In the race for cleaner industry, clean energy is falling behind fossil fuels. That’s because we’re pinning our hopes on hydrogen. In theory, the most abundant element in the universe could be a kind of climate key, opening up emissions-free routes to producing fertilizers, steel, petrochemicals and cement.
Such a change would be profound. About a quarter of global CO2 emissions come not from power plants or vehicles, but from industrial smokestacks. If a single process could decarbonize all of these industries, we would have discovered a technology as groundbreaking as solar power, wind farms and electric vehicles.
This will not work with hydrogen as we know it. Currently, less than one tonne of the 1,000 tonnes we consume is “green hydrogen”, which is produced by splitting water into hydrogen and oxygen using electricity. The vast majority is “grey hydrogen”, which is produced from natural gas, oil or coal and releases enormous amounts of carbon in the process.
Optimistic forecasts suggest that the cost of water-splitting electrolyzers and the clean energy needed to run them will fall as quickly as other green technologies. But the opposite seems to be the case – and if nothing is done, the more environmentally harmful options will gain ground.
First, let’s look at what happened to costs. The high inflation and interest rates of recent years have been a challenge for many clean technologies – but wind, solar, batteries and electric vehicles have now reached sufficient scale to deliver efficiency gains and keep prices low. This is not the case with green hydrogen.
Instead of falling from a price of around $3 per kilogram to the US government’s target of $1 per kilogram – a price that could potentially undercut natural gas – costs in the US have risen to almost $5 per kilogram, according to a study by the Hydrogen Council and McKinsey last year. Even the generous incentives of the US Inflation Reduction Act are not enough to make this competitive.
We have seen a similar picture in the EU. Brussels has tried to set up a hydrogen bank to build a green H2 supply chain – but the first auction for the plant in April attracted high bids of at least $6.34 per kilogram.
We saw a similar result last month at an ammonia auction held by the H2 Global Foundation in Germany. The cheapest offer was more than twice the price of ammonia from fossil fuels.
The oil majors have not sat idly by, either. An alternative way to reduce the climate footprint of H2 is to capture carbon dioxide and pump it into depleted oil wells to bring more crude to the surface. “Blue hydrogen” only reduces emissions of grey H2 by 60-70%, but is still potentially attractive to consumers who want something cleaner than grey without the cost of green.
It’s also interesting for the oil industry, which currently has far more money to spend on research and development than cash-hungry green H2 startups. Engineering work is complete and site preparations are already underway for Aramco’s first carbon capture project, CEO Amin Nasser said on a conference call with investors last week, and the company expects offers from Japanese and Korean buyers within months.
BP is in the final stages of planning a blue hydrogen hub in the north-east of England, while Shell has signed engineering contracts for a project in Oman.
Currently, blue H2 appears to be taking the lead. More than half of the green H2 planned to be operational by 2030 is in the earliest stages of development, according to BloombergNEF, and could therefore easily be discontinued. About half of the blue supply has already received planning permission, compared to 15% of green projects.
Blue is certainly better than grey – but at the moment it looks as if the green variant can hardly meet existing needs and certainly not fulfill its promise to decarbonise a whole range of additional sectors.
Changing this will not be easy. Government policy to date has focused on subsidies for producers rather than mandating the use of this energy by large consumers – the opposite of the demand-side support that fuelled the renewable energy boom in the 2000s.
Trade tensions could also deter project developers from buying Chinese-made electrolyzers, which can be up to three-quarters cheaper than domestically manufactured models – a potentially huge cost advantage that is being neglected.
To reduce financing costs, interest rates need to be reset to lower levels. Most importantly, weakening government support for clean energy means investors are unlikely to bet on such a risky, nascent technology.
That’s a massive set of chicken-and-egg problems, but we’ve solved them with solar, wind, lithium batteries and electric vehicles. There’s no reason why the same trick can’t work for green hydrogen. If the political will is lacking, Big Oil is ready to step in and clean up. ©bloomberg
