Cleaning Up Episode 126 Edited Highlights - Marco Alverà

The Inflation Reduction Act offers European energy producers an opportunity for “the most beautiful arbitrage,” with its subsidies for carbon capture and green hydrogen production, according to the CEO of Tree Energy Solutions (TES).

On the latest episode of Cleaning Up, Marco Alverà explained how TES plans to exploit IRA subsidies to import green hydrogen into Europe in the form of ENG – or, Electric Natural Gas. The interview featured some surprising admissions from Alverà, formerly of Eni, Enel, and Snam, and repeated accusations from Michael that the business appeared dependent on becoming a “subsidy hoover.”

Michael Liebreich So, Marco, thank you very much for joining me here on Cleaning Up. Can you tell us about what you're doing with TES?

Marco AlveràTES wants to be the Tesla of hydrogen, and we supercharge hydrogen by converting it into a special molecule called ENG. We're racing to build projects, both to produce the ENG upstream, and to receive the ENG downstream in Germany. ENG is renewable synthetic methane, a molecule that's chemically indistinguishable from normal natural gas, and it's made by combining green hydrogen and CO2. It's a way to bridge the gap between the world of electrons, renewable energy and the intermittency of solar and wind, and the more stable world of natural gas. By 2030, we want to produce one million tonnes of ENG, and with 2045 in mind, when German law will have prohibited fossil fuel, we're building a large LNG terminal at Wilhelmshaven that we will gradually fill in with ENG.

MLSome people are unhappy with LNG terminals, because they think we should be going straight to something cleaner. What do you say to them?

MAGermany consumes six times more energy in the winter than it does in the summer. So, if you try to worry about the seasonal, extra demand for heating, with electrons, you're never going to get there. So, you need to store molecules; those molecules can be LNG, can be ENG, can be bio-ENG. But we have the reservoirs underground, we need to fill them up with something. ENG is essentially hydrogen, so, when you import ENG, you're importing hydrogen. For clients who want pure hydrogen, we can separate the ENG back into hydrogen. ENG is going to be a very cheap way to bring hydrogen from Australia, or Texas, into Germany. But most of our clients are saying, why should I take the pure hydrogen if I can take the ENG because that is a much more interesting molecule.

MLSo, as TES, you want to get to a fully circular pathway where you're bringing in ENG, but the CO2 is then going back to carry more hydrogen into Europe. Can you tell us about your first project?

MA So, the first project which we will be announcing in a matter of days is in the US, because there's a lot of money there to be made in layering all the different subsidies from the Inflation Reduction Act. So, you get a subsidy for capturing CO2, for producing the renewables, for producing the hydrogen, and we may even be able to get additional subsidies in Europe. This whole IRA brought my cost reduction curve five years forward. So, in Texas, there's a lot of CO2 available, that has already been captured, which they’re using to enhance the recovery of oil. What we're saying is, don't put it underground to produce more fossil fuel, give it to us, because we have the perfect home for that. Hydrogen in our model is a carbon absorber, it's a carbon sink.

MLThat CO2 that you're using is fossil CO2. That's not net zero, right? It's gone through two power generation cycles, but it has ended up in the air. So, if we all did that, we're not net zero and the planet is kind of screwed, right?

MANo, if we all did that, you'd have two power plants at the price of one in terms of CO2. That plant, we assume, wouldn't be capturing it, otherwise, they wouldn't sell it to us. They emit the CO2, they give it to us, we merge it with the hydrogen, we give it to them. So, it's a circular carbon loop. There's no emissions generated from our loop. Our product is carbon neutral, by definition, because it absorbs as much CO2 as it emits. Because if I emit more than I absorb, I will lose product, my volumes will decline.

MLBut this is regulatory arbitrage, because what you're actually doing is getting the IRA to pay you to capture the carbon, and then you're sneaking off to Europe, emitting it, and helping somebody to avoid a carbon price in Europe. So, you're double-dipping, but the CO2 is ending up in the air, let's be absolutely clear - the CO2 is ending up in the air. Why would the IRA continue paying you to capture it and put it in the air?

MARight now, they're paying people to put it underground to produce more oil that produces exponentially more CO2; we're keeping it in a loop, and using it to carry hydrogen from A to B. This is why Japan has committed to going to 90% ENG by 2050. The CH4 molecule is just so much easier and more beautiful than an H2 molecule. No, embrittlement, much harder leakage if it's done right, and more energy intensity. So this process, if you start with an electron, it's about 55% energy efficiency delivered to the customer in Germany, which is a horrible thing if you're looking at it from an engineering point of view - you're wasting 45% of the energy. But if you look at it from an economic point of view, it's the most beautiful arbitrage that I've seen in my life.

ML I want to come back to the subsidies offered by the Inflation Reduction Act. The IRA is going to give you $3 per kilo of hydrogen in the US, right? This is a subsidy hoover; it’s an enormously efficient process at absorbing subsidies, no?

MA ENG stands up without subsidies for those who want a green fuel, either because they avoid the ETS, or because there's a Carbon Border Adjustment Mechanism, or because there's a Contract for Difference. If we want to continue with fossil fuels, that's fine; if we want to electrify everything, that's also fine: the world will need green molecules. And I've studied green molecules for 20 years: this is the cheapest, the most resilient, the easiest green molecule to produce. Then the subsidy is generous? Let it be so. This is just going to help accelerate the building up of electrolyzers, which is really the key bottleneck; is getting that technology to cost less and less and less, because it's still too expensive.

ML Let's talk about that sort of end-point where you've gone circular. Because at some point, not only does the $6 per kilo of hydrogen probably go away, but also the ability to sort of piggy-back on US CO2 emissions.

MA So, we're going to start in the US because of the speed of doing business in the US, the availability of renewables, and the IRA. We also have teams flat-out working in the Middle East, and in Australia. As of October, Europe will have a Carbon Border Adjustment Mechanism. So, if you're bringing steel or aluminum into Europe, you'll have to pay a carbon tax if it's not green. So, if you're in the Middle East, and you're producing aluminium, and you have a lot of sun and wind, and you have a lot of CO2, ENG is the perfect product to help you produce 1-5% of your aluminium that you want to sell to Europe and make that green. So, that's a closed loop, without any shipping, any transport, anything.

MLI like this. That's good. However, how does Germany then compete - with Brazil, Australia, India, China - doing this process with your CH4, that only works because you get the IRA subsidy on the hydrogen?

MA A steel plant loves CH4 much more than hydrogen: no embrittlement, they use the carbon, they keep the same facility. The cost of moving the CH4, the ENG molecule, the cost of shipping ENG from the Middle East to Germany is only about 10% of the product. So, the question isn't, a steel maker pays twice as much as a steel maker in the US. The question is, does the value added of having all the technology integration present in Europe - of having all that heat integration, of having the logistics rails going from Salzgitter to Volkswagen - is that worth the 10% extra cost? For some products, yes, for others, no.

MLJust to close Marco, isn't this just incredibly risky to build your business on all these subsidies?

MAWe're trying to fill a gap here to a world where electrolyzer costs come down, solar costs come down, and electrification takes huge market share, and molecules just need to take care of whatever can't be electrified. Of course, a lot of heavy industry will move to where it's sunny and windy; of course, a lot of places like Iran and Russia and Qatar are going to be hard to beat because they have free natural gas. But our job is to give a small contribution, by building 1 million tonnes, which is a drop in the drop of the drop of the ocean. I'm confident that in that decarbonized energy mix, ENG can have a 5%, 10%, 15% market share. So, this is not the solution to everything; we believe in nuclear, we believe in ammonia, we believe in green hydrogen. This is just a very cheap way of moving $10 energy into countries that are now spending $200 for the same energy.