Hydrogen Fuel’s Untapped Potential: Challenges and Opportunities for a Carbon-Free Future

Hydrogen’s potential as a carbon-free fuel has generated a lot of excitement globally. From the sun-soaked deserts of Australia and Namibia to the windy plains of Patagonia, governments and companies plan to build 1,600 hydrogen plants. This gas can be produced using wind or solar-powered electricity, splitting hydrogen molecules from water in a clean process. However, there is a major challenge: most of these ambitious projects lack customers committed to buying the fuel.

For the few projects that have secured purchase agreements, the deals are often non-binding, allowing potential buyers to back out if circumstances change. This uncertainty means that many of the highly publicized hydrogen plants aimed at making countries the "Saudi Arabia of hydrogen" may never materialize. In fact, only 12% of low-carbon hydrogen plants – those that avoid natural gas or minimize emissions – have firm customer agreements, according to BloombergNEF.

“No sensible developer will begin producing hydrogen without a guaranteed buyer, and no banker will finance such a project without confidence in the demand,” says BNEF analyst Martin Tengler.

The enthusiasm for hydrogen is understandable. It is viewed as critical for the world’s goal to reach net-zero carbon emissions. When burned in turbines or fed through fuel cells, hydrogen produces energy without emitting harmful greenhouse gases. Although hydrogen is currently produced from natural gas, using renewable energy sources to split water creates zero carbon emissions.

Experts see hydrogen as key to decarbonizing industries that cannot easily transition to electricity, like steel manufacturing and shipping. BloombergNEF forecasts that by 2050, the world will need to produce 390 million tons of hydrogen annually – more than four times today’s output – to achieve global carbon neutrality.

Yet, transitioning to hydrogen is not as simple as flipping a switch. Many industries would need to invest heavily in new equipment to use hydrogen, a cost they’re hesitant to take on. Moreover, hydrogen produced through clean energy is significantly more expensive—up to four times the cost of hydrogen made from natural gas. Additionally, infrastructure to produce and transport hydrogen, such as pipelines, requires long-term demand to justify its construction.

“It’s like any other large-scale energy development,” says Laura Luce, CEO of Hy Stor Energy. “Natural gas pipelines weren’t built without customers.” Hy Stor has an agreement to supply hydrogen to an iron mill planned by Sweden’s SSAB SA in Mississippi. Several countries with abundant renewable energy sources, like Chile (wind) and Australia and Egypt (solar), have set ambitious hydrogen production goals, often targeting exports.

The European Union aims to produce 10 million metric tons of carbon-free hydrogen annually by 2030 and import an additional 10 million tons. In the U.S., President Biden has allocated $8 billion to develop hydrogen hubs, regions where hydrogen production and usage are concentrated.

However, projects face hurdles. Andy Marsh, CEO of Plug Power, mentions that his company is working on European hydrogen projects that would use 4.5 gigawatts of renewable energy. But he tempers expectations, saying that even if 50% of those projects succeed, they’d consider it a win. Regulatory delays in the EU and uncertainty over hydrogen tax credits in the U.S. continue to hinder progress.

Hydrogen faces additional obstacles when it comes to export. Unlike oil or natural gas, there is no established global system for shipping hydrogen. Transporting the gas requires complex processes like supercooling or converting it to more manageable forms like ammonia.

Werner Ponikwar, CEO of Thyssenkrupp Nucera AG, believes pipelines are a feasible solution, but they are not always an option—especially for exporters far from potential customers. He expects many ambitious projects will eventually be shelved.

Successful projects will create “complete ecosystems”, locating hydrogen plants near energy sources and customers. For instance, Thyssenkrupp Nucera supplies equipment to a hydrogen plant in Sweden, which will power a nearby iron and steel mill developed by H2 Green Steel. This project, backed by €6.5 billion in funding, will use hydropower for electricity, and Mercedes-Benz Group has already agreed to buy 50,000 metric tons of green steel annually.

Hy Stor’s Mississippi project follows a similar strategy, using on-site wind and geothermal energy to produce hydrogen, which will be stored underground. The proximity to customer SSAB has attracted interest from other potential buyers, and while construction is yet to begin, the project is scheduled for completion by 2027. As Luce notes, “Projects built around customers tend to succeed.”

Credits: Economics Times