Hygrogen: A lot of ifs and buts!

"We believe at the IEA the time for hydrogen may finally come." said Fatih Birol International Energy Agency Executive Director, in October 14th 2020, in an online Hydrogen Energy Ministerial Meeting. Does that mean that the momentum for hydrogen has really started? To answer this question, a multifaced analysis should be driven tackling the political, economic and ecological areas.

Undoubtedly, the humanity is facing an ecological problematic which gets worst day on day and the Green House Gases’ emissions are reaching unprecedented levels led by the increasing human energy appetite. Then, the vicious cycle seems hard to stop and necessary actions need the commitment of every player even the smaller one, from engaging governmental actions to changing daily citizens habits. The ultimate solution is finding alternatives to our conventional energy sources to decarbonise our energy consumption. Among the given alternatives, if only it is produced and used in certain conditions of competitiveness, the hydrogen looks like a good low-carbon multifunctional and storable chemical energy carrier.

The global ecological context is making interest in hydrogen surge in many countries and companies to seek how to explore its potential to, at the same time, decarbonise the so-called hard-to-abate fossil-fuels-based sectors and provide flexible storage for the increasing renewables installed capacities. But, even if the goal is almost the same, depending on the regional context and each country’s reality, hydrogen would play a different role and would be produced by different technologies and used in different applications.

It is certain that the ecological context is strongly urging to have alternatives for polluting energy sources as hydrogen for the near future, but there are two players who should make efforts to make it easy for hydrogen to breakeven with fossil fuels and to become competitive vis-à-vis other low-carbon alternatives. First, policy makers should prepare the most favourable regulatory framework to mitigate the non-technical risk. Second, investors should make future centric decisions, by scaling up the projects and stimulating the demand to move towards hydrogen-based consumption.

General context

While nowadays there are several countries which have a relatively clear hydrogen roadmap with targets and achievement milestones, it was not always the case. Almost until 2018, hydrogen was only raising interest within some first-movers as Japan, Norway and the Netherlands. There are now hydrogen projects in virtually every European country. To add to it, some MENA’s countries are seeking to harness their renewable energy surplus by exporting it via hydrogen.

In regards with regional strategy disparities, Europe and Asia currently seem to be more demand focused and the MENA region is focusing on the supply of hydrogen. Adding to that, the fact that while Europe is targeting to decarbonise the hard-to-abate industry sectors, Asia is rather focusing on liquid hydrogen for Ammonia production and as a fuel for shipping and road transport. In contrast, the Americas are considering producing hydrogen for their own consumption and export.

Certainly, there is a general move toward this low-carbon alternative but the predictions about its future demand, carried out by several scenarios, are less certain and range from 6% to 25% of final worldwide energy consumption by 2050 with a high sensitivity to hydrogen production technology. Nevertheless, if the future focuses mainly about green hydrogen, the current reality is less green. According to IFPEN, nowadays, almost the entire hydrogen supply has a fossil origin, with a consumption of 6% of global natural gas and 2% of global coal. Consequently, this means that hydrogen production emits CO2 and then is not less pollutant than fossil fuels, with around 830 Mt of CO2 emissions per year equivalent to emissions of the United Kingdom and Indonesia combined.

If green hydrogen represents only 4% of the global production, the future is more or less bright with the cost or renewables going down. Furthermore, the green hydrogen potential is becoming more compelling even with the “hard-to-decarbonise” and energy intensive industries as steel, chemicals and shipping due to the urgency to cut CO2 emissions.

Last but not least, one of the most disturbing characteristics of hydrogen with which the main players should deal is the hydrogen efficiency. Ranging from 20% to 40% in the hydrogen case, such an efficiency will work against it, especially, for its rump-up in the power-to-hydrogen-to-power applications. Consequently, the question about the benefits of hydrogen’s role in the energy transition may remain without a clear-cut answer for all the applications.

Policy

The European Commission President Ursula von der Leyen said during her speech in the Hydrogen Council 2021 CEO Event: “We want to have hydrogen produced where it is most economical, and then build strong distribution grids to transport it where it is needed.”. She also mentioned that green hydrogen is a key element for the European Green Deal, in order to conciliate the economic activity with the ecological health of the planet providing that the policy-makers and business-doers work together to ensure that hydrogen reaches the competitiveness tipping point.

The speech of the European Commission President was full of hopes and ambitions but from an investor point of view, this would not be sufficient to risk his investment, especially in the high-risk current context. Furthermore, even if the European Union decision to allocate hundreds of billions of euros for the green recovery has improved the outlook for hydrogen, historically speaking, there were significant differences in terms of policy sectorial support. For example, the figure 3 mentions the number of countries supporting each industry sector and the automotive sector is far more supported than the Power generation sector.

Policy being a main driver for the hydrogen take-off, it is clear that the actual situation is more worrying than reassuring for investors. Till today, only twelve countries and the EU have published their respective hydrogen strategies. Others, like China, Belgium, Austria, Russian Federation, United Kingdom, and Italy, will follow in the near future, driving for now serious discussions about the targets and the measures for hydrogen support. Such a poor regulatory environment could undermine the investors’ confidence especially with the fact that each country has its own vision and targets and then, the scaling up of a specific technology across a regional zone could be impossible. Furthermore, the only goals that are common to the 12 countries’ strategies are decarbonizing their economies and fostering their growth. Finally, it is of paramount to mention that only 3 countries have set clear hydrogen cost.

Investments

Addressing the industry actors, the European Commission President Ursula von der Leyen said during her speech in the Hydrogen Council 2021 CEO Event: “Our success will depend entirely on cooperation with companies like yours.”. Then, it seems that, the so-called “hydrogen economy” is still at an embryonic development phase facing the “chicken and egg problem” between supply (production) and the demand (final consumer). Each one of both parties needs that the other ensure a sufficient and profitable enough volume to set the full hydrogen market. Nevertheless, several hydrogen technologies are at different maturity stages and already contribute to explore the possible paths to get the hydrogen adventure as secure as possible.

According to the Hydrogen Council report entitled “Path to Hydrogen competitiveness – A cost perspective”, in terms of investment needed, for the next decade, to take the different hydrogen applications off the ground, no less than USD 76 billion are necessary. This amount is aimed to fund USD 20 billion for the electrolyser capacity needed and USD 6 billion to get low-carbon hydrogen to the breakeven threshold. Coming to the transport sector, USD 30 billion are necessary and an additional USD 10 billion for the building heating systems to shift from natural gas to hydrogen for almost 6 million households.

Since investors are risk averse by nature, the only chance for hydrogen to be picked-up widely as a profitable investment lies in being quickly competitive to other alternatives. For example, against the natural gas, the first step for investors to lower the risk is to target some niche markets with high maturity like domestic heating. This would ensure a large utilization and accelerated scale-up by replacing gas boilers by hydrogen-based ones and taking advantage of the existing pipe network to lower the related CAPEX.When it comes to fossil fuels in mobility, investors could as well take advantage of the traditional market maturity and size by targeting captive fleets like buses and taxis. This will allow the transportation sector to quickly decarbonize and will give the network investors the needed size threshold to secure their investment.

In both given examples, the hydrogen demand is yet to be created. Then, the presence of a mature enough market where niches could be specifically targeted and a technical network able to be used as a hydrogen facility are drivers for the hydrogen attractiveness.

Besides the niche market targeting, the scale-up is still the first main lever for reducing the risk for hydrogen-based technologies. But, in fact, the strongest constraint to hydrogen competitiveness lies on the cost of the molecules which remains highly important to all hydrogen-based technologies. So, the real question is how to get an acceptable hydrogen production costs. The answer depends mainly on the hydrogen production technology. For renewable hydrogen, the steadily decreasing cost of renewables seems to make this option more attractive, but the electrolysis cost makes it more difficult to opt for it. Actually, according to the Hydrogen Council report entitled “Path to Hydrogen competitiveness – A cost perspective”, the 300 MW electrolyser installed capacity needs to grow up to 70 GW to get the green hydrogen overall costs to break even with grey hydrogen.

With regards to blue hydrogen (low-carbon hydrogen), governments and decision-makers would be required to commit to large-scale projects and strong regulatory support to get a clear and secure situation in terms of technology viability. Finally, grey hydrogen could be a middle-term solution to scale-up hydrogen use, since no decarbonization would be achieved. The step after could be, as above mentioned, to switch to grey hydrogen or even to green hydrogen.

While the hydrogen demand has tripled since the 70’s, the investors are becoming bolder and the projects are getting bigger. For example, in The Netherlands, the project NorthH2 aimed to produce hydrogen from offshore wind gives an idea about the ambition for setting the tone for the hydrogen economy. The same country has witnessed the opening of the Europe’s first factory dedicated to hydrogen truck production. Another example in Italy, Snam, Alstom and Baker Hughes tested the world’s first hybrid hydrogen turbine for trains, giving some hope to the hydrogen-gas blending. Italy would also see its region Ravena becoming one of Europe’s biggest CO2 and low-carbon hydrogen hubs, since ENI has announced the scaling up of its CCS project.

Other countries like Spain are not left behind. The Spanish Iberdrola and Fertiberia agreed to build a large solar PV and electrolyser to produce renewable hydrogen and ammonia for the fertilizers industry. Finally, besides the national-based projects, some European cross-border projects are being built like the MosaHYc hydrogen infrastructure project between France and Germany.

Competitiveness

The competitiveness of the hydrogen is the main lever to its survival as a viable alternative to fossil fuel for the green transition for the next coming decade. As for any other investment the Final Investment Decision (FIDs) won’t be made unless there are sufficient guarantees for the projects long-term sustainability. Then, to decrease costs, the industrial competition could enable a global breakthrough. Such a competition would maybe make EU companies take bolder steps not to lose their first-mover advantage, and China to offer cheapest technologies.

But alongside competition, some forms of collaboration are needed to allow some cross-border and intercontinental projects to see the light of day. For example, bringing the North African hydrogen to Europe would need a high level of cooperation to align the different players objectives. In such an interdependent project, the renewable energy installation, the gas pipeline construction/conversion and, end-user markets, and the states support would be absolutely and completely aligned to make the project bankable and, above all, profitable.

Beside the competition and the coordination, the breakeven points of hydrogen still are the ultimate indicator about its ability to survive against the other low-carbon energy sources. The thresholds are different depending on regional context, sectors, and subsectors. According to a study performed by the McKinsey Center for Future Mobility based on the Total Cost of Ownership (TCO) of Fuel Cell Electric Vehicles (FCUV), the small vehicles for urban transportation and the largest commercial vehicles would have their breakeven point within respectively 2035 with a TCO of 0.18 USD/Km and 2028 with a TCO of 0.22 USD/Km. When it comes to trucks, the TCO is lower ranging from 0.04 USD/Km for the Heavy-Duty Tracks (HDT) up to 0.16 USD/Km for Light Commercial Vehicle (LCV) and a breakeven before 2030 for all the trucks’ types. For the buildings heating sector, hydrogen is far from competing with the conventionally used and most spread energy source which is natural gas. The threshold for hydrogen to do it is a molecule cost under 1 USD/Kg, which remains a far target to reach. The cost threshold could be slightly higher (1.10 USD/Kg) if the cost of CO2 exceeded the 100 USD/t but this would need strong governmental regulatory actions. Nonetheless, before breaking even with the natural gas, with a fuel price of 5.4 USD/Kg hydrogen could outcompete heat pumps for the refurbished residences and could outstrip biomethane with a molecule price of 3 USD/Kg. The industrial heating seems to have the same cost thresholds with the tipping point going up to 1.5 USD/Kg in the case of 100 USD/t for the CO2 cost, and a breakeven point of 2 to 3 USD/Kg to outcompete biomass.

In regards to hydrogen-based power generation, the breakeven with CCGT turbines would occur with a molecule cost of 2 USD/Kg resulting from a renewable energy cost of 25 USD/MWh, a capacity factor of 50%, and a low-cost cavern-based storage of 0.30 USD/Kg. While for the hydrogen used as industry’s feedstock, which consumes over 90% of the current global production, the breakeven depends heavily on the production technology and regional context. For the ammonia production, the breakeven would depend on the expected carbon cost for the blue-hydrogen and on the local/regional gas price for the green-hydrogen. It is quite the same mechanism which drives hydrogen competitiveness for the low-carbon steel production against the conventional blast furnace. The breakeven is highly dependent on the CO2 cost, and it would not happen unless the cost of molecule ranged from 1.80 to 2.30 USD/Kg.

The main idea for the three aforementioned sectors, is that hydrogen competitiveness depends on several independent parameters related to different market players. This situation makes that hydrogen a high-risk investment which needs bold FIDs, strong regulatory frameworks, a fierce technological competition, and an inter-regional collaboration to turn competitive.

Conclusion: lot of ifs and buts!

To sum up, there is no doubt that hydrogen production could be done through different technologies, but it is clear as well that only green or blue hydrogen would be viable in regards to the ecological constraints. Then, given that, currently almost all the hydrogen supply comes from natural gas and coal, shifting to the blue and/or green hydrogen will require huge investments and significant governmental regulatory action. To add to it, the non-sufficient regulatory support and the high cost of producing low-carbon and clean hydrogen are undermining investors’ confidence and holding back the hydrogen widespread adoption. Last but not least, the near-full electrification limitation also adds another constraint to the hydrogen pathway.

At the same time, hydrogen holds promise of long-term and clean affordability with the advantageous possibility of reusing the existing gas network infrastructure and cleaning even the hard-to-abate sectors as steel and chemical industries. Finally, hydrogen seems to be a good energy carrier to store renewable energies surplus. However, the deployment of hydrogen solutions would not happen overnight. There are a lot of ifs and buts and even if the hydrogen economy is still the talk of the town in EU and some first-mover countries, maybe the momentum for the most abundant molecule in the universe has not really started on our planet.

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