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3 factors affecting hydrogen's future in decarbonising Europe in 2020

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Hydrogen is increasingly seen as a critical component in the future net zero energy system. Costs are falling faster than expected and the first green hydrogen schemes are being put together.

The greatest victory for environmentalists (and arguably the planet) over recent years has been the fall in costs of solar and wind energy, driven in its initial stages by subsidy systems around the world.

Now that these cheap renewable sources can often compete on a sound commercial basis with hydrocarbons, policymakers in many countries are considering redirecting attention and subsidy flows to the other key elements that will be required in a zero-carbon system, which the market does not yet support.

These areas include decarbonising heating systems and industrial energy consumption, as well as providing low carbon power when solar and wind are not available.

The European Commission’s Green Deal strongly promotes green hydrogen (produced using electrolysis and renewable power) for use as an energy store and fuel for power backup (it can be used to fuel CCGTs). The commission is also pushing it in vehicles (especially larger ones, where electricity is less efficient), industrial processes and heating (initially mixed into the existing gas grid to reduce carbon intensity).

In the UK, the Committee on Climate Change, which advises government, is also pointing to hydrogen as a key contributor in these areas – both green hydrogen and hydrogen sourced from methane reformation combined with carbon capture and storage (CCS), which is known as blue hydrogen.

Blue hydrogen is (at least on paper) currently cheaper at scale, and may represent the best short-term option for large scale production where the right infrastructure is in place.


Getting the costs down

The main problem for green hydrogen is the cost of production, which has been falling but has not yet reached commercial levels in most areas. Most analysts expect that increased scale and technological improvements will reduce this over time, in the same way that wind and solar costs have fallen.

The European Commission expects both the subsidies and overall investment required to be relatively modest. In its Hydrogen Roadmap report, it estimates that during the scale-up of the green hydrogen industry towards 2030, annual investment of just €8 billion would be needed across the EU in its ‘ambitious’ scenario (where hydrogen development is most extensive). This is less than 5% of the total annual investment in energy and automotive assets in Europe.

The two components of green hydrogen cost are the capital outlay on the electrolyser and the cost of power. Falling renewable prices (last year’s Portuguese solar auctions awarded at bids as low as $16/MWh, and the UK saw £39-41/MWh in recent offshore wind CfD awards), make hydrogen production much cheaper.

Power costs can be brought down further by using power that is currently curtailed (surplus renewable power – either free or negatively priced), which can happen when supply outpaces demand. That curtailed renewable energy could instead be stored in the form of hydrogen.

However, such power will never be available all the time and so non-surplus supply must also be used to ensure a high utilisation rate of electrolysers (most plans so far have a dedicated renewable generating facility).

The costs of electrolysers are also falling, with levels down to $1,200/kW from about $1,750/kW in 2014. McKinsey estimates that with each doubling of capacity, the cost of the equipment should fall by between 9 and 13%, and a number of manufacturers (including Nel, ITM Power and Hydrogenics) have plans for gigawatt-scale factories.

Mott MacDonald predicts that the cost could fall to 30cts/kg by 2030-2035, but in the medium term it is more likely to come down to around $1/kg (equivalent to $45/bl oil). And that’s before any distribution costs, which are expensive for hydrogen due to its low energy intensity and fungibility (making it prone to leaks).

Recently costs have been coming down faster than expected. In February, Europe’s Hydrogen Council forecast that "the cost of hydrogen solutions will fall sharply within the next decade – and sooner than previously expected. As scale-up of hydrogen production, distribution, equipment and component manufacturing continues, cost is projected to decrease by up to 50% by 2030 for a wide range of applications, making hydrogen competitive with other low-carbon alternatives and, in some cases, even conventional options."


Green hydrogen upstream: taking the plunge

Some countries are now moving forward with the first steps to develop green hydrogen output. In late 2019, Denmark said it was considering redirecting subsidies to less mature green technologies, such as green hydrogen, and away from solar and wind, which are increasingly being priced at near market levels avoiding the need for subsidy.

The Danish government’s statement was followed by an announcement from state-owned Ørsted (one time Danish state oil and gas company and now the world’s biggest wind generator), that it plans to invest in pilot projects that will use wind power and other renewable energy sources to make hydrogen fuel.

Ørsted’s CEO, Henrik Poulsen, said this green hydrogen could be used to store energy and create a renewable power source: “We are ready to invest in pilot projects and are working on finding good pilot projects,” he said, adding that green hydrogen was a “strategic extension of both offshore and onshore wind”, although it is still a technology in its early stages. Ørsted might expect to benefit from the redirection of subsidies to this area, and secured funding for one project in December1.

Then in January, Germany’s new government announced it was also considering offshore wind exclusively for hydrogen production, along with another 33 measures in a 21-page draft Hydrogen Strategy. This will have an initial target of producing 20% of Germany’s hydrogen from domestic renewable power by 2030.

Germany has less offshore wind potential than the UK or Denmark, and is also faced with falling onshore wind expansion due to planning issues, which means that it envisions importing a significant portion of its hydrogen from countries that have more plentiful cheap renewables or methane/CCS (although Germany very much favours green hydrogen over blue).

The Netherlands is also an early mover in hydrogen development. Last year, Dutch gas company Gasunie and grid operator TenneT produced their first 2050 zero-carbon energy plan (required to meet Dutch carbon reduction commitments), which points to a wholesale adoption of hydrogen from surplus renewables in heating and power as the optimum (and by far the cheapest) means of achieving the goal. The two companies, along with grid operator Thyssengas, are also involved in similar plans in Germany.


UK blues

In the UK, the most advanced and extensive plans are for blue hydrogen, aided by the availability of a number of depleted offshore oil and gas fields for CO2 storage. Oil and gas companies are keen on blue hydrogen as it provides a potential future market for methane, and makes use of existing infrastructure, both onshore and offshore.

Planned projects in the UK include Hynet2 in the northwest and another on Humberside, that would supply large industrial clients and millions of residential customers through the gas grid. These plans are currently cheaper than green hydrogen, but unproven and with less potential for further cost reduction, along with higher residual emissions.

“Renewable hydrogen is currently more expensive than hydrogen produced from gas or coal. Therefore, it's important… to scale up the [electrolyser] technology and make it more efficient, so that we'll be able to produce renewable hydrogen at a price which can compete with the price of the fossil-based alternatives," said Anders Nordstrøm, Vice President and Head of Ørsted's hydrogen activities.

It is unclear so far whether the new UK government will follow the CCC’s advice and push ahead with hydrogen, and less clear still whether any of the blue hydrogen schemes will get its backing.

The government must do something to meet the UK’s ambitious 2050 zero-carbon target but has traditionally tried to remain technology-neutral and use some form of market mechanism to achieve the end-goal – although it appears industrial strategy may be more important under the new Johnson administration.

Longer term, as electrolyser (and renewable power) costs fall further, green hydrogen projects are expected to prove more attractive than the alternatives. This will be particularly true of electrolysers located where renewable power costs are low – including the North Sea, but also desert areas with cheap solar power.

Transportation problems will need to be addressed for these benefits to be realised, however.

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