China would have to build ~112 of these plants.
Assuming costs stay the same — which is quite conservative given how much key capital cost items like wind turbines have fallen in recent years — it would cost ~$165B to build this capacity.
Assuming costs stay the same — which is quite conservative given how much key capital cost items like wind turbines have fallen in recent years — it would cost ~$165B to build this capacity.
Just to put that in perspective, last year China invested ~$107B in solar power installations and another ~$131B in solar manufacturing alone.
In other words, less than one year's worth of solar-related investment redirected at this type of integrated green hydrogen project could enable China to replace its entire aviation fuel demand with domestically produced e-kerosene.
Notably as the article mentions, this wind capacity is "off grid" meaning it will not be counted in the "on-grid" numbers that are widely reported.
Over time "off-grid" clean energy may start to rival the scale of "on-grid" deployment especially if integrated green hydrogen projects like this really take off.
Over time "off-grid" clean energy may start to rival the scale of "on-grid" deployment especially if integrated green hydrogen projects like this really take off.
People debating the economic viability of green hydrogen are not paying enough attention to what is happening at scale in real-time in China or taking into account the rapid decline in the key input cost into these projects $/watt of solar and wind in particular.
Every time the $/watt of solar and wind declines, it results in an across-the-board decline in anything derived from the clean energy it produces.
Hydrocarbons produced from clean energy are benchmarked against global fossil fuels.
Hydrocarbons produced from clean energy are benchmarked against global fossil fuels.
As such you are effectively comparing the capital cost of clean energy projects with the capital cost of extractive fossil fuel projects.
In the case of green hydrogen, the fossil fuel in question is natural gas.
In the case of green hydrogen, the fossil fuel in question is natural gas.
While hydraulic fracturing innovation led to a stepwise decline in the cost of NG production in the U.S. over the last two decades, the technology is now mature and capital costs will most likely inflate over time from here.
This is in sharp contrast to the rapid and consistent decline in the key capital components of solar and wind projects, namely solar PV and wind turbines.
With each decline, the economics of hydrocarbons derived from clean energy compare more favorably to fossil fuels.
With each decline, the economics of hydrocarbons derived from clean energy compare more favorably to fossil fuels.
With green hydrogen there are other key capital inputs.
There are component costs outside of the wind turbines (e.g. electrolyzers and supporting infrastructure) and every technology has a different cost/learning curve.
There are component costs outside of the wind turbines (e.g. electrolyzers and supporting infrastructure) and every technology has a different cost/learning curve.
But a key component that should only grow over time is labor, particularly the blue-collar construction labor that is required to build these plants.
As capital costs of key components fall, the labor component becomes a more significant part of the project cost.
As capital costs of key components fall, the labor component becomes a more significant part of the project cost.
Absent major advances in construction productivity, this means that a nation's construction workforce may ultimately become the key constraint on how quickly projects like this and clean energy in general can be deployed.
In China integrated green hydrogen projects need to compete for this finite labor pool with other efforts like building out NEV and battery manufacturing capacity, on-grid solar farms, offshore wind, pumped storage etc.
One might even point to 3RL and the shift away from residential greenfield construction as a key enabling factor for ramping up capacity in advanced manufacturing and clean energy deployment as it removed one of the largest sources of demand for this finite labor pool.
It is still quite under-appreciated how critical China's blue-collar labor force (predominantly migrant workers) has been to rapid scaling of all forms of domestic infrastructure.
Even more specifically, the ability to rapidly re-deploy this workforce from one sector to another.
Even more specifically, the ability to rapidly re-deploy this workforce from one sector to another.
Since 3RL, this workforce has been quite flexibly re-deployed from putting up residential buildings to erecting solar farms and wind turbines and NEV/battery plants and other new infrastructure.
Migrant workers are by definition traveling away from home for work so moving from a housing project in one location to a wind farm in another is quite natural.
Migrant workers are by definition traveling away from home for work so moving from a housing project in one location to a wind farm in another is quite natural.
It is reasonable to expect that the construction workforce will continue to be flexibly redeployed to new construction-intensive activities like large-scale integrated green hydrogen projects as other large infrastructure phases buildouts are completed.
From a demographic perspective we know that the blue-collar labor pool is going to start to shrink in the coming years.
This is a combination of basic demographics (the largest cohort was born in 1985) and the rise in tertiary (college/university) education.
This is a combination of basic demographics (the largest cohort was born in 1985) and the rise in tertiary (college/university) education.
By the 2040s the non-college educated portion of the working age population — which correlates to this blue-collar workforce — will shrink to half of the size today.
The demographic backdrop of the construction workforce may be why Chinese economic policy continues to favor such infrastructure-centric investment.
It is to take advantage of this labor pool before it shrinks dramatically over the next 15-20 years.
It is to take advantage of this labor pool before it shrinks dramatically over the next 15-20 years.
And clearly there is still a vast amount of infrastructure that needs to get built to reach net zero (which is synonymous with energy independence).
If it takes $165B to replace kerosene, multiply by that by 20x to replace petroleum, broadly.
That’s 2,000+ of projects of similar size/scope to this one in Inner Mongolia.
If it takes $165B to replace kerosene, multiply by that by 20x to replace petroleum, broadly.
That’s 2,000+ of projects of similar size/scope to this one in Inner Mongolia.
Note: it’s quite possible that the numbers don’t turn out to match what is being floated.
We’ll have to wait to see actual production.
We’ll have to wait to see actual production.
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