🚀 Hydrogen, fuel of the future? Part 2
The opportunities and challenges of hydrogen in the energy transition.
Last week in Hydrogen, fuel of the future - Part 1, we saw that Hydrogen (H₂) has the potential to become the CO₂-free energy carrier of the future. With well-known production processes, the perk of only emitting water when consumed, and an existing ~150B$ H₂ generation market size, why wouldn’t it?
In this edition of Seagnal, a newsletter at the intersection of technology and sustainability, we will look at the challenges clean hydrogen production is facing.
Can we greenify existing hydrogen production?
Today, hydrogen is mainly used in industrial applications (~ 50 megatonnes (Mt)) and refining crude oil (~ 40Mt). 99.9% of this hydrogen is made from fossil fuel, and less than 1% is considered low emission (some type of carbon capture or electrolysis). While we have all the technologies required to “greenify” today’s hydrogen production (via water electrolysis or carbon capture), they remain too expensive for mass adoption.
We can understand the extent of the cost discrepancy between natural gas and electrolysis production methods using the Levelized Cost Of Hydrogen (LCOH), which takes into account the building and operating costs over the asset lifetime:
Hydrogen prodction cost by technology, Global Hydrogen Review 2023, IEA.
In 2021, before the gas price surge of 2022, the levelized cost of hydrogen (LCOH) produced from natural gas was between USD 1-3/kg. In comparison, the LCOH for hydrogen produced through electrolysis using low-emission electricity ranged from USD 3.4-12/kg, making electrolysis consistently more expensive, in some cases up to 12 times more expensive. For comparison, the average solar LCOE (levelized cost of energy), is 29% cheaper than fossil fuels (which is what you want for a non-subsidy based energy transition).
I believe these numbers showcase that we are nowhere near a drastic shift in the adoption of clean hydrogen in existing use cases. Fortunately, due to the nature of ranges, and with the help of subsidies/grants, will continue to see some projects work, and reduce pollution from these hard-to-abate sectors.
Some small wins in industry
One such project is the H2 Green Steel project in Boden, Sweden. The project aims to produce 5 million tonnes of green steel yearly by 2030 (0.2% of current yearly steel production), and has managed to raise more than USD 4 billion in debt financing and USD 2 billion in private placements.
Interestingly, half of the expected production volumes have already been sold in 5 to 7-year binding contracts, highlighting real customer demand. The project has also signed a long-term Power Purchase Agreement (PPA), to power its 700-800MW electrolyser for hydrogen production.
The H2 Green Steel project in Sweden showcases that while making green hydrogen is more costly than grey hydrogen for use in industrial applications, it can still make economic sense. Capitalising on cheap 24-hr electricity, early demand for greener products (in this case green steel), and applications where hydrogen is a small portion of the cost breakdown (like in steel where most of the cost comes from iron ore), seems to be the path forward.
Looking to the future
Despite the big cost gap green hydrogen has to close, there are still plenty of electrolyser projects coming online, under Final Investment Decision (FID), and in early development stages. According to the IEA, global electrolyser capacity was expected to more than triple in 2023:
Electrolyser capacity, Global Hydrogen Review 2023, IEA.
Electrolysis, being one of the few (nearly) CO2-free alternatives for many industrial processes, continues to play a crucial role in government decarbonization strategies. For countries like Australia, it also presents an opportunity to export energy, provided the necessary infrastructure is developed (see Australia's announced capacity above). Additionally, there are favorable conditions for this energy export market, as Europe's reliance on natural gas has been compromised by recent geopolitical turmoil.
Long-term trend of shipping LNG exports, showcasing the potential for H2 shipping, Nat Bullard’s annual presentation 2024.
With green hydrogen production costs showing that 50% of the expenses come from renewable energy, a significant reduction in production costs could be achieved if the price of renewable electricity falls. Cheap, around-the-clock, renewable electricity could enable hydrogen to become the fuel of the future.
Wrapping it up
Hydrogen holds great promise as a CO₂-free energy carrier, but significant challenges remain in scaling up its clean production. Currently, the cost of producing hydrogen through electrolysis is much higher than traditional methods using fossil fuels, slowing its deployment and the decarbonisation of the hard-to-abate sector. This could change with:
Increased taxation of emissions from grey hydrogen production.
A decrease in around-the-clock electricity prices.
However, projects like H2 Green Steel in Sweden show that with the right conditions green hydrogen can still be economically viable today. With no real alternatives for decarbonizing these hard-to-abate sectors, we must continue to develop projects and expertise in greener H₂ production, both through electrolysis and carbon capture.
The broader role of hydrogen as the fuel of the future, outside these sectors, seems reliant on the availability of abundant cheap electricity.
From San Francisco 🇺🇸,
Jean
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