RECAI 56: The public and private sectors are focusing on green hydrogen’s potential to enable decarbonization, but it needs demand and supply-side support to scale up.
- Green hydrogen could be a viable emissions-free alternative to fossil fuels and other forms of hydrogen, if costs fall and production efficiency is improved.
- Creating demand at scale for green hydrogen is key to its development, and will require support from industry and policymakers.
- Green hydrogen could help countries with limited domestic renewables resources to decarbonize and reach net-zero targets.
The EU launched its hydrogen strategy in July, placing low-carbon or clean versions – and in particular “renewable” hydrogen – front and center as an enabler to meet ambitious net-zero targets across the region.
While the existing market for hydrogen is dominated by “gray” production, which uses fossil fuels resulting in carbon emissions, the EU strategy focuses on the development of “clean, renewable” or green hydrogen. This is produced through the electrolysis of water, using carbon-free electricity from solar or wind resources. Another low-carbon option, blue hydrogen, is produced using fossil fuels from which the carbon emissions are captured and stored.
Between now and 2024, the EU aims to install at least 6GW of the electrolyzers used to create green hydrogen, to produce up to 1m tonnes. By 2030, it wants to have at least 40GW of renewable hydrogen electrolyzers, producing up to 10m tonnes of green hydrogen.
Such targets will require electrolyzer investments of €24b–€42b (US$28b–US$49b) before 2030, according to the EU strategy. An additional €220b-€340b (US$257b–US$396b) would be needed to scale up and connect 80GW–120GW of renewable energy production capacity to these electrolyzers.
While green hydrogen is the main focus of the plan, blue hydrogen will play a short- to medium-term role in the EU strategy.
Blue will “rapidly reduce emissions from existing hydrogen production, and support the development of a viable market at significant scale,” according to the EU strategy (pdf). And it calculates that retrofitting enough existing plants with carbon capture and storage facilities to accommodate this will cost around €11b (US$13b).
Individual European governments, including in France, the Netherlands and Germany, have followed suit in incorporating low-carbon hydrogen into their decarbonization strategies. Exploration of the role it could play in a future low-carbon economy is also taking place in other parts of the world, including Japan and Australia.
The belief that both blue and green hydrogen can play important and complementary roles in decarbonization efforts appears throughout the wave of hydrogen policies released in recent months. However, green hydrogen is beginning to attract more attention from both policymakers and investors because of its long-term sustainability.
With renewables capacity increasing globally, and the cost of this power continuing to fall, green hydrogen presents a sustainable way to create and store zero-emission energy for use throughout the decarbonized economies of the future.
Chapter 1
Making low-carbon hydrogen more cost-competitive
Subsidies are needed to bring the price of green and blue hydrogen in line with conventional fuels.
If green hydrogen is to fulfill this role at scale, it must become cost-competitive with blue and gray hydrogen and other conventional alternatives. According to Hydrogen Europe’s Clean Hydrogen Monitor 2020 report, the current estimated cost of producing gray hydrogen is around €1.5 per kilogram (US$1.76/kg) in Europe, depending on natural gas prices and disregarding CO2 costs. Blue hydrogen costs around €2/kg (US$2.35/kg) while green is currently produced for between €5–€6/kg (US$5.87–US$7.04/kg) on average in most EU countries.
The report adds that, for hydrogen to realize its potential in a decarbonized economy, it must be produced “on a mass scale in a sustainable way. For that to happen, however, clean (green and blue) hydrogen needs to become cost-competitive with conventional fuels. Today, neither renewable (green) hydrogen nor low-carbon (blue) hydrogen … are cost-competitive against fossil-based hydrogen.”
Multiple studies have shown that low-carbon hydrogen costs are falling. For green, in particular, a Hydrogen Europe analysis based on average wind and solar conditions in individual European countries shows production costs could be as low as €2.9/kg (US$3.40/kg) when using photovoltaic (PV) in southern Europe and €3.5/kg (US$4.11/kg) in Germany.
But with costs still as much as two to three times higher than gray in most countries at present, reaching these lower levels will require government support. “Whether it’s blue or green hydrogen, it’s not yet competitive with the fuels it needs to replace – that gap needs to be filled, and policy could do that,” says Allan Baker, Global Head of Power at Société Générale. “Similar to renewable energy development, that whole industry has moved from complete reliance on subsidies to a more commercial regime, and we see the same thing happening for hydrogen.”
The fact that clean-hydrogen development is starting from an earlier point than renewables should also be taken into account, argues Alan Mortimer, Director of Innovation, Renewables, at energy services company Wood. As a result, he says: “In the early stages, some targeted support will be required, including grants and support for infrastructure to increase the volume of activity as early as possible. This will help the market to function and bring costs down efficiently as the industry scales up.”
Similar to renewable energy development, that whole industry has moved from complete reliance on subsidies to a more commercial regime, and we see the same thing happening for hydrogen.
Decreasing renewable energy prices are a significant contributor to falling production costs for green hydrogen in particular, as are the strides taken to develop electrolyzers in recent years.
“The cost of renewable power dominates the revenue model (for green hydrogen),” says Dr Graham Cooley, Chief Executive of UK electrolyzer producer ITM Power. “The cost of the electrolyzer and its load factor are secondary, and the desire of industry to buy the hydrogen once produced is also important.”
This fact has caught the attention of investors, who are becoming increasingly active right along the value chain, but particularly in the electrolyzer space.
“Electrolyzers are probably the most interesting part (of the market),” says Claes Orn, Chief Executive and Managing Partner of Geneva-based wealth management firm Orn & Cie, which manages the Thematica Future Mobility Fund. “This is the backbone of the green-hydrogen economy. It’s at a very early stage, but it’s very promising.”
Christophe Hautin, Deputy Portfolio Manager of Allianz Global Investors’ Climate Transition Fund, which invests in the European hydrogen space, adds: “As investors, we’re happy to see commitments from governments and corporates in Europe to invest significant amounts of money into the sector to develop technology – electrolyzer capacity in particular. That’s what is driving investor interest and the valuation of those companies in the market.” However, he adds: “Subsidies are part of the solution, but certainly not enough to support the development of hydrogen to a large scale.”
Indeed, scaling up production is only one side of the equation; stimulating demand for low-carbon hydrogen production will also be key to its development – and that will require support from industry and policymakers, according to investors.
Helpfully, public and private investment interest in production has also spurred a change in the industry’s attitude towards integrating future low-carbon hydrogen supply. “Because the policy is there, they see incentives coming, and that has really boosted interest in (green) hydrogen recently,” Cooley adds.
Governments are tightening emissions targets, making decarbonizing hard to reach, so high-emitting sectors such as transportation, domestic heating and heavy industry are an increasingly important goal.
Chapter 2
Helping green hydrogen reach scale by developing demand
Targeted support for infrastructure is needed to overcome the “which comes first” dilemma.
In the transport sector, large vehicles and public transport networks are ideal candidates for a switch to hydrogen because of the high energy demands and the need for quick refueling. Long-haul trucks have the onboard space to store hydrogen tanks, while fleet vehicles – such as buses and taxis – could use centralized infrastructure for refueling.
Transportation examples such as these can also drive demand and bring down costs in a way that would enable further expansion, says Jo Bamford, owner of energy producer Ryse Hydrogen and Northern Ireland’s Wrightbus.
“I have 200 buses going back to a depot every evening – that’s demand,” he explains. “If I’ve got demand, I can make production, and if I’ve got production, I can apply it to the rest of the economy – trucks, trains, ferries, and so on.”
However, infrastructure remains “a bit of a weak link” for transportation, says Orn, of the Thematica Future Mobility Fund, although he admits there is “great will” from policymakers and industry to address this issue.
“Infrastructure is extremely important, whether it’s pipelines, onsite storage or refueling stations,” he says. “We see a lot of possibilities and progress on the infrastructure side. It needs investment, and the focus on the need to scale that up is now growing.”
As such, this kind of high-value, relatively low-volume application is expected to be developed regionally, in line with distributed green-hydrogen production, or added to high-volume demand sources to improve economics.
Large vehicles and public transport networks would be ideal candidates for a switch to hydrogen. Long-haul trucks have the onboard space to store hydrogen tanks, while fleet vehicles – such as buses and taxis – could use centralized infrastructure for refueling.
In the power sector, green hydrogen could tackle intermittency issues as renewables’ share of generation continues to grow. Converting power into hydrogen creates a chemical battery with more scope for long-term storage than utility battery storage.
“Whether storing wind energy that was generated at night for use the next day, or shifting solar power from the summer into the winter, that could happen at a pretty meaningful scale with hydrogen,” says Alex Helpenstell, Strategy Consultant at EY-Parthenon.
While any form of clean hydrogen could be integrated into the power sector, Mitsubishi has launched a US$3b project to develop three green-hydrogen-ready power plants in New York, Virginia and Ohio. Initially capable of operating on 30% hydrogen and 70% natural gas, they could eventually reach 100% green hydrogen, according to Paul Browning, President and Chief Executive Officer of Mitsubishi Power. Once online, Mitsubishi will then build underground storage facilities connected to pipelines, to enable the plants to transition to hydrogen-only over time.
“We are trying to solve the chicken-and-egg problem where investing in hydrogen is unattractive unless there are power plants to offtake that hydrogen, but no one is going to invest without the infrastructure to supply the hydrogen,” Browning explains, making a point that applies equally to any type of clean hydrogen.
“By starting out with power plants that use 30% green hydrogen we can create economies of scale, enable more renewables, and prepare for a future when we can make the infrastructure investments to fully transition from natural gas to 100% hydrogen and become part of the renewables landscape,” he adds.
Pilot projects to inject hydrogen into the natural gas grid are happening in the US, Australia, Japan and throughout Europe. This could present a significant near-term demand source for low-carbon hydrogen, of which a limited amount can be blended with natural gas before existing pipeline infrastructure needs to be upgraded or end-use applications adapted.
The amount that can be blended varies by country. Germany currently allows the highest volume blend in certain circumstances, while, in France, a group of gas infrastructure operators has suggested a blend of up to 6% hydrogen could be possible right now without major changes to pipelines and end-user boilers.
In a report on its findings in this area, the group recommended a system-wide target of 10% blended hydrogen by 2030, and 20% beyond. By 2050, the report found, injected hydrogen volumes of up to 40TWh (32% by volume) would be possible.
Reaching 100% hydrogen deployment in the gas-infrastructure sector would require large-scale conversion of end-user appliances, such as domestic boilers, and the development of safety measures for the use of hydrogen in a residential setting. However, blending even 5% would provide a significant source of demand relative to current hydrogen production, especially in the early stages of the market.
In France, gas infrastructure operators have suggested a blend of up to 6% hydrogen could be possible right now without major changes to pipelines and end-user boilers. By 2050, injected hydrogen volumes of up to 40TWh (32% by volume) would be possible.
There is scope for governments to implement a feed-in tariff mechanism, as is currently used to encourage biogas injection into the UK gas grid, to help establish the existing gas market as a demand source for hydrogen.
Similarly, given the important role he believes clean hydrogen could play in terms of longer duration storage, Browning suggests a combination of state and company requirements for utilities to add more energy storage capacity, “along with incentives in the early days to help offset higher costs as we are deploying this technology and achieving scale.”
He points to the UK’s contracts-for-difference mechanism, and the investment and production tax-credits models used in the US for renewables development. “Those are familiar incentives that we think could equally apply to storage,” Browning says.
In addition to these specific use cases, such mechanisms could also be used to incentivize investment in hydrogen production and, if applied to some of the rapidly emerging use cases around the world, to stimulate demand. Focusing efforts on developing production and demand in this way is the surest route to bringing clean hydrogen to scale.
Chapter 3
Supporting hydrogen development through clusters
Ports and other energy-intensive areas could be key to boosting demand and nurturing markets.
Heavy industry presents a high-volume use case for low-carbon hydrogen that could produce the necessary scale to solve the industry’s “chicken and egg” dilemma, according to Jorgo Chatzimarkakis, Secretary General of Hydrogen Europe. He argues heavy industry is the low-hanging fruit that could switch to hydrogen use relatively soon.
Industrial clusters are already being explored as a way to support both production of and demand for low-carbon hydrogen simultaneously. The UK’s Gigastack project, for example, is studying the feasibility of powering an industrial cluster in the Humber region in northern England. The current phase of the project would connect a 100MW electrolyzer to the 1.4GW Hornsea Two wind farm, which is set to be the world’s largest offshore wind development upon completion in 2022. On the demand side, the Phillips 66-owned Humber Refinery would offtake the green hydrogen produced, providing a significant demand anchor for the project. Last February, the project received £7.5m (US$9.7m) in funding from the UK Government to support this phase.
Explaining the cluster concept, EY-Parthenon’s Helpenstell says: “There would be a single point of production with an anchor industrial demand, shared infrastructure for local refueling and distribution, paired with demand from ships, trains, buses, forklifts and industry operating in the area. Local authorities can support development of hydrogen by creating policies for these zones, leading to an end-to-end market in that space.”
Industrial clusters can be used to support blue and green-hydrogen development. Local governments can apply incentive mechanisms and production models to a specific area where a market can be created and nurtured. Infrastructure can then be built out to a nearby city for transportation, residential heating and power needs.
Gigastack aims to identify the regulatory, commercial and technical needs of developing clusters of hydrogen demand in energy-intensive geographic areas, such as ports that have high carbon emissions and multiple potential demand applications. Although this particular project focuses on green hydrogen, industrial clusters can also be used to support blue and green-hydrogen development, with both satisfying the same demand sources using the same infrastructure.
Local governments can apply incentive mechanisms and production models to a specific area where a market can be created and nurtured. Infrastructure can then be built out to a nearby city for transportation, residential heating and power needs.
Even further down the line, hydrogen could play a role in helping entire countries to decarbonize. For those with limited domestic renewables resources, this approach could be key to reaching net-zero targets. At the moment, countries including Australia and Japan are looking into possibilities around transportation of liquefied hydrogen.
The European Hydrogen Backbone project is also exploring an almost 23,000km pipeline network that would connect future hydrogen supply and demand centers across Europe by 2040. Three-quarters of the network would be converted from existing natural gas pipelines.
We see a lot of possibilities and progress on the infrastructure side. It needs investment, and the focus on the need to scale that up is now growing.
The timeline for scaling the green-hydrogen industry will depend on technical and economic factors, including the right Government support to help the industry grow. Most importantly, large-scale development will depend on coupling renewable generation with growing electrolyzer production capacity and connecting this to a significant demand anchor, such as an industrial cluster. This will help to drive the economies of scale required to bring the hydrogen industry into line with increasingly ambitious government decarbonization targets.
Now that policymakers have recognized hydrogen’s potential in relation to decarbonization, supporting such projects will create the right signals to attract private investment to match public funds. This will enable green hydrogen to play a major role in meeting global climate action goals.
Summary
There has been a surge of interest in green hydrogen this year, from policymakers and investors alike, highlighting its potential to support decarbonization. However, while the technology for producing green hydrogen has matured, it has yet to reach scale – so what can governments and investors do to stimulate the demand and support volume production that will make green hydrogen competitive with fossil fuels and other decarbonization options?
Source: ey
