Hydrogen: Booming interest (thanks to the fight against climate change) and many uncertainties

Hydrogen is the object of renewed and momentous interest around the world as a way to contribute to the decarbonisation of the global economy. Indeed, while hydrogen has multiple applications across (heavily polluting) industrial sectors and potential for new uses in transport, heating and power generation, it does not emit any CO2 and it leads to almost no air pollution when used. It enters in industrial processes as a feedstock, can be burned as a fuel, serve as an energy carrier, or for energy storage. However, today, its share in the global energy mix stays very limited, mainly because of cost considerations. While it is used in many public initiatives around the world, technological, financial and regulation risks (among others) will remain. 

Diverse production sources and (future) uses

Hydrogen can be produced through multiple technologies classified by colour. There are three main types of hydrogen. ‘Grey’ hydrogen is produced from fossil fuels, typically with natural gas reforming or coal gasification. ‘Blue’ (or low-carbon) hydrogen is produced from fossil fuels, like the ‘grey’ one, but during the reforming process, carbon emissions are captured by a Carbon Dioxide Capture and Storage (CCS) plant, and stored in underground sites. ‘Green’ (or renewable or clean) hydrogen is produced from renewable power by electrolysis (i.e. the process of separating water molecules into their constituents, hydrogen and oxygen) or from biomass with limited emissions. 

Today, hydrogen is almost exclusively supplied from fossil fuel (95% of the global hydrogen production), contributing to significant CO2 emissions. It is principally dedicated to industrial uses such as oil refining, ammonia production, methanol production and steelmaking. Whilst blue hydrogen can play an important transitional role to replace grey hydrogen, the cleanest option of them all is green hydrogen. There is an increased interest in green hydrogen for clean alternative uses in several sectors and activities, which enlarges the range of its future applications. Green hydrogen could be used in transport (via hydrogen fuel cells for cars or as a fuel in heavy-duty transport such as trucks, shipping or aviation), in energy-intensive and ‘hard-to-decarbonise’ industries via direct electrification such as steelmaking, in heating and power for buildings, or in power generation¹.

Green hydrogen and renewables are complementary technologies and their mutual development should support each other. The expansion of green hydrogen will support the demand for renewable energy, and the continuous cost reduction for renewables (and electrolysers) will improve green hydrogen’s competitiveness. 

Cost remains a big deterrent for renewable hydrogen

Indeed, the production cost of green hydrogen remains high when compared to hydrogen derived from other sources. The current cost of hydrogen using fossil fuels ranges between USD 1-2/kg while blue hydrogen is estimated to average at USD 2-4/kg. The cost for green hydrogen is higher at USD 3-6/kg.
 

While today hydrogen is mostly used in a gaseous state close to where it is produced, a larger deployment will require it to be converted into another medium, stored or transported. If not consumed where it is produced, hydrogen can be compressed and stored as a gas in underground geological storage facilities or pressurised gas tanks before being transported via pipelines or trucks to the end-users. As a result, end-user costs for hydrogen can rapidly rise and additional infrastructure could be needed. Those conversion costs are potentially the second-largest cost component in a hydrogen project.

Besides high costs, a lack of dedicated infrastructure for its transport and conversion (i.e. pipelines, hydrogen refuelling stations, liquefaction terminals, etc.) and significant energy losses at each stage of the value chain are important barriers to the uptake of green hydrogen.

The deployment of green hydrogen will therefore require public support at its early stage, as was the case for renewables.

Green hydrogen pushed by public initiatives around the world

With about 60 countries in the world being committed to carbon neutrality before 2050, many governments have recently adopted roadmaps to support the adoption of green or blue hydrogens as a way to tackle climate change. While today China supplies and consumes about one third of global (grey) hydrogen (followed by the US), Europe and Asia are expected to be the leading players in the adoption of green hydrogen. However, given the accelerating momentum under Biden’s administration, the US should also be among the frontrunners.

One of the most ambitious regions for green-hydrogen adoption is the European Union. In July 2020, the European Commission released its Hydrogen Strategy as part of the European Green Deal, and clean hydrogen was highlighted in the EU Recovery Plan as one of the essential areas to address in the context of energy transition. The EU’s target is to install at least 6GW of renewable-hydrogen electrolysers by 2024, producing at least 0.8 mt, and 40GW by 2030, producing 10 mt, equivalent to about its current use of grey hydrogen. The gas should be integrated into as many sectors as possible and lead to economies of scale and a cost reduction for green hydrogen. According to Fitch Solutions, the EU project pipeline encompassed 81 projects amounting to 48GW in May 2021, accounting for 45% of the global project pipeline, with an accelerating trend in the number of commercial-scale green-hydrogen projects. One major project is linked to the development of the port of Rotterdam, which aims at becoming a hydrogen hub. Besides other projects, there is one planned for a new 250MW electrolyser capacity, supported by an offshore wind farm. The existing retrofitted Dutch national gas grid could be used to transport part of the production. One of the main obstacles to the realisation of this bulk of European projects will be the considerable additional renewable-power generation needed. 

Asia is another key future producer of clean hydrogen, and Australia in particular has the largest share of planned capacity within the continent. Australia’s well-developed and expanding renewable-energy capacity – which has already pushed electricity prices down in recent years –, a wide availability of funding, and government support are favouring such trend. There is a large potential regional demand from outside the country, in particular from Japan, South Korea and China through their future global leadership in hydrogen fuel cell vehicle adoption, among other things. That demand combined with well-established domestic LNG infrastructure and expertise, could lead the country to choose to invest in liquefied hydrogen. This type of hydrogen is adequate for exports and could help transform the country into a hydrogen export hub. 

Conversely, the deployment of hydrogen will lag in some other regions of the world. Today’s absence of green-hydrogen production in Sub-Saharan Africa will be difficult to eliminate as a series of challenges prevent those countries from developing green-hydrogen production operations. In particular, an inadequate electricity supply combined with a sluggish renewables uptake and water scarcity are among the key hindering factors.  

Regarding blue hydrogen, both North America – with its large and well-developed natural-gas industry and current hydrogen demand in addition to a significant potential for future demand – and Western Europe – thanks to public support for boosting hydrogen supply and demand in the transition towards the adoption of renewable hydrogen – should see the bulk of new projects.

Risks of various types need to be lowered

Like every large-scale technological development in its starting phase, the launching, building and operation of hydrogen projects imply risks of various types.

Technological risks associated with hydrogen include, above all, the well-known fire and explosion risks. When handling hydrogen, there is a danger of explosion if it is mixed with air. What is more, leaks are hard to detect without dedicated tools since hydrogen is colourless and odourless. In case of fire, prolonged business interruption significantly increases total losses. 

The rapidly evolving cost of the hydrogen industry makes the prospective competitive environment difficult to assess. For green hydrogen, the supply of electricity can amount to half the market price. Further price declines in onshore/offshore wind and solar energy are therefore expected to have a large impact. Costs of electrolyser hardware, which accounts for 20-40% of green-hydrogen costs, will also benefit from efficiency improvement thanks to further R&D. As for the fossil-fuel hydrogen with carbon capture storage, the cost of carbon is another key driver in the cost analysis. Carbon prices in the range of EUR 55-90/tonne of CO2 are estimated to be needed to make blue hydrogen competitive with fossil-based hydrogen today. While a consensus is being formed that both green and blue hydrogen could fall below USD 2/kg of hydrogen by 2030, this evolution is subject to much uncertainty. Public support and incentives are crucial at this stage of the deployment. Their continuity and reliability is key and this could lack in countries with versatile policymaking. 

The demand side evolution of the market is also difficult to ascertain at this stage. Hydrogen is not a broadly traded commodity and is often produced on-site by its users today. Consumption will depend on future uses and the volume of hydrogen demand can differ substantially between applications.

Paradoxically, environmental and social considerations may also prevent such projects to get off the ground. As a way to illustrate this, in June 2021, the Australian government denied an environmental permit to the massive 26GW Asian Renewable Energy Hub in Pilbara, Western Australia. The hub was expanded to incorporate wind and solar generation with the production of green hydrogen and ammonia, and the permit was denied on the grounds that it would have unacceptable impacts on wetlands and migratory birds in the region. The project had been under development since 2014 and was expected to enter the construction phase in 2026 in its expanded version, with the first exports planned for 2027/28. The developers expect to take a financial-investment decision in 2025.

Analyst: Florence Thiéry – f.thiery@credendo.com

¹ According to the International Energy Agency, hydrogen is one of the leading options for storing renewable energy, and hydrogen and ammonia can be used in gas turbines to increase power system flexibility. Ammonia could also be used in coal-fired power plants to reduce emissions.