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The world’s largest low-carbon steel plant moves closer to completion

H2 Green Steel’s new $1.6 billion investment puts its hydrogen-fueled plant on track to open in 2025, in what would be a first for the hard-to-decarbonize industry.
By Jeff St. John

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overhead view of industrial facility amongst trees
An artist’s rendering of the low-carbon steel facility that H2 Green Steel is building in northern Sweden. (H2 Green Steel)

A plan to build the world’s first large-scale green steel plant just moved closer to becoming a reality. 

H2 Green Steel, the company behind the groundbreaking project in Sweden, has raised a €1.5 billion ($1.6 billion) equity round. It’s a major step forward for the years-long effort to decarbonize the steelmaking industry, which is responsible for between 7 and 9 percent of human-caused global carbon emissions. 

The new round of funding is one of the last pieces in the puzzle” of financing necessary to complete the project, H2 Green Steel CEO Henrik Henriksson told Bloomberg in an interview. The money will allow H2 to begin building at its site in the northern Sweden city of Boden, where it has been preparing for construction for the past two years and plans to open its plant in 2025

The company aims to replace fossil fuels with clean hydrogen in the steelmaking process, and the forthcoming facility will be the first at-scale test of its capabilities. At the plant, H2 will combine more than 700 megawatts of hydrogen electrolyzers with a set of electric arc furnaces capable of producing up to 5 million metric tons of green steel by 2030

That’s just a fraction of the nearly 2 billion metric tons of steel produced globally each year, highlighting the massive challenge the world faces in curbing a source of carbon emissions that exceeds the CO2 output of the European Union as a whole. Still, the H2 Green Steel plant would be a milestone for the push to decarbonize steel by substituting clean hydrogen for fossil fuels — a technique thought to be among the most promising ways to tackle the problem. 

While other routes to cutting the carbon emissions of steelmaking are being developed — like Boston Metals process of molten oxide electrolysis — they’re much further from the sort of full-scale commercialization H2 now says is within reach with this new investment.

The funding round was co-led by European hydrogen consortium Hy24, a new investor, and by existing investors Altor, GIC and Just Climate. And it was joined by new investors Andra AP-fonden and Temasek along with a lengthy roster of existing funders. 

The push to create — and sell — green steel

H2 Green Steel is one of a growing number of companies and consortia of metals and energy giants with fossil-free steel on its mind. 

These organizations mostly all plan to use zero-carbon hydrogen to process iron ore into what’s called direct reduced iron (DRI), which can then be converted into steel using electric arc furnaces powered by clean energy. This process would replace the coal- and coke-fired blast furnaces that have been used to convert iron ore to iron for steelmaking for more than a century; it can cut carbon emissions by more than 95 percent compared to the traditional method. 

But this emerging hydrogen-based process is much more costly than using fossil fuels. It also requires green hydrogen production at scales that have only just begun to be planned and financed. The 700 megawatts of electrolyzers that H2 Green Steel plans to build represent one of the largest such hydrogen commitments in Europe to date.

The European Parliament estimated in 2020 that green steel made using hydrogen would cost roughly one-third more than traditional steel, and that producing the amount of green hydrogen needed to fully decarbonize the EU’s steelmaking capacity would require a 20 percent increase in electricity production. 

A March study indicated that the cost of electrolytic hydrogen will have to fall from today’s level of $5 to $6 per kilogram to below $2 per kilogram to make this green steel process cost-competitive with steel produced via traditional methods. That’s within reason in the U.S. thanks to the Inflation Reduction Act’s $3-per-kilogram hydrogen subsidies, but it’s less clear how feasible it is elsewhere — like in Europe. 

Average zero-carbon electricity prices must also fall to $15 to $20 per megawatt-hour or lower to eliminate the cost premium of green steel, according to clean energy think tank RMI. (Canary Media is an independent affiliate of RMI.) 

In addition to these challenges around cost, the green steel process is both capital-intensive and unproven at a large scale — a combination that typically makes major investors squeamish. 

But Vargas Holding, the Swedish private equity firm behind H2 Green Steel, has done a remarkable job aligning the equity and debt finance needed to build this first-of-a-kind project, said Shravan Bhat, a senior associate with RMI’s Center for Climate-Aligned Finance. H2 Green Steel had already raised €1.8 billion ($1.93 billion) in equity in several rounds over the past three years, with investors ranging from sovereign wealth funds to family offices. 

One key success factor for the company has been securing customers willing to pay the green premium” to offset the higher upfront costs of producing lower-carbon steel, Bhat noted. 

H2 Green Steel last year announced pre-orders of 1.5 million metric tons of steel from customers including automakers BMW, Mercedes-Benz and Scania, appliance maker Electrolux, and primary steel suppliers such as Bilstein Group and Klöckner & Co., and said it secured price premiums of 20 to 30 percent for those purchases. 

H2 Green Steel has also secured government backstops for the 3.5 billion ($3.74 billion) in debt financing it announced last year, Bhat noted. Those assurances include a pledge from the Swedish National Debt Office to provide a green credit guarantee” of €1 billion ($1.07 billion) of the project’s senior debt. 

That means that if I’m a banker, giving money for this first-of-a-kind thing, if anything goes wrong, the Swedish government is on the hook — and I have confidence that they will repay,” Bhat said.

This political support plus important natural advantages have helped make Sweden the epicenter of European green steel investment. The country is Europe’s primary source of iron ore and it’s rich in carbon-free hydropower. In addition to the H2 Green Steel facility, Hybrit, a partnership of Swedish steelmaker SSAB, state utility Vattenfall and major iron ore producer LKAB, is scaling up its own hydrogen-fueled green steel pilot plant in the northern city of Luleå, and in 2021 delivered its first green steel to automaker Volvo Group.

Similar DRI-based green steel projects are also being developed by steelmakers elsewhere in Europe, including Luxembourg-based ArcelorMittal in Germany and Spain, Voestalpine in Austria and Salzgitter in Germany.

But EU countries account for only around 7 percent of the world’s steel. China makes more than half of the global supply of steel, and its investments in reducing the carbon impact of that production remain in the early stages.

And the U.S., which makes about 6 percent of the world’s steel, hasn’t yet seen any major investments in hydrogen-DRI green steelmaking. But the Biden administration has made building a domestic green steel industry a priority, and funding for green hydrogen production and industrial decarbonization from the 2021 Bipartisan Infrastructure Law and last year’s Inflation Reduction Act could help change the picture, said Chathu Gamage, a principal in RMI’s Climate-Aligned Industries Program. 

Other efforts to jump-start a U.S. green steel industry are also underway. 

Corporate consortia, like the First Movers Coalition, organized by the U.S. State Department and the World Economic Forum, have already pledged to buy a certain portion of green steel by 2030, Gamage noted. But now there is a middle ground of, how are they going to get the steel, and who’s making the steel?” 

And at last year’s Clean Energy Ministerial event in Pittsburgh, representatives of steelmakers and industrial giants met with government officials to chart a course to enable the requisite cycle of investment and industrial revitalization. The progressive Ohio River Valley Institute issuedreport in May that found a buildout of green steel and hydrogen industries could reverse the steady job losses in the U.S. steel industry across the Northeast and Midwest. 

But ultimately, what will go the furthest to boost green steel — in the U.S. and elsewhere — is creating the supply and demand linkages that enable early efforts at large-scale production from entities like H2 Green Hydrogen and Hybrit, Gamage noted. 

Jeff St. John is director of news and special projects at Canary Media. He covers innovative grid technologies, rooftop solar and batteries, clean hydrogen, EV charging and more.