The race to net zero is on, and taking part is no longer optional. That means we have no choice but to explore new technologies and integrate them into our energy systems and our economies.
“Decarbonisation is a no-return pathway,” says Bert van der Toorn, ING’s Managing Director, Energy Sector. “So the debate is not so much whether we're going to decarbonise or not – the question and the concern is the speed at which we all act. The longer we wait, the higher the ultimate costs and, importantly, those who pave the way can secure a lasting competitive advantage as they are ahead on the learning curve.”
“Hydrogen’s characteristics mean it can become a clean energy source for long-term energy storage, industrial heating, fertilisers, chemicals, steel making and transportation,” says van der Toorn. “Many expect it to become essential to achieving global emissions-reduction targets. It solves challenges where electrification or more mainstream low-carbon alternatives are not a viable or feasible option. “The aim is to facilitate clean hydrogen,” he adds. “And therefore faster decarbonisation. We are still agnostic about how this is achieved as long as a business case can be made, akin to how wind and solar projects got started.” The most immediate application is to replace grey hydrogen, which is made with natural gas, with clean hydrogen: either with blue hydrogen (grey hydrogen with carbon capture, storage and re-use to cut CO2 emissions), or with green hydrogen, which is produced with zero emissions from renewable electricity.
“Most scenarios don't foresee green hydrogen playing a significant role in Europe before 2030,” says van der Toorn. “That is because, firstly, around 70% of hydrogen cost is directly related to electricity, therefore the price of electricity also determines the price of green hydrogen.
Secondly, the challenge and cost of transporting hydrogen will remain high. And, finally, hydrogen really needs to be produced with mostly renewable electricity. Otherwise it would substantially increase CO2 production. Hydrogen produced with electricity from natural gas combustion produces 18.5 kg CO2 per kg of H2, which compares with 8.5kg of CO2 per kg of H2 produced from natural gas directly – before any carbon capture,” he says.
“So it is quite likely to be at least 10 years before green hydrogen can become truly entrenched,” he says. “But, as with mobile phones, disruption can happen quickly.” By the end of the decade, clean hydrogen could be playing an important role in the value chain of a number of industries across the world. What needs to happen first?
Policy support incoming
The roll-out of hydrogen depends on policy support and subsidies, says van der Toorn. “We don't need it to be economic to get started,” he says. “We just need reliable frameworks to be in place. So in that respect, governments need to take action rapidly.” One example of this is the EU’s €750 million recovery package, which commits in its Green Deal to “kick-starting a clean hydrogen economy in Europe” (1). And in June 2020, as part of its Covid recovery stimulus package, Germany earmarked €9 billion for developing green hydrogen to help reduce its reliance on coal (2).
“We're able to incorporate the lessons learned from other industries that developed thanks to supportive public support and regulatory frameworks – such as renewable energy,” says Wafaa Ermilate, Head of Infrastructure and Energy Iberia at ING. “A clear downwards pathway in terms of costs need to be achievable to ensure best value for money for taxpayers – and overall affordability.”
Hydrogen technology can be rolled out where it is most needed – and where it is most appropriate. Ermilate says there is particular potential for green hydrogen in the sunny Mediterranean region and in countries such as Chile that have low-cost renewable electricity. Blue hydrogen may be more practical in other areas that have not yet achieved a very high percentage of renewables in their electricity mix. Internationally, small-scale hydrogen plants could be used to supply rural and off-grid areas.
Japanese conglomerate Marubeni, for example, has a government-supported green hydrogen pilot in South Australia that capitalises on the region’s low-cost renewable power. The project incorporates hydrogen production through electrolysis, to provide fuel for ancillary services for the grid, or to be converted to an appropriate form ready for transportation.
“We have confidence that the whole value chain will become economically viable, providing a definitive path towards a zero-carbon future,” says Moroo Shino, CEO of Marubeni Asian Power. But Shino sounds a note of caution: “Much work still needs to be done to make this technology financially viable and scalable globally.”
And some of that work will require private sector investment, and indeed, interest from private-sector financial institutions is growing in the $117.5 billion global hydrogen industry (3). Project finance for green hydrogen currently makes most economic sense where it can replace grey hydrogen that is already in use in industrial processes, that means where there is already a hydrogen off-taker in place and contracted future cashflows can be used to structure a bankable financing structure.
“The fertiliser industry and refineries use grey hydrogen today, and they need to green their activities,” says Ermilate. “So we see them as the first adopters.” A number of projects are already progressing across Europe. Over the past two years, Shell and Iberdrola have announced green hydrogen developments in Germany and Spain respectively, which will feed into existing industrial plants (4). Shell’s green hydrogen refinery complex in North-Rhine Westphalia is slated to be operational in 2021 and is expected to produce about 1,300 tonnes of green hydrogen a year (5).
Overcoming the cost
Yet cost is still a major hurdle. Hydrogen generation is an energy-intensive process that needs a lot of low cost electricity – and preferably from renewable sources. Green hydrogen costs between $3.50 and $5 a kilo, against $1.50 a kilo for grey hydrogen and between $1.50 and $3.50 a kilo for blue hydrogen (6).
Compressed hydrogen has significantly more energy density than lithium batteries, but it takes more electricity to create it than it can store. And developing the technology for production, storage, and transportation will be capital-intensive – at a time when the world attempts to recover from a deep recession. Ermilate, however, thinks there is cause for optimism. “With scaling up, there is a strong opportunity for the value chain to develop and mass production to become the norm,” she says. “The recent examples of solar panels and wind turbine generators have set a successful precedent that can hopefully be replicated in the hydrogen space.”
Prices for electrolysis are already trending downwards as technology improves and becomes more widespread, creating economies of scale in manufacturing (7). “The pandemic could have disrupted the ambition to achieve net-zero, but it has instead fuelled it – and unprecedented momentum has built up over the past few months,” says Ermilate. “Decarbonisation is a shared goal, so global collaboration and a sustained pace on the policy side should hopefully see to it that all of these obstacles are tackled one after another.”
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