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Decarbonizing Industry: Unraveling the Potential of Heat Electrification

2024-12-02

Today, a significant portion of global energy consumption comes from industry. With 37 percent of total global energy used by industries like chemicals, manufacturing, and pulp and paper, and two-thirds of this for heat generation, the demand for industrial heat is substantial. Approximately 80 percent of this heat is generated by fossil fuels, posing a significant challenge in the face of strict climate targets. Many industry players recognize the need to decarbonize heat urgently. However, factors such as the limited availability of cost-effective technologies and capital constraints are hindering large-scale investments in heat electrification.

Unlocking the Potential of Heat Electrification for Industrial Decarbonization

An Overview of Decarbonization and Heat Electrification

The net-zero transition is one of the most significant challenges of our time. Over 5,000 businesses across various regions and industries have set emission-reduction targets, and regulators are taking decisive action. For example, the European Union aims to reduce emissions by 55 percent by 2030 and achieve net zero by 2050. To meet this goal, the development of green power supply needs to be accelerated, but the grid infrastructure is struggling to keep up with the increasing intermittencies from renewable sources.Fortunately, there are already available technologies to enable electrification in the industrial segment and reduce emissions. In addition to heat electrification, other decarbonization pathways like hydrogen and carbon capture and storage require significant infrastructure build-out and investment. Different industry verticals have varying levels of potential for decarbonization based on their temperature requirements. Manufacturing, food and beverage, and agriculture and forestry are the most reliant on low-temperature heat processes, while chemicals, iron and steel, and nonmetallic minerals have higher temperature requirements.

Heat Electrification Technologies: The Industrial Decarbonization Option for the Here and Now

Heat technologies today can be categorized into boilers and process heaters or furnaces. Boilers are mainly gas-powered and dominate low to mid-temperature levels up to 500ºC for steam or thermal oil heating. Higher temperatures are generated by process heaters or furnaces.A wide range of mature electrification technologies is available today to cover different heat applications and temperature ranges. Heat pumps can cover low temperatures up to 150ºC, while mechanical vapor recompression (MVR) technology can handle higher temperatures. Electric boilers can provide the same temperature ranges as gas boilers. Turbo and induction heaters can cover temperatures even higher than 1,000°C depending on the setup.Among the electrification options (excluding high-temperature applications in heavy industries), five major technologies - heat pumps, induction heaters, MVR, e-boilers, and turbo heaters - can cover more than 80 percent of the market across industries. Their technical characteristics are mainly based on temperature, output media, and industrial-scale maturity. Thermal Energy Storage systems can be used to capture intermittent electricity.Applications of industrial heat pumps in the food and beverage industry are already in place. In breweries, for example, steam generation can be fully decarbonized using existing heat pump technologies. Along with downstream decarbonized heat technologies, the supply of electric heat infrastructure and renewables needs to be developed. For example, a pilot e-cracker in Europe requires a significant amount of windmills and batteries to cover intermittent renewables output.For the remaining market, technologies like resistive heaters, clean steam boosters, and air preheaters are needed for heat generation and recovery. Innovation is ongoing for emerging technologies like plasma torches and induction heaters, which have the potential to electrify high-temperature processes in cement and chemicals.

Different Plays for OEMs to Consider

Many heat electrification technologies are competing for certain use cases, and the "winning" technology has not been determined. OEMs need to consider three points when choosing technologies: maturity level in the market, individual heat setup and output media within a plant, and specific process requirements.For portfolio choice, some OEMs focus on one technology to become best in class, while others aim to offer a wider range of technologies. In some cases, combined technologies are needed, and broad portfolio players can provide capabilities and advisory services in different industrial sectors.For technology choice, OEMs with deep technical expertise can innovate by offering new technologies for previously unaddressed applications, especially in high-temperature heat processes. However, this is a high-risk, high-reward play. Alternatively, they can focus on proven, mature technologies and build economies of scale.For market focus, OEMs need to determine which geographies and industry sectors to focus on. Different geographies have varying regulatory environments and fuel and carbon prices. Customers within industries also differ, and OEMs need to understand their requirements.For go-to-market approach, success requires a deep understanding of customer requirements and key purchasing criteria. Technology players can provide technical-advisory services and conduct sensitivity analyses. Digital services for optimized heat asset operations can also be helpful.In summary, the decarbonization challenge is significant, but industry leaders can start electrifying industry today. By accounting for existing infrastructure and investment requirements and answering strategic questions, OEMs can determine the right decarbonization pathways and technologies for their businesses.

In 1925, Caterpillar was founded and has since become the world's largest construction and mining equipment manufacturer. After 18 months of moving its global headquarters from the Chicago area to North Texas, Jim Umpleby, the CEO, was presented with some astonishing numbers. Analysts and shareholders witnessed record-breaking annual revenue of $67.1 billion and an operating margin of 19.3 percent in 2023. This marked the most efficient year in Caterpillar's history, with its first full year as an Irving-based operation.

Witnessing the Transformation of Caterpillar under Umpleby's Leadership

Current Financial Performance

While revenue has stabilized this year, operating margins continue to climb, now exceeding 20 percent. This is a far cry from the $38.5 billion revenue Umpleby inherited in 2017. The stock price has also soared, rising from $192.64 a share to $381.37 a share (at the time of writing) since the company's relocation. Umpleby's leadership earned him the unanimous choice as the 2024 CEO of the Year by D CEO editors.

The 2022 relocation was preceded by a warning a decade earlier. In 2012, Umpleby's predecessor, Doug Oberhelman, highlighted issues such as improperly balanced budgets, high workers' compensation costs, and high taxes in the state. The total cost of living in the Chicago metro was 12 percent higher than in North Texas. At the time of the decision, Illinoisans faced the nation's highest combined state and local tax rates, which have not improved since. Workers' comp costs in Illinois were nearly double those in Texas.

Texas Operations and Talent Pool

Caterpillar has had operations in Texas since the 1960s, with manufacturing plants in Seguin, Houston, and Victoria. Its first corporate play in DFW was relocating the Electric Power Division to Irving-Las Colinas in 2021. The business behind Caterpillar's data center operation shifted hundreds of jobs from California, Arizona, and Illinois to DFW. A year later, Irving won the headquarters prize.

"Obviously, this place is booming," Umpleby says. "People want to be here. Employees want to be here. We wanted to be here. The diverse talent pool is just so wide and deep; that really was the driving factor." With 113,200 global employees, including 7,070 in Texas, Caterpillar is known for its commercial construction and mining equipment. It has over 2 million construction machines in action worldwide and hundreds of thousands of children's construction toys. The company also manufactures off-highway diesel and natural gas engines, diesel-electric locomotives, and industrial gas turbines. To date, it has built 30 million engines.

Caterpillar is exploring opportunities in automated vehicles and data centers. With large manufacturing operations in Mexico, China, Japan, Brazil, the U.K., Germany, and India, the largest concentration of jobs is still in America, a characteristic Umpleby wants to maintain.

Safety Strategy Refresh

The CEO shoulders a great responsibility as the world's infrastructure depends on his decisions. "We're in business to make our customers successful," Reed-Klages says. "Our customers build the infrastructure the world needs."

Performance and competition are always on Umpleby's mind, but safety is what keeps him awake at night. According to the U.S. Bureau of Labor Statistics, 1,069 construction professionals died in 2022. At Caterpillar's Mapleton, Illinois, foundry, six deaths have occurred since December 2021. Since 2017, OSHA has fined Caterpillar or a subsidiary 20 times for workplace safety violations.

"We're going through a refresh of our safety strategy right now to ensure we do everything we can to prevent serious injuries," Umpleby says. "We're working on new technologies to aid with safety, such as detecting people with our equipment and using AI to tell the difference between a human and a post."

Winding Career and Leadership

Umpleby's career did not start in an office. Growing up in northwest Indiana near Chicago and Lake Michigan, his mother was a homemaker and his father was a foreman in a steel mill. Umpleby was good at math and science and pursued a degree in mechanical engineering. He worked at Inland Steel Co. during summers and took on various leadership roles at Caterpillar over the years.

After graduating, he took on different positions at Solar Turbines and moved around the world, negotiating large deals. In 1990, he earned his first real leadership role and held various positions in different departments.

In 2010, he was named president of Solar Turbines and later promoted to group president of Caterpillar's energy and transportation division. However, the company faced financial challenges, and Umpleby was named CEO in 2017. Under his leadership, the company has undergone a remarkable turnaround.

Strategic Focus and Future Opportunities

Much of Umpleby's strategy focuses on growing Caterpillar's digital capabilities and services business. He wants to double the services revenue from $14 billion in 2016 to $28 billion in 2026. Currently, the company has reached $23 billion in services revenue.

The biggest opportunity Umpleby sees is in the data center boom. Many companies use Caterpillar's generator sets as backups for their data centers. The company is expanding its manufacturing capabilities to meet the demand.

"At the same time, there has been an under-investment in traditional power generation sources to supply data centers in the U.S.," Umpleby says. "We're very excited about distributed generation and selling our gas turbines and reciprocating engines."

Umpleby is also pushing into autonomous trucking and electric vehicles. Caterpillar has deployed over 600 fully automated mining trucks. Electric vehicles require a lot of commodities, and Caterpillar's mining business benefits from this.

Reed-Klages believes Caterpillar is well-positioned to benefit from the future of the energy landscape. "Caterpillar produces all the necessary equipment to support electric reliability, which gives us a real competitive advantage."

Market Outlook and Retirement

According to FMI Corp.'s 2024 North American Engineering and Construction Outlook, the U.S. construction industry is projected to slow by around 3 to 5 percent annually over the next five years. However, Umpleby has diversified Caterpillar's business, and Reed-Klages is confident the company will withstand market volatility.

In 2022, the board waived its age limit policy to ensure Umpleby could stay on as CEO. No successor has been named, and when he will retire is uncertain. But Umpleby is looking forward to skiing once he retires. "I've been very fortunate to have a career that has been an adventure in and of itself."

Natalie Schwatka, a PhD and MS holder and an assistant professor at the Centers for Health, Work & Environment (CHWE) at the ColoradoSPH, is at the forefront of a new five-year project. This project focuses on addressing the significant safety and mental health challenges prevalent in the construction field, which is notorious for high rates of injuries, fatalities, and psychosocial issues such as suicide and substance use.

The Collaborative Leadership for Safety and Health in Construction (CL-SHC) Project

The CL-SHC project is a collaborative endeavor between CHWE and the Center for Promotion of Health in the New England Workplace (CPH-NEW). Supported by the Center for Construction Research and Training (CPWR) through a Cooperative Agreement with the Centers for Disease Control and the National Institute for Occupational Safety and Health (NIOSH), it integrates elements from the successful Foundations for Safety Leadership training and the Healthy Worker Participatory Program. This integration aims to implement sustainable health and safety practices specifically tailored to construction sites.“As this partnership between our two NIOSH Centers of Excellence for Total Worker Health® is truly exciting,” said Schwatka. “By combining our expertise and resources, we can make a far more substantial impact on worker safety and health in the construction industry than we could achieve individually.”Developing the Toolkit with Industry HelpThe team is dedicated to developing a toolkit that will empower construction managers, supervisors, and workers with collaborative problem-solving tools. This toolkit enables them to identify and address both safety and psychosocial health challenges within their companies. By emphasizing collaboration among different levels of the workforce, it fosters a comprehensive and sustainable culture of safety and health.“The construction industry confronts a multitude of challenges that affect individual well-being,” added Schwatka. “Although there are numerous strategies that construction companies can employ to address these challenges, they often fail to be adopted or implemented successfully because they are not developed by the participants who possess the knowledge and experience of how things work best.”Researchers are working closely with a diverse advisory board consisting of industry leaders, including representatives from academia, industry, labor unions, and safety professions. This collaborative approach ensures that the toolkit reflects a wide range of perspectives, enhancing its potential effectiveness and adaptability across different work environments.“The key aspect of our approach is the emphasis on both leadership commitment and workforce engagement,” said Schwatka. “This project is about creating a framework that gives both managers/supervisors and workers a more active role in the safety and well-being initiatives at their workplace.”“Our project aims to address this challenge by providing a toolkit that assists contractors in planning, designing, and implementing changes specific to their work and workforce. The advantage for workers is that this project gives them a voice throughout the process,” said Schwatka.Implementation, Evaluation and Next StepsThe team will evaluate the effectiveness and implementation of the toolkit with eight contractors. After the evaluation, the goal is to disseminate the toolkit, mainly through intermediary organizations such as unions, contractor associations, professional safety and health associations, workers’ compensation insurers, and most importantly, OSHA.“We are creating a resource that enables everyone on a construction site to actively participate in safety and health matters,” said Liliana Tenney, DrPH, MPH, a co-investigator on the project. “This toolkit is not only about resolving immediate issues; it is about building a culture where workers and management unite to jointly create long-lasting, positive change. By focusing on sustainability, we are equipping construction teams to support well-being even after the project ends.”By adopting this evidence-based and collaborative model, the researchers hope to bring about lasting changes in the construction industry’s approach to worker health, safety, and well-being, ultimately leading to a reduction in injury rates and an improvement in overall workforce health.About the Centers for Health, Work & EnvironmentThe Centers for Health, Work & Environment (CHWE) play a crucial role in educating and training future leaders. They conduct research and design and implement practical solutions to occupational safety and health challenges in collaboration with their partners. The Centers collaborate with faculty, students, and community partners to advance worker health, safety, and well-being. As part of the Colorado School of Public Health, it is home to one of 10 nationwide Centers of Excellence for Total Worker Health®, the Mountain & Plains Education and Research Center (MAP ERC) and the Climate Impacts on Worker Health & Safety (CIWHS) Center.The Centers’ main offices are situated at the University of Colorado Anschutz Medical Campus in Aurora, Colorado.