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Business Intelligence: Is the Hydrogen Economy ready to take-off?

Hydrogen as a feedstock for the petrochemical industry

Since the first demonstrations of water electrolysis some two hundred years ago, Hydrogen has witnessed many false dawns. As recorded by the International Energy Agency (IEA) in its landmark report on the Future of Hydrogen, commissioned by the Japanese Presidency of the G20 in June 2019, hydrogen was used to fuel the first internal combustion engines and “propelled humanity to the moon in the 1960“. However, as acknowledged by the IEA in the same report, “today hydrogen is mostly used in oil refining and for the production of fertilisers“. None of the previous waves of interest in hydrogen as a primary source of energy translated into large scale investments. Between 2008 and 2018, worldwide government spending on hydrogen declined by 35%.

Hence, the challenge moving from a world in which hydrogen sits on the fringes of global energy production and consumption, as it is currently mostly used as a feedstock for the petrochemical and metallurgy industries, to a world in which hydrogen becomes a central part – as an energy carrier – of the global energy equation represents a true challenge.

Source: IRENA 2018.

A classical chicken and egg problem

It would require massive investments to achieve a significant cost reduction of hydrogen production costs and to retool and upgrade the currently available energy transportation and distribution infrastructures and networks which are currently used for transporting oil and natural gas. In a sense it is “a chicken and egg” problem as for any technology revolution. A substantial reduction of unit costs there can only be achieved through scaling.

A comparison can be drawn with the semiconductor industry where the economics were based for decades on the so-called “Moore’s Law” – named after the distinguished scientist and Intel co-founder Gordon Moore – or by extension to its improper equivalent – “Swanson’s Law” – which applies to the photovoltaic solar industry.

But in order to build utility-scale facilities and to achieve these scale effects in the production and distribution of hydrogen there is a need to prove that the ROI is positive it which in turn is related to securing sufficient demand and supporting the initial uptake of demand through various forms of guarantees, loans, subsidies and other financial incentives. There are also risks of resources and infrastructures being locked-in in a direction that could prove to be wrong.

This has not prevented some countries and corporations of making pioneering investments in order to gain a first mover advantage. Japan, for instance, is an early pioneer and supporter of the hydrogen economy.

The current international focus on climate change and ramp up of commitments toward carbon neutrality, alongside the implied move toward utility-scale deployment of renewable energies and mass production of electric vehicles could change the whole equation. As an example, In June 2020, Germany announced it would spend 9 billion euros to expand its hydrogen production capacity as part of its post-covid-19 recovery plan in order to turn the country into a global supplier of fuel-cells and other hydrogen-based technologies.

According to Hydrogen Roadmap Europe, an advisory body on the Hydrogen economy backed by the European Commission and key EU member states, provided the momentum in public and private investment is sustained, Hydrogen could provide up to a quarter of total energy demand in the EU by 2050.

Source: European Hydrogen roadmap

Decomposing the hydrogen value chain

In order to overcome this “chicken and egg” problem there is a need to understand where the most penalising bottlenecks are located. The cost of deploying hydrogen-powered applications includes three types of cost:

  1. The cost of the large-scale infrastructure for the production, transportation and distribution of hydrogen (INFRA)
  2. The cost of purchasing the new equipments or retooling/refurbishing existing equipments (CAPEX)
  3. The maintenance cost over the lifecycle of the equipments (OPEX)

While the private sector and end-users can assume CAPEX/OPEX costs – with some smart subsidies and “sweeteners” provided by the governments -, government support is instrumental for the INFRA-related part of the hydrogen value chain which typically has much longer payback cycles spanning over many decades rather than over just a few years.

Hydrogen is already competitive in certain sectors / market segments

Keeping in mind the Paris Agreement’s objective of a global temperature rise below 1.5 degree by 2050, there is a need to decarbonate significantly the energy that is consumed today around the world.

Given the current mix in the power sector and given the cost of electric batteries and the long time needed to recharge them, Hydrogen is competitive in certain sectors like long distance road transport, high temperature heating for industry applications and ambient heating for residential buildings, offices and commercial facilities. As the chart below shows, hydrogen fuel cell powertrains are cost-competitive for heavy transport from 100 km onward. Hydrogen refueling is 15 times than fast battery charging.

Source: Hydrogen Roadmap Europe

A tradeoff between cheap hydrogen and clean hydrogen?

As can be read in the above cited IEA report, Hydrogen is almost entirely supplied from natural gas and coal today. With an annual output around 70 million tonnes, the global production of hydrogen consumes 6% of the natural gas and 2% of the coal produced every year in the world.

Some environmental advocacy groups and lobbies protest that the production of Grey hydrogen from fossil fuels does little to change the global environmental and climate change equation. In order to be relevant for the global energy transition, they insist on using Green hydrogen, which produced from renewable / carbon-free energies.

A middle ground is Blue hydrogen which is produced from fossil fuels but whose CO2 emissions are absorbed through carbon capture, utilisation and storage (CCUS) solutions.

However, some industry experts and policy makers warn that the focus on green hydrogen might actually delay if not derail the large scale adoption of hydrogen-based technologies and prevent investors from investing in this field. In any case, the achievement of scale economies in green hydrogen production is unequivocally linked to the scale economies and cost efficiency gains achieved in renewable energies as well as cost efficiency gains of electrolysers.

Source: US Department of Energy, Office of Energy Efficiency and Renewable Energy

Should the hydrogen economy take off, Refineries are well positioned to take advantage of their almost complete dominance in hydrogen production through methane reformation.

Refineries in turn are generally located in industrial ports which might become critical production, distribution and transformation nodes/hubs in a future hydrogen economy. Some infrastructures already exist. In Western Europe for example, a 900 km hydrogen-pipeline network connects the ports of Rotterdam (the Netherlands), Antwerp (Belgium), and Dunkirk (France).

Retooling natural gas infrastructures

The existing natural gas infrastructure can to some extent be retooled for hydrogen, making the dilemma between Blue and Green hydrogen more apparent than it really is.

Supporting the hydrogen economy

In order to achieve the required scale economies needed for the hydrogen economy to take off, there is a need for governments to ramp up significantly their support to producers and consumers with financial commitments extended over a long period. Lessons could be drawn from the solar industry, a sector that is today largely dominated by Chinese players thanks to massive subsidies granted to PV cells and solar panel manufacturers, which were extended over more than a decade allowing scale economies to play fully. This allowed China literally to kill the German PV industry which was the most advanced on a worldwide basis in the 2000s, after taking the leadership mantle from Japan. However, according to a study by the US-based think tank ITIF, China’s hegemonic control of the PV industry led to a slowdown in R&D and innovation in the field and to an eviction of alternative technological pathways. Therefore, there is a need for international cooperation alongside competition.

In a report published earlier this year, Bloomberg New Energy Finance summarised some key turning points that would signal a transformational momentum and an ensuing take-off for the hydrogen economy. These turning points or signals are consistent with the recommendations issued by Energy advisory bodies like the IEA or the IRENA. International cooperation in this field would speed up the transition and act as a catalyst of existing government-led or private sector initiatives and projects.

But perhaps the most important support could come from a significant increase in the cost of carbon. Today it still hovers around €30 per tonne of carbon dioxide in the European Union’s Carbon Exchange Trade System. A doubling or tripling of this price would be required to accelerate the energy transition in non-transport application. In transport other carbon taxation mechanisms and pollution standards are already in place and are likely to get even tougher over the coming years. However, most studies show that for the time being, Fuel Cell Electric Vehicles (FCEVs) are more expensive than Battery Electric Vehicles (BEVS) except for buses, trucks and other heavy vehicles.

The geopolitics and geo-economics of hydrogen

Shifting from fossil fuel to hydrogen exports

As stated in an article titled The new oil? The geopolitics and international governance of hydrogen, published by a team of Researchers (Thijs Van de Graaf et. al., 2020) at the Norwegian Institute of International Affairs (NUPI), For the oil and gas exporting countries in the Middle East and North Africa (MENA) region, hydrogen could be an answer to one of the big challenges they are facing today: how to diversify their economies away from reliance on oil and gas export revenues. These countries have several advantages, including the availability of abundant, low-cost solar (for producing green hydrogen), underground storage options for carbon sequestration (in case the blue hydrogen production route is taken), and a geographic location that is ideal to serve both European and Asian markets.”

Yet if these countries abandon their role as net exporters of hydrocarbons only to become net exporters of hydrogen they will continue to be commodity exporters and they will grasp only a tiny fraction of the overall value-added generated by the hydrogen economy. Therefore, if these countries really want to become relevant players and to leverage on their capacity to produce Blue hydrogen, they cannot forego the need to develop comprehensive industrial supply chains and to invest heavily in R&D and innovation.

The Geopolitics of Hydrogen

Japan received its first cargo of liquified hydrogen from Brunei in early 2020. As stated in the aforementioned article, “cross-border maritime trade in hydrogen has the potential to redraw the geography of energy trade, create a new class of energy exporters, and reshape geopolitical relations and alliances between countries.”

The prospect of hydrogen geopolitics – which would give significant political and economic leverage to a few producer countries – sounds appealing. But it misrepresents the reality. In deed, wide-scale production, transportation and distribution of Green Hydrogen is likely to be less asymmetric than natural gas production, especially when Green Hydrogen will become competitive. But in the mean time, it is very likely that today’s dominant natural gas and coal producers will be advantaged. Methane is more likely to be transported and transformed at its end point – in the industrial ports that are closer to its final consumers.

Appendix: Marginal abatement cost curve from using hydrogen for emission reductions (BNEF)