FMG chases green dream

Disruption is one of the cornerstones of the success of Andrew Forrest’s Fortescue Metals Group.

FMG’s ability to get things done in the face of seemingly insurmountable barriers can be illustrated no more vividly than when BHP and Rio Tinto sought to prevent the then start up iron ore miner from accessing its rail lines in the Pilbara.

FMG built its own and outdid its rivals by extending those lines to Perth.

Dr Forrest has turned his passion for disruption to the energy sector, driven by his ambitions for green steel production powered by hydrogen.

In the first of his three-part Boyer Lectures broadcast in January entitled, “Oil vs Water — Confessions of a carbon emitter”, Dr Forrest said green hydrogen gives Australia an opportunity to slash emissions, and the impact could be nation-building if done right.

“The answer isn't to stop mining iron ore, which is critical to the production of steel and to humanity. The answer is green iron ore and steel — made using green, zero-emissions energy.”

Leading by example - soon

Dr Forrest’s remarks in his Boyer Lectures received widespread coverage but they would not have surprised those who track his and FMG’s actions.

In June 2020, Fortescue set a long-term emissions reduction goal to achieve net zero operational emissions by 2040.

At its AGM in November 2020, the company committed $1 billion to its wholly owned, renewables focussed vehicle, Fortescue Future Industries, saying 10 per cent of FMG profits will be made available to FFI.

Fortescue Chief Executive, Elizabeth Gaines, is more tempered telling the AFR, the parent company was investing closer to $US100 million in FFI this financial year, and that money would only be spent if projects were worthy.

“The intention to allocate up to 10 per cent of net profit after tax is a capital allocation framework ... this provides a broad framework but importantly facilitates the progression of these very exciting and important diversification opportunities for Fortescue,” she said.

Major investors have backed the decision, comparing it to BHP’s play on potash. Former Prime Minister, Malcolm Turnbull has signed on to chair FMG’s.

Dr Forrest said FFI would apply the same lessons and company culture that have made its iron ore business successful to the renewable energy sector.

Let the markets decide?

Some of Dr Forrest’s words could be interpreted as a call to government to get out of the way and let the markets decide on decarbonising the economy.

“When fossil fuel energy becomes more expensive than renewable energy, that's when we'll reach the tipping point. That's when the world will begin the journey in earnest to become zero-carbon.”

“Not only because it's the ‘right’ thing to do, but because it makes great sense.”

“And the shift will be lightning fast. Forget 2050 — zero emissions will begin to happen overnight. That's how capitalism works. You can predict that too.”

Nothing by halves

FFI aims to eventually build capacity to 235GW of renewable energy generation, to support green hydrogen, ammonia and metals production. It is extremely ambitious given that it is four times the capacity of the National Electricity Market, and Enel Green Power, which claims to be the world’s biggest renewable generator, currently has 47GW of managed renewable capacity.

Fortescue plans to start building Australia's first green steel pilot plant this year in the Pilbara, powered entirely by wind and solar, with commercial operation to commence in the next few years.

Fortescue’s investment in green hydrogen production and technologies so far includes:

• A partnership with the CSIRO to develop new hydrogen technologies, including a world first membrane technology which provides the potential for large scale hydrogen extraction from ammonia.
• A $32 million hydrogen mobility project at Christmas Creek in WA’s Pilbara region, including the construction of a renewable hydrogen refuelling facility and the deployment of a fleet of hydrogen fuel cell passenger coaches from mid-2021.
• A partnership with ATCO Australia to build and operate the first combined green hydrogen production and refuelling facility in Western Australia.
• A Memorandum of Understanding with Hyundai Motor Co and CSIRO to advance renewable hydrogen technology for domestic transport.

FMG has also invested in hydro and renewable feasibility studies for projects in Papua New Guinea.

It remains committed to steady power supplies for its operations. In 2020 FMG announced it was supplementing its transmission project in the Pilbara with the Pilbara Generation Project. It will include 150MW of gas-fired generation, together with 150MW of solar photovoltaic (PV) generation to be supplemented by large scale battery storage, constructed, owned and operated by Fortescue.

The future

There are reasons to be sceptical about hydrogen’s potential at the moment.

It’s difficult to store and transport, it’s highly flammable and the process to make green hydrogen is water-intensive (one kg of hydrogen requires nine litres of very pure water[i]), and it’s currently expensive to produce.

While it acknowledges its high cost, lack of infrastructure, and current uncertainty in respect of long-term policy as the main barriers to uptake of hydrogen, the Australian Energy Market Operator (AEMO)  incorporates a hydrogen market in Australia in one of its scenarios for likely power system development[ii]. 

But AEMO acknowledges a substantial shift in global carbon policy is needed to make green steel a viable commodity.

Current estimates show even if hydrogen price fell to US$1-$3/ kg, green steel making costs would still be 25-60 per cent higher than fossil fuel-based production.[iii] It is a big bridge to cross.

But the market operator says only if there was a coordinated global push to decarbonise industrial areas such as steel production- with the right policies to support this, then significant production of green steel in Australia could occur. Its future hinges on China, which produces over half the world’s steel.

Most state and territory governments are examining a hydrogen industry, and green hydrogen was a feature of the Federal Government’s technology roadmap released last year.

The Tech Roadmap sees clean hydrogen produced by electrolysis powered by renewables as a path by which Australia can make strong inroads into lowering its carbon emissions.

The roadmap views clean hydrogen from off-grid gas, with Carbon Capture and Storage (CCS), and coal gasification with CCS, as potentially the lowest cost clean production methods in the short-term but notes renewable production methods are likely to come down in cost as clean hydrogen demand grows.

In May last year the Grattan Institute released a major report which flagged the potential for a hydrogen economy to decarbonise industrial processes and create export opportunities.

The report saw three main ways that renewable resources could underpin the supply of steel to our Asian trading partners (Figure 1):

1. Direct reduction of iron ore to iron metal, and the further refining and casting of the iron into a semi-finished steel product for export, all done locally.
2. Australia producing direct reduced iron for export with the importing country refining it into steel.
3. Australian hydrogen being shipped to the country needing steel, which would use it to produce steel.

Figure 1: Steel pathways 

Source: Grattan Institute

In its report Grattan argued that more jobs are likely to come from Australia using its energy cost advantage to produce low-emissions, energy-intensive commodities for export, particularly given manufacturing activities are typically more labour-intensive than renewable energy operation.

In terms of hydrogen exports, the Grattan report observed that large-scale hydrogen exports markets don’t currently exist. The product is challenging and expensive to transport and needs to be either liquefied via extreme cooling or converted into a chemical like ammonia. There is also the challenge of being cost competitive.

The report concluded that using renewable hydrogen to locally produce “green” steel appears the most likely to create large-scale, economically feasible opportunities.

“With globally cost-competitive hydrogen, it will be cheaper to produce green steel here than to ship hydrogen and iron ore to countries such as Japan or Indonesia that have inferior renewable resources.”

Grattan believed it is one of the few economically credible ways to make the low-emissions steel the world will need, if it intends to get serious about tackling climate change.

Fortescue has read the same reports and nevertheless sees a future in exporting green hydrogen, despite its current limitations. Hydrogen production has political and environmental group backing so the timing may be right for an entrepreneur to jump into the market.

FMG intends to turn the energy sector on its head, applying the same methods and zeal that have seen it become a major player in mining.

For Andrew Forrest this just might be an easier task than one of his other passions, reforming Australian Rugby.

[i] https://cleanenergypartnership.de/en/faq/hydrogen-production-and-storage/#:~:text=To%20produce%201%20kg%20of%20hydrogen%2C%20nine%20times%20the%20amount,is%20necessary%2C%20i.e.%20nine%20litres.

[ii] https://aemo.com.au/-/media/files/major-publications/isp/2020/appendix--10.pdf?la=en

[iii] https://aemo.com.au/-/media/files/major-publications/isp/2020/appendix--10.pdf?la=en