Unpacking the e-methane business model
Are you struggling to understand the business model behind synthetic methane (or e-LNG)? Does it seem far-fetched? I'll do my best to explain...
Have you seen the news that TES's Wilhelmshaven "e-LNG" terminal has been exempted from tariff and third-party access regulation in Germany? Are you mystified by the busienss model behind synthetic methane? Read on.
Background
Natural gas - or fossil gas, as it is better called - is made up mainly of methane (CH4). Methane can also be synthesised from hydrogen and CO2, for instance via the Sabatier reaction. If you use green hydrogen and CO2 captured from the air using green power, you can make non-fossil methane: when you burn it, the resulting CO2 goes back where it came from. You can even be carbon negative, if you capture and sequester the CO2.
Sounds wonderful right? Sure! As long as you don’t worry about thermodynamics, engineering or economics.
Making e-methane is a thermodynamic turd. You are, in effect, un-burning natural gas, and doing so in a series of lossy steps, so you have to put in more than twice as much energy as is embodied in the resulting gas. Not only do you waste over half your input energy, but the energy you put in is the form of electricity (high-exergy, yum yum!) and what you get out when you eventually burn the resulting e-methane is heat (much lower exergy, bleugh!).
If you use the resulting e-methane to generate power, you end up with less than a quarter of your input green electricity. If you use it for space heating, you achieve about an eighth* of what you could achieve via a heat pump.
[* note: an earlier version said a quarter - that was an error]
As a result of this thermodynamic turdiness and the associated chemical engineering and infrastructure, it is a hugely expensive process, many times the cost of extracting fossil gas. If you had any alternative - any way at all of avoiding burning natural gas in the first place - you should be doing it.
So why does anyone want to make synthetic methane?
It’s all about the subsidies, in particular in the U.S. When you make synthetic methane, total Inflation Reduction Act (IRA) subsidies add up to more than $60 per MMBTu of resulting e-methane (see graphic above).
TES is not the only company trying to play the e-methane game. Terraform Industries is too, and there are others. But TES is probably the highest-profile group trying to bounce the world into e-methane.
TES’s CEO Marco Alverá has been very open about the business model. This is what he said when he came on Cleaning Up Podcast: "There's a lot of money there to be made in layering all the different subsidies. So, you get a subsidy for capturing CO2, you get a subsidy for producing the renewables, you get a subsidy for producing the hydrogen."
"Layering" subsidies - bingo!
"There's a lot of money there to be made in layering all the different subsidies. So, you get a subsidy for capturing CO2, you get a subsidy for producing the renewables, you get a subsidy for producing the hydrogen."
Today's Henry Hub natgas spot price is $1.48/MMBTu. That means those "layered" IRA subsidies pay out *40 times* the value of the commodity produced, equivalent to a carbon price of $1,062/TCO2e. And IRA funding is not the only free money available - there are R&D grants and credits, US Infrastructure Act money for pipelines and grid infrastructure, and so on. The US taxpayer is getting rolled.
And TES wants to export the resulting e-methane. Here's Alverá again: "…and guess what, you can export that molecule!" So TES is hunting for support in Germany too - that exemption that has just been in the news, soft finance on the import terminal in Wilhelmshaven, exemption from the EU-ETS, etc. The EU taxpayer is getting rolled too.
Bottom line, this is as bad as it gets!
In fact, it's even worse
As if the subsidy-sucking economics were not enough, every kWh of green electricity used to make synthetic methane means one less kWh available to replace coal power, drive heat pumps, or charge EVs - which are up to eight times as effective at reducing CO2 emissions. Remember, that climate emergency we are all meant to be focused on?
And in case you think that the cost of making synthetic methane is soon going to plummet by a factor of 10 and make all this irrelevant, think again.
Let’s start with the CO2. Even the biggest promoters of Direct Air Capture (DAC) of CO2 are only hoping to get to $300/TCO2 in the next 5-10 years, and that just provides the carbon content of the e-methane - excluding the cost of hydrogen, Sabatier process, transport, compression, etc.
Then, the green hydrogen. Most of its cost is driven by clean power and things like pumps, tanks, reactor vessels, compressors, pipes, flanges and the like - whose costs are not about to go off a cliff. Sure, electrolyser stacks will get very cheap, but they make up only half of the capex for a green hydrogen plant, and capex will drive only a quarter of the cost of its output.
And finally, the Sabatier process. It’s a petrochemical plant, based on a 120-year-old process - not about to get much cheaper. There are alternative approaches to methanation, such as PEM electrolysis, but they are not technically mature and cannot eliminate thermodynamic losses.
In summary
If you want high-cost heating for ever, by all means go with e-methane. If, however, you want heating at around the same cost at fossil gas, get serious about heat pumps.
Similarly, if you want high-cost power forever, go with e-methane. But if you want power at anything like the same cost as now, invest in flexibility and use green power to the greatest extent possible as it is produced.
Not only is the whole subsidy-sucking mess repellent, but it also creates a huge risk for the rest of the Net Zero transition. When those who oppose climate action on ideological grounds figure all this out, it could be the next Solyndra.
Don’t say you have not been warned!
Selah.
As always, if I’m in error, and there is some way in which “layering” of these subsidies will be stopped via regulation or tax law, do let me know and I’ll gladly issue a correction (and pop a champagne cork).
If you want to read more, including quotes from the master of "subsidy layering", TES's Marco Alverà, here you go.
Do tell your friends and colleagues to subscribe to Thoughts of Chairman Michael, as well as to the substack Cleaning Up Newsletter.
If the numbers claimed by Terraform are both correct and pre-subsidy, post subsidy they will be stonkingly profitable and can be expected to grow like topsy. However I *think* the numbers are actually post-subsidy. One to watch, but with a skeptical eye!
Dear Michael,
I'm a big fan of your work, but this time I'm afraid you may be too quick to throw the baby with the bath water, so to speak. I'll explain, read on.
All that you're saying about TES' particularly bad approach makes sense, especially their proposed project in Shawinigan, Quebec, as detailed by engineer Paul Martin.
But it doesn't have to be the same for e-fuels at large. You're for instance very dismissive of Terraform Industries without going into the specifics.
It's worth looking at what Terraform Industries is doing, especially after their latest demo. And rest assured, I'll worry here about thermodynamics, engineering and economics.
Let's talk first about engineering and economics.
They follow a simple playbook. Adapt a known industrial process to ultra-cheap solar power by a) radically reducing capex to compensate for lowered utilization and b) developing processes that are robust to variations in power due to weather, as well as diurnal and seasonal power shifts.
They're betting on the continued decline of solar PV cost (a fair assumption, right?). As such, they're not looking at the most efficient systems, but the cheapest, they're happy with low efficiency as that means lower capex per unit of output. And it makes it easier financially then to work with intermittent power 12 hours a day on average. Their systems have been tested successfully to work on and off.
What that means is that while you write "Even the biggest promoters of Direct Air Capture (DAC) of CO2 are only hoping to get to $300/TCO2 in the next 5-10 years", Terraform Industries' proprietary direct air capture (DAC) system concentrates CO2 in the atmosphere today for less than $250 per ton.
That's today, the state of the art, as detailed here following their latest demo. "How? Our DAC capex costs <$600/T-year-CO2." https://terraformindustries.wordpress.com/2024/04/01/terraform-makes-carbon-neutral-natural-gas/
They're assuming a solar PV DC electricity cost of $20/MWh, 12 hours per day.
And these figures can only go down. This is what you'll get for their first product, the Terraformer, which is only of 1MW of power and designed to last 5 years! We're not talking about a gigantic plant to be amortized across 30 years. The machine will occupy as much space as 2 containers.
Let's talk about the electrolyser: it converts solar power at $20/MWh 12hours/day into hydrogen with current production costs at less than $2.50 per kg of H2. How? Their electrolyzer capex costs <$100/kW. It's been tested successfully to work intermittently. And again, this is for their Terraformer of 1MW of power, it's not reached because of some crazy scale, though of course to get scale one can simply add more Terraformers.
The cells are operated at atmospheric pressure, so there’s no need for any kind of pressure containment vessel. The oxygen stream is vented directly, while the hydrogen stream is moved through large, low pressure tubes directly to the adjacent reactor.
What's brilliant about that approach is that the CO2 filtered from the air and the H2 produced don't need to be compressed, stored, cooled down or transported far, it's consumed as it's being produced at the place of production to make pipeline grade natural gas. The reactor uses no rare or expensive catalysts.
At current pace, solar PV electricity LCOE will get down to $10/MWh and below before 2030 in the best places, and almost anywhere on Earth south of Denmark before 2040. So gradually e-methane and other e-fuels like e-kerosene will get cheaper than imported fossil fuels, not today nor tomorrow sure, but gradually and then suddenly on our way to 2040.
And what about thermodynamics?
Yeah, it's only 30% efficient power to methane, as per their founder Casey Handmer.
So yes, if we steal green electricity from the grid to feed such processes while we could instead power ground transport, and home as well as industrial heat way more efficiently, that would be a shame indeed, fully agreed!
But it doesn't have to be the case!
As you're fully aware, the limiting factor right now is not our ability to manufacture solar panels and install solar farms, it's our ability to connect them to the grid! So we could totally first feed the grid with as much solar farms it can absorb, to prioritize what's more efficient thermodynamically (electrifying ground transport and heat) and then in parallel build off-grid solar farms to power such e-fuels processes! It's super welcome, even if subsidized at first, as it will help speed up even more our going down the learning curve!
This is how we'll make deep sea shipping and aviation carbon-neutral and allow them to grow in the 21st century to bring convenience to 9 billion people.
So I'm afraid dear Michael you may have been to quick to dismiss Terraform Industries and e-fuels production at large.
As you've had TES’s CEO Marco Alverá on your podcast, it's only fair to invite Casey Handmer as well to give him a chance to make a better (the best?) case for e-fuels. I'm in touch with him so I can connect you two, let me know :)
thomasjestin@gmail.com