A decade ago, leading tech giants helped usher in a new era for solar.
Thanks to civil society pressure over the emissions impact of their data centers, and a novel new financial intervention that could save them money while reducing those emissions –- the power purchase agreement (PPA) — companies like Apple, Alphabet (then Google), and Meta (then Facebook) unlocked the corporate procurement market. They did so because the value proposition was clear: buy solar power, get Greenpeace off your back, and save some money to boot.
Today, leading electric vehicle makers may have the chance to unlock the green steel market in much the same way.
As the world shifts from cars that burn oil to cars that run on electricity, the emissions profile flips from the tailpipe to manufacturing. Accordingly, leading EV makers increasingly face calls to clean up emissions from their supply chains. And they’ve begun to make moves.
For instance, Volvo joined the demand-side initiative Steel Zero, which involves a public commitment to buy and use 50% low-emission steel by 2030, and 100% net-zero steel by 2050. And the Swedish automaker is also among those that have signed MOUs or purchase agreements directly with steel companies to provide the investment certainty needed to get the first green steel plants built and the first green steel products brought to market at scale.
These high-level commitments are certainly important market signals. But true progress for green steel — and for the prerequisite green hydrogen — requires automakers to put real money on the table, accompanied by the certainty it will be there for the long haul. Without guaranteed demand, it’s going to be hard to get the first wave of green steel plants through the valley of death.
That means more long-term bilateral contracts for specified amounts, like the one signed between Mercedes and H2 Green Steel for 50,000 tons per year from 2025. And it also means that it’s time for automakers to mimic the tech companies of a decade ago more explicitly, by establishing and scaling green steel purchasing agreements that draw inspiration from the solar industry but are tailored to the realities of the nascent green steel industry.
These realities include the fact that steel prices and volumes can fluctuate dramatically from year to year and — importantly — the fact that green steel production depends on green hydrogen production, which in turn depends upon renewable energy production. This means an extra layer of supply chain uncertainty.
So what exactly would contracts that account for some of these challenges look like? Solar PPAs tend to be rigid when it comes to long-term fixed pricing, which makes sense due to the specifics of that market. However, steel procurement is very different, given that volume and price are renegotiated every year. Accordingly, it will take creativity to generate the long-term certainty of demand required to commercialize green steel.
For the fairly limited volumes currently available, these contracts could instead build in flexibility by operating with a cost-plus formula indexed to traditional steel market prices. In this way, they would ensure production cost transparency and the ability to revise pricing based on key commodity costs, even in a long-term contract. This would provide a transparent safety valve in the likely event that green steel prices fluctuate.
Perhaps the most important difference between green steel and solar markets is the green premium: green steel today is simply more expensive than steel made using traditional (carbon-intensive) methods. While that may change over time, saving automakers money today is simply not a promise that green steel companies can make.
Even so, some government support in the form of contracts for differences could help offset the premium. For instance, Germany is using a model to support industrial decarbonization that entails companies submitting the carbon price that will make it possible to run projects using renewables alone, i.e. the green premium. Winning bids then secure a contract for difference that covers all or a portion of that premium. The set-up, which mimics an earlier iteration in the Netherlands, has the added benefit of generating price discovery and ensuring that the first wave of projects get the government support they require at the lowest cost possible to the public purse.
But while the green premium is real, it’s worth remembering that compliance costs to clean up supply chains are also coming. Indeed, France is already planning to tie its EV subsidies to clean supply chain requirements, in part to protect European companies from growing Chinese exports. Couple that with the regulatory compliance costs of the recently passed carbon border adjustment mechanism — which could be expanded in the future to include embodied steel in vehicles — and it’s clear Europe’s green steel premium is already shrinking.
If that is indeed the case, the value proposition for automakers to sign green steel purchase agreements will be real and compelling, even if it comes in a different shape from that of tech sector interventions in solar markets a decade ago. Car companies eager to sell EVs have the opportunity to get civil society off their backs and save money on regulatory compliance costs in the bargain. And, given that the most optimistic production projections indicate that there won’t be nearly enough green steel to go around through at least 2030, they may also manage to lock in what limited supply currently exists, and at their competitors’ expense.
For tech companies, solar was the clearest solution to cleaning up their supply chain. By committing to doing so they single-handedly helped create a significant new climate tech market. It’s still early days for green steel, but EV-makers are now faced with the same opportunity. The question is: will they seize it?
Justin Guay is the director of global climate strategy for The Sunrise Project. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.
