Looking for green hydrogen’s easy wins in Europe
Integration of low-carbon hydrogen into existing value chains will need new regulatory frameworks in all jurisdictions
There was much talk at the European Hydrogen Conference last month, and more generally across the gas industry, of the ‘low-hanging fruit’ when discussing the integration of low-carbon hydrogen into existing value chains, particularly in respect of turning grey hydrogen green (or, at the very least, blue).
But are these apparently easy wins too good to be true? While the consensus appeared to be an initial aim of replacing existing grey hydrogen use with low-carbon alternatives before expanding to new markets and hard-to-decarbonise sectors, strong financial incentives will be needed to persuade purchasers of grey hydrogen to make the change to a less carbon-intensive product.
At present, other than taking a step on the pathway to net zero, where are the incentives for existing purchasers to seek out those offering a low-carbon alternative? The recent policy announcements from the EU in respect of its ‘Fit for 55’ update to its green deal (the ‘55’ being a reference to the 55pc reduction in carbon emissions targeted for 2030) included elements to sharpen the cost of emitting greenhouse gases, but will they be enough?
Strong financial incentives will be needed to persuade purchasers of grey hydrogen to make the change to a less carbon-intensive product
There remains a clear and urgent need for regulatory frameworks in all jurisdictions to be fit for purpose, as there are currently too many gaps. Within the EU there is a pressing need to introduce a smart subsidy design. Without it, the fledgling industry is unlikely to see the reduction in capital costs that needed to enable any of the potential use cases for low-carbon hydrogen to progress at speed—whether in the ‘low-hanging fruit’ areas or otherwise. Subsidy support for operating costs will also be needed to help investors manage the risk of stranded assets should an offtake arrangement fail.
There are significant amounts of investment capital ready to be deployed if the risk model is right, but investors are all chasing mature renewables at present. Given the targets set by the EU, it will need to increase the pace of bringing forward a subsidy scheme or, the reality is, it will not get to where it wants with green hydrogen within the timeframe it has set for itself.
The view across the gas industry is that the EU ought to be seeking to replicate the success of early wind and solar subsidies with its initial support for green hydrogen projects, while being mindful of the need to build in an exit strategy to enable a move from a government-supported system to a more competitive, market-led strategy when the time is right.
Sufficient transport and storage systems for hydrogen would help developers manage stranded asset risk, but scale-up of both supply of and demand for hydrogen of any colour will remain challenging until the necessary infrastructure is put in place. There are many existing energy assets which could be repurposed (for example, existing natural gas pipelines, LNG vessels and import terminals, and gas storage facilities).
It might be that, even where some of the ultimate end-use cases cannot be considered ‘low-hanging fruit’, the establishment of the requisite supporting infrastructure could be. Of course, there will be significant conversion costs involved, but at least by repurposing—rather than starting from scratch—that network can be put in place (relatively) quickly, and scalability is likely to be less of an issue. In addition, the EU’s revised Alternative Fuels Infrastructure Regulation will require member states to install hydrogen fuelling points every 150km on major highways, which ought to help drive adoption of hydrogen fuel cells in heavy-goods vehicles.
The view across the gas industry is that the EU ought to be seeking to replicate the success of early wind and solar subsidies with its initial support for green hydrogen projects
So what are the ‘low-hanging fruit’ use cases? A number of the initial wave of green hydrogen projects are aimed at transport sector offtakers, where the alternative fuel is diesel. Double-decker hydrogen-fuelled buses became a feature of the London public transport landscape just last month, following the use of single-decker buses on certain routes from as early as 2004, and many other European cities have or will shortly have hydrogen-fuelled buses purchased under projects co-funded by the EU.
There were about 4,250 hydrogen-fuelled buses on the world’s roads at the end of 2020, according to analysis firm BloombergNEF. While this is a fraction of the estimated global bus fleet of around 1.5mn, China, Japan and South Korea are all seriously promoting fuel-cell technology. Clearly, this is not where action is urgently needed. It is certainly an area where a business case for green hydrogen can be more easily made than, for example, replacing industrial use of cheap natural gas.
Shipping sweet spot
Whereas shipping’s sweet spot might be ammonia for cost-effective and cleaner shipping and storage solutions (the energy density of hydrogen, and consequently the size of the tanks required, rendering a hydrogen-powered shipping fleet unworkable in the near-term), Val Miftakhov, founder and CEO of US-UK hydrogen-electric aircraft developer ZeroAvia, stunned many of the attendees at the European Hydrogen Conference by telling the audience the transition to hydrogen as a fuel source within the aviation industry is a relatively “easy win”.
While the technology might be quite a challenge, it was claimed that the commercial feasibility is easier than in many other sectors. The breakeven points on both the costs of fuel and engine maintenance, at $5-6/kg of hydrogen, are apparently already competitive with traditional aviation fuels when looking at small, light passenger aircraft such as a 10-20 seater.
Despite this positive financial view, the EU’s updated green deal contained a number of proposals in respect of aviation intended to force the industry to step up its effort to decarbonise, but did not specifically support hydrogen as an alternative primary aviation fuel.
60pc – Potential fall in green hydrogen production costs by 2030
The RefuelEU Aviation regulation requires all aircraft departing from EU airports to use a proportion of sustainable aviation fuels (SAF), with the percentage of the SAF blend into jet fuel increasing from 2pc in 2025 to 63pc by 2050, but does not include hydrogen within the initiative. The view from the EU is that, although hydrogen is considered promising in the longer term, it is expected to be available only for short-haul flightsand not until after 2035, casting doubt on whether aviation is such an easy win in the short term after all.
Turning to industrial processes, while the manufacture of steel cannot be described as an easy win due to the huge capital costs involved in replacing existing blast furnaces with those that can use hydrogen, perhaps it is a relatively easy win to switch from ammonia produced via traditional methods (using natural gas or LPG) to ammonia produced from green hydrogen—green ammonia? The technology for production, storage and transport is long established, the infrastructure is in place (subject to scale-up) and, as with other sectors, cost will be key.
When data firm IHS Markit carried out a study of hydrogen economics last year, it reported that the cost for producing green hydrogen had fallen by 50pc since 2015 and predicted that it could fall by an additional 30pc as early as 2025 given anticipated technological advancements and a more standardised manufacturing process. At this year’s hydrogen conference, consultancy McKinsey went further and predicted renewable hydrogen production costs will drop up to 60pc on today’s prices by 2030.
This will be driven by economies of scale as automated processes drive down the cost of manufacturing electrolysers and transformers, just in the way the cost of solar panels has plummeted by 80pc over the last ten years as panels have become mass-produced.
If these cost savings can be passed on to the making of green ammonia, it could see success both as a replacement for traditionally produced ammonia in areas such as the fertiliser industry, as well as becoming a realistic alternative shipping fuel. As mentioned above, ammonia rather than hydrogen is more suitable for the decarbonisation of the shipping industry on a transatlantic scale.
There are some coastal and short sea ferries running on hydrogen, where the opportunity to frequently refuel is not a problem, but for transatlantic routes ammonia is far more practical, not just for its energy density but because the ammonia only needs to be cooled to - 33°C in order to transport it as a liquid, rather than -253°C for hydrogen (or indeed, -162°C degrees for LNG).
Perhaps now the EU intends to introduce carbon prices in shipping, together with the IMO’s requirements to reduce harmful emissions, interest in green ammonia will increase. Japan is certainly betting on ammonia as a fuel of the future, both for power generation and for shipping, so it might be that green hydrogen producers in Europe are better off looking east for reliable buyers. If they wish to do so, they will need to be quick given the existing cooperation on ammonia between Japan and Saudi Arabia, the UAE and Russia, which again reinforces the need for European producers to have reliable and effective subsidy support—and fast.
Andrew Hedges (partner, London) sits on the European Hydrogen Advisory Board and Penny Cygan-Jones is a knowledge Of counsel in Norton Rose Fulbright's global energy practice.