2020 brought along an increased interest in hydrogen– with new strategies coming from the EU, Germany and France to name a few key players. In Norway the first national hydrogen strategy was launched in June with an additional roadmap being expected during the spring of 2021.

We have talked to analyst Martin Tengler to get a global view on how the hydrogen economy is progressing.  

– A hydrogen economy has been talked about on several occasions over the years? Yet, it has never materialized. What makes it different this time?  

– You are right that there have been these waves of enthusiasm for hydrogen. In the 1950s it was proposed as a fuel for aviation, in the 70s for cars and then again in the mid 200s when fuel cell manufacturers coupled with car manufacturers saying they would be selling hundreds of thousands of cars in just a couple of years, and that did not happen.

So, as you point out, there has been a hope that never really materialized. And most of those hopes were involving cars.  What is different this time is that hydrogen is being talked about as a means for decarbonizing the economy. And especially those sectors that are hard to decarbonize with electrification. Some sectors you can`t put more wind or solar into it, like steel production, it won´t solve the problem. You need a molecular fuel to produce the heat and even the chemical reaction that is needed. And that is where hydrogen can play a role.  

Heavy industri and transport spearheads market development

– Continuing that line of reasoning, in your opinion which sectors are most primed to use hydrogen?  

– First off, hydrogen is a really big market today. The annual production is more than a hundred million metric tons of hydrogen, and 99 percent is produced from fossil fuels without carbon capture and storage. Which means that is a heavily polluting process today.  

So, when we talk about sectors that can use hydrogen made from renewables, it makes sense to look at sectors where hydrogen is already used; starting with ammonia and oil refining. Then there are sectors that are not using hydrogen today, but could be.  

I have already mentioned steelmaking. We have calculated that the carbon prize required to switch to green hydrogen in steel-making could be as low as $50 per kg CO₂, if you can produce hydrogen at $1 per kg. Which we think can be feasible, probably before 2050 in many countries.  

In addition to industry, the transport sector could be well suited for hydrogen. I do not believe that is the case for cars, but in heavy transport and trucks, where batteries have a weight disadvantage. In the maritime sector we think that compounds of hydrogen could be used – like ammonia.  

Two reasons to expect lower costs

– An important factor in order to achieve this is of course the cost of green hydrogen. You mentioned that a carbon price of $50/kg CO₂ would be enough for steel production, you estimate just below $80/kg CO₂ for ammonia, and if you look at the EU ETS-prices today they are being sold at just below $50 dollars per quota.

But this is if, and that is a big if, the cost of green hydrogen is $1/kg. How can that be achieved?  

– The cost today for hydrogen from fossil fuels is about $1 per kilo, compared to $2.5-4.5 for green hydrogen from a top notch, well optimized system built in 2019. One that you could say is more of a theoretical system.  

So how can you get lower prices? There are two parts to that equation. First, the electrolyzers are expected to have a significant drop in costs. From 2014 to 2019 BNEF analysis shows a 40-50 % cost reduction, and this is expected to continue with increased production volumes.  

Secondly, renewable energy sources like wind and solar are becoming cheaper by the year – and this is the most important factor – as it makes up the largest proportion of the total cost of hydrogen.   

Green hydrogen is cheaper than blue in the long run

– Norway is a large gas producing country – and you can produce hydrogen from natural gas and capture and store almost all emissions – what is called blue hydrogen. What do we know about price comparisons between blue and green hydrogen?  

– I think we counted four sites globally that produced hydrogen and stored the carbon in 2019. Assuming that costs we gathered from those projects are representative for a wider trend – then the cost of storing the carbon per kilo hydrogen produced is about $.60 dollar per kg. If you add that to the cost of production hydrogen from cheap fossil fuels, you get a price of $1.60/kg of hydrogen.  

When you compare that to the cost of producing hydrogen from renewables, it is a lot cheaper. So, as of today it is cheaper to make blue than green hydrogen. But when you project future costs it becomes quite clear that green hydrogen will be the cheaper alternative in most places by 2030 and certainly by 2050.  

The reason is that the combined declines for renewables electricity prices and electrolyzers are likely going to be higher, if you have enough demand, than for blue hydrogen. Production of hydrogen from fossil fuels is already a well optimized process. Even assuming CCS becomes completely free – which of course it won´t – the cost of hydrogen from fossil fuels with CCS will never be lower than the cost of hydrogen form fossil fuels without CCS, or about $1/kg H2. Green hydrogen can get cheaper than that.  

So green hydrogen could be cheaper than fossil fuel-based hydrogen, but not for some time. But for now, people are only going to use green hydrogen if they have the right incentives to do so, and those incentives needs to come from governments. It probably takes a combination of carbon prices and subsidies to get the industry going.  

Access to space is problematic in some regions

– To make green hydrogen you need large amounts of renewable electricity. According to the New Energy Outlook 2020 Climate scenario– with a pathway to a well-below-a-two-degree emission budget, a hydrogen-based scenario would need 38 percent more than the current global production of electricity. How much renewable capacity would that need?

– It depends on the electricity source you assume. At the low end, if all of this hydrogen were made by nuclear at 100% capacity factor, an extremely unlikely scenario, you’d need about 5 TW of electrolyzers and 5 TW of nuclear. If it were powered by offshore wind, you’d need some 7TW of electrolyzers and 9-10TW of offshore wind. If it were made by a 50-50 combination of onshore wind and solar, you’d need 9-10TW of electrolyzers and 7TW each of onshore wind and solar. My hunch is we’d end up somewhere between the second and third scenarios.

– With such a massive need for new renewables, are running we running out of land to build on?  

– It raises a lot of different questions. The good part is that globally there is enough space. The second good part is that by adding more renewables, the renewables themselves could get even cheaper than we think today, as increased production has done in the past.  

The challenges will be on a regional level. Some countries are much better resourced and has much more space to build and produce hydrogen. You can probably name the suspects with lots of sun or wind and space. Think of Northern Africa, Australia, countries in South America – even the Nordics. They can produce more than they need.  

Other countries like Japan where I am based, it is very unlikely that Japan can build enough to both decarbonize the electricity grid and also produce enough hydrogen to decarbonize other sectors. They would need to import hydrogen, which they are thinking about, but that involves a lot of challenges.  

Global or national markets?

– So, will we see a few large hubs that produces and then transport hydrogen globally? Or smaller regional markets?  

– I think that depends on how you set up the market. In terms of cost, we found that larger electrolyzers means lower cost. So, if you can produce hydrogen in one large place it is probably going to be cheaper than the equivalent from ten smaller electrolyzers. But if you produce hydrogen for a larger area you need to distribute that hydrogen to the final customer, which of course will add to the cost.  

What we found is that if you are based next to a pipeline that can transport hydrogen, the cost could be very cheap. If you have to transport by trucks or even by ships to places like Japan, then the cost could be very high. If you compare hydrogen to natural gas in liquid form – LNG – you need more energy to liquify and more space to transport the same amount of energy. You can see how the costs stack up, even in low-cost scenarios in 2050. Transporting by ship from Norway to Japan adds at least $2 per kg of hydrogen.  

Would it make more sense to transport it as ammonia, which is already a well-developed market? At BNEF we believe so. In addition to storing more energy per unit of volume, an additional benefit is that you can use ammonia directly, you don`t have to convert it back to hydrogen. That saves you a lot of costs.  

But going back to your previous question, the lack of space in some parts of the world implies that we`ll see hydrogen being transported from hubs to demand centres, but otherwise the transportation means at hand will be a decisive factor when it comes to global hubs vs. national/regional markets.  

Market volume must double by 2030

– We have talked about the growth trajectory of green hydrogen. What do we currently know about supply and demand in the near future?

So far about 26 GW of electrolyzers have been announced for commissioning by 2030 and another 22 ‘blue’ hydrogen projects. Most are pre-FID (final investment decision) and may not be built as planned, while many other projects may be announced in the meantime. So in terms of supply we’ll probably have enough for a while.

The main challenge will be demand – who will buy all that clean hydrogen. We are likely to see demand pick up slowly at first, but rise steadily after 2025-2030. Much of the early demand is likely to come from a small number of large projects, such as power turbines running on natural gas + hydrogen and steel plants using hydrogen.

– How much does the demand-side have to increase to «stay on target»?

To get to sub-2 degrees in the NEO Clean Electricity and Green Hydrogen Pathway scenario, we’d need to see growth of >100 million tons every five years between 2030-2050. In other words, by early 2030s, we’d need to see hydrogen demand to double from its current volume, and all of that new demand would have to be for clean hydrogen.

Whether we get there will depend on how keen governments will be to subsidize such projects and how high the CO₂ price is. So far our projections for the EU ETS don’t suggest clean hydrogen will be competitive by 2030 without subsidies. But I’d watch the EU (and neighboring countries like the UK and Norway) closely, that’s where most of the action is likely to take place early on. The US could be interesting for power generation. Quite a few turbine projects that could co-fire hydrogen – if they get enough supply and the incentive to do so – are being planned there.

But to summarize, it looks promising for a hydrogen economy, with a couple of caveats. For some sectors hydrogen is not going to be the ideal solution. I mentioned cars as an example where you are better off with batteries and direct electrification. But for some sectors, in heavy industry especially, if we are serious about net zero, and it seems like many countries are, you are probably not going to get there with hydrogen.