Green retrofitting can be cheaper and less disruptive than replacement

Jaguar Land Rover and Ford have recently grabbed attention and UK and US government support with plans to build new battery plants for electric vehicles. And a Swedish start-up just received the permits it needs to operate one of the first nearly no-carbon steel plants.

Despite the justifiable excitement, this kind of fresh construction will not be enough to address the growing climate crisis. Just as the world will continue to need fossil fuel for many years, there are simply too many existing machines and buildings that cannot be replaced without large disruption or expense.

Decommissioning factories and heavy machinery that still have life in them can even be counterproductive because it wastes raw materials and energy and can cause inflation.

But investors should not let corporate executives sit on their hands. Retrofitting existing equipment and processes can substantially reduce carbon footprints and make many industries more sustainable. This presents a business opportunity, especially as some upgrades earn back their installation costs quite quickly.

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Take AGCO, a US-listed company that has been making tractors and other farming equipment since the 1990s. It is now carving out a niche within precision agriculture, with retrofitting kits that use sensors, cameras and artificial intelligence to cut costs, waste and carbon.

Roughly 60 per cent of the company’s $700 million (€635 million) sales in this area last year were to farmers seeking to upgrade at a fraction of the cost of buying new. AGCO’s sprayer module identifies plants in the field and automatically adjusts the type and the amount of herbicide that is applied, cutting chemical usage by 70 per cent. Its grain storage bin kit detects when a crop is overheating and turns on blowers to move the air around to prevent spoilage.

Both kits work by automating existing machinery that is normally operated by human beings, albeit much less precisely. “We do this on anybody’s brand of equipment,” explains chief executive Eric Hansotia. “You are managing by the metre rather than by the field.”

Retrofitting extends well beyond agriculture. Steel factories are experimenting with furnaces that heat with an electric arc or hydrogen rather than fossil fuel. Some are also installing nearby sustainable power sources, such as solar panels, to provide electricity.

Pulp and paper factories built in the 2010s, when energy costs were low, are often equipped with production lines that are so hot that plant doors are propped open in winter. Installing capture hoods allows that heat to be recycled instead of released. Sensors can further save energy by ensuring that the machines run at the most efficient level, rather than at full blast.

But until Russia’s invasion of Ukraine drove up energy prices, few factory owners were interested in making that investment, says Diego Hernandez Diaz, a McKinsey partner.

Part of the problem is that small improvements do not fire the imagination the way whole new technologies do. “It’s more exciting to say we have invented an entirely new path than to say I have retrofitted a factory and it’s 30 per cent better,” says David Winter, co-chief executive of Standard Industries, which sells specialised insulation products that can drastically cut energy costs for warehouses and other buildings.

Inertia also plays a role: if a factory or farm has been running successfully for 15 or 20 years, it can feel risky – or unnecessary – to mess with operations. Adding sensors and automation may also rile unions and raise worker concerns about being replaced.

The big government climate programmes, such as the Inflation Reduction Act in the US, are aimed mostly at large-scale new-build projects. That makes some sense for industries that need big investment. A McKinsey study estimates that the world’s 3,000-plus cement plants will not be able to reach carbon zero without the invention of new technology.

Until that happens, governments need to nudge companies to move forward with retrofitting – the McKinsey study also says alternative fuels and energy efficiency can cut cement’s carbon footprint by 20 per cent.

Higher fuel prices have done part of the work by making energy efficiency more financially rewarding, but higher interest rates will weigh on corporate investment. Additional carrots and sticks are needed. Carbon taxes are one option. Procurement programmes that pay a premium for greener products are another. Waiting around for someone else’s shiny new projects to save the world is not the right option. – Copyright The Financial Times Limited 2023