Apr 22 2022
With roots in Germany's industrial heartland dating back to 1865, chemicals giant BASF is readying itself for carbon neutrality. As it builds a foothold in the renewable energy space, the company is morphing from buyer to producer of green electricity.
Boasting a market capitalization of nearly Eur47 billion, BASF makes products including fertilizers, industrial gases, electronic-grade chemicals and glues, which it manufactures at production hubs in Texas, Belgium, Malaysia, China and other global locations.
The company has committed to buy electricity from multiple European wind and solar farms, has taken an equity stake in a Dutch offshore wind farm, is bidding for another one and in January established a dedicated renewables division.
In setting up BASF Renewable Energy, the company is making renewables part of its core business. "This is the extension of our existing approach of integrating ourselves in the value chain for key inputs," Horatio Evers, CEO of the new division, told S&P Global Market Intelligence.
BASF, which already generates most of its own electricity through steam and gas turbines, has a goal is to "provide a secure, ideal portfolio of renewables," Evers said. Its "make and buy" strategy includes building up its own capacity while buying electricity through long-term power purchase agreements.
Such activities have accelerated in recent months. In November 2021, the company signed a 25-year PPA for green electricity with French utility Engie, encompassing up to 20.7 TWh of power. This came after buying a 49.5% stake in the Hollandse Kust Zuid offshore wind farm in the Netherlands from Vattenfall, of which BASF agreed to sell half to German insurer Allianz at the end of the year.
More recently, BASF bought a stake in a company called Vattenfall Hollandse Kust West VI, with Vattenfall and BASF confirming April 22 that they will bid for the 700 MW Site VI concession in the Netherlands' Hollandse Kust West offshore wind tender. The tender opened April 14 and closes May 12, with the winners set to be announced after the summer.
Having a more involved BASF in the construction and planning of offshore wind farms would be a welcome development, according to Martin Neubert, chief commercial officer at Danish wind developer Ørsted.
"There is a huge amount of [interest] from industry to directly secure, procure and be part of development," Neubert said at industry group WindEurope's annual conference in Bilbao, Spain, on April 6. "I think it's good, in terms of how we best allocate resources, capabilities, but also risk. An open-door approach empowers the industry to ramp up."
Ørsted will sell 186 MW of output from its 900 MW Borkum Riffgrund 3 wind farm in Germany's North Sea coast to BASF under a 25-year PPA. The project is expected online in 2025.
Buying green power under long-term PPAs allows BASF to secure the required volumes at predictable prices, Evers said.
The deals also help reduce BASF's direct Scope 1 and 2 greenhouse gas emissions -- those associated with its own production and purchased energy -- which stood at 21.8 million mt of CO2 equivalent in 2020, according to S&P Global Trucost, having barely changed since 2016. German utility RWE more than halved its direct emissions during that time.
BASF wants to reduce its Scope 1 and Scope 2 emissions by 25% by 2030, compared with 2018 levels. For those scopes, the company is targeting net-zero by 2050. Home country Germany, by comparison, has a net-zero target of 2045. To support its goals, BASF wants to spend around Eur4 billion on low-carbon technologies by 2030.
The company does not have a target for Scope 3 emissions, which arise from customers using its products, but said it aims to be "among the first companies to provide large volumes of as many products as possible with reduced carbon footprints."
Renewable electricity will help to decarbonize the company's activities, but many processes rely on natural gas or gas-derived hydrogen and cannot be directly electrified. Fertilizer ingredient ammonia, for instance, is made using gray hydrogen, produced with natural gas, including by BASF.
The company uses around 1 million mt of hydrogen per year across its global operations, and flagship location Ludwigshafen in western Germany makes around a quarter of this hydrogen.
To clean up these polluting operations, EU policymakers want chemicals companies to switch to green hydrogen, which is made with renewables and electrolysis. BASF's renewables unit welcomes this plan, Evers said, while calling for a targeted approach and focus on specific use cases.
"Hydrogen alone will not solve all of our problems," the executive said. "For the production we will also need vast amounts of renewables that we currently do not have."
As a result, deployment of hydrogen needs to happen in areas that are directly reliant on hydrogen, such as chemicals and steel, Evers said. Policymakers ought to prioritize these sectors over power generation or heating, where sufficient alternatives exist. "Precious hydrogen should not be wasted," Evers said.
As the market and production capacity for green hydrogen ramps up, BASF also wants production to take place near existing hubs like Ludwigshafen, while a gas network for long-distance transport is built up for the medium to long term. To that end, the company will build an electrolyzer in Ludwigshafen starting this year, subject to subsidy approvals.
"We know how power-intensive electrolysis is," Evers said. BASF is testing a supplementary method of hydrogen production at the site, called methane pyrolysis, which the company says uses less electricity. The process splits gas into hydrogen and solid carbon and produces no greenhouse gas emissions if run on renewables, according to BASF.
The approach is not without critics.
"Methane pyrolysis is almost as bad as the current major process of producing hydrogen," Mark Jacobson, professor of civil and environmental engineering at Stanford University, said in an email. This is chiefly because of gas leakage in the value chain, while the green energy required to power pyrolysis is prevented from replacing coal and gas in power generation, Jacobson said.
Europe's industries will also tap hydrogen in a pivot from Russian gas usage, with the EU committed to stopping all imports by 2027 in light of Russia's invasion of Ukraine. This shift will be felt strongly in German industry, as the country is heavily reliant on Russian gas, importing more than half of its supplies from there via pipelines. BASF's stock declined sharply as Russia invaded Ukraine and is down 18% in the year to date as of April 13.
The company also owns a majority stake in Wintershall Dea, one of the financiers of the now-shelved Nord Stream 2 gas pipeline; Wintershall took a Eur1 billion impairment on that project.