IEA (2019), The clean hydrogen future has already begun, IEA, Paris https://www.iea.org/commentaries/the-clean-hydrogen-future-has-already-begun
Mr. van Hulst, the Hydrogen Envoy at the Ministry of Economic Affairs & Climate Policy of the Netherlands, is a former Chair of the IEA Governing Board (2017-2018). He also chairs the High-Level Advisory Panel for the IEA’s forthcoming hydrogen study. The report is produced to support the Japanese presidency of the G20, and will be released in June.
There is a growing international consensus that clean hydrogen will play a key role in the world’s transition to a sustainable energy future. It is crucial to help reduce carbon emissions from industry and heavy transport, and also to provide long-term energy storage at scale.
Hydrogen is a versatile energy carrier that can be produced from a wide range of sources and used in many ways across the entire energy sector. It could become a game-changer in its low-carbon form, but its widespread adoption faces challenges.
The International Energy Agency is preparing a major new study to assess the state of play for hydrogen, its economics and potential. Due to be published in mid-June, the report will be a key contribution to Japan’s 2019 Presidency of the G20.
Researchers have found that clean hydrogen still costs too much to enable it to be widely deployed. Prices may not come down sufficiently until the 2030s, according to some estimates. But despite the uncertainty surrounding the future of clean hydrogen, there are promising signs that it could become more affordable sooner than expected.
Where the hydrogen comes from is important. At the moment, it’s mainly produced industrially from natural gas, which generates significant carbon emissions. That type is known as “grey” hydrogen.
A cleaner version is “blue” hydrogen, for which the carbon emissions are captured and stored, or reused. The cleanest one of all is “green” hydrogen, which is generated by renewable energy sources without producing carbon emissions in the first place.
At the moment, grey hydrogen is cheaper than the other two. Its price is estimated to be around €1.50 per kilo. The main driver is the price of natural gas, which varies around the world.
Too often, people assume that the price of grey hydrogen will remain at this relatively low level for the foreseeable future. That ignores the IEA’s projection of a structural rise in natural gas prices due to market forces. And more important, it fails to take into account the potential volatility of gas prices, as demonstrated in Europe, where they have become more linked to spot markets.
What’s more, grey hydrogen’s CO2 emissions carry a cost in an increasing number of jurisdictions around the world. In the European Union’s emissions trading system, the price of CO2is in the range of €20 to €25 per ton.
A growing number of European Union countries want to establish a minimum CO2 price that will gradually increase to around €30 to €40 per ton over the next 10 years. That means the cost of CO2 could eventually add almost €0.50 to the price of a kilo of grey hydrogen in Europe, bringing the total price to around €2.
In an increasingly carbon-constrained world, we should also not lose sight of the diminishing social acceptability of continuing to emit CO2 while producing and using grey hydrogen in industry.
The price of blue hydrogen is also mainly influenced by natural gas prices. But its second-most important driver is the cost of capturing and reusing or storing the carbon emissions.
Current estimates put the price of carbon capture, utilization and storage (CCUS) in the range of €50 to €70 per ton of CO2. The price is lower in specific cases like ammonia production .
This puts the current price of blue hydrogen in Europe a bit above the price of grey hydrogen, but that gap will shrink if the price of CO2 emissions increases further in the coming years.
Once the process of CCUS in blue hydrogen plants is scaled up and standardized, the cost is likely to come down.
Innovation should eventually open up more opportunities for utilization of CO2 in industry, which may further push down the cost of CCUS. Those developments could bring the price of blue hydrogen closer to that of grey hydrogen sooner than is often assumed.
Different factors come into play for the priceof green hydrogen, which is estimated to be between €3.50 and €5 per kilo at the moment.
The first one is the cost of electrolysis, the process through which hydrogen is produced from water using renewable energy. Total global electrolysis capacity is limited and costly at the moment. Most industry experts expect that a significant increase of electrolysis capacity will reduce costs by roughly 70% in the next 10 years.
The most critical factor for the cost of green hydrogen, however, is the price of the green electricityused in the electrolysis process.
The cost of generating solar and wind energy has come down spectacularly in the past decade. That should prompt caution about what will happen to the cost of green hydrogen in the future. Similarly to wind and solar, it may come down a lot faster than experts now expect.
In countries and regions blessed with abundant sunshine and wind power – such as the Middle East, North Africa and Latin America – green electricity prices have come down to around 2 euro cents per KWh.
Experts expect them to decrease even more in the near future. Former US Energy Secretary Steven Chu recently suggested the prices could soon go as low as 1.5 US cents (1.3 euro cents) per KWh.
In those countries and regions, there is a real prospect of mass producing green electricity for domestic use – and also green hydrogen for both domestic applications and export markets.
Green hydrogen can in principle be shipped around the world to places that are less well endowed with cheap renewable energy sources.
Japan has several important pilot projects underway – with countries including Australia, Saudi Arabia and Brunei – to determine the best way to transport green or blue hydrogen over large distances by ship.
It is too early to tell how the cost of transport will develop and how fast this global hydrogen market may develop. Depending on technological advancements, a market similar to that of liquefied natural gas may see the light of day in the decades to come.
What does all this mean for the cost of green hydrogen in Europe?
First, that it may indeed take more time for the cost of green hydrogen to come down to levels near those of grey and blue hydrogen. The scale-up of electrolysis needs to drive down the cost. Even more critically, mass production will require large volumes of cheap green electricity.
The projected scale-up in offshore wind production in Northwest Europe is expected to kick in over the next 10 to 15 years. By the early 2030s, mass deployment of green hydrogen may have begun in that part of the world.
Some big industrial players, like Engie, have set an explicit cost target for green hydrogen to reach grid parity with grey hydrogen by 2030. The Japanese government has also formulated stringent cost targets for clean hydrogen by 2040.
Those ambitions are long term, but they don’t preclude significant use of green hydrogen in the next few years. It’s already happening locally across Europe, where on-site wind or solar power units generate green hydrogen for applications in industry, transport or energy storage.
In a number of cases, creative companies have figured out sustainable business cases. Swedish power company Vattenfall has calculated that producing a €20,000 car from CO2-free steel (using green hydrogen) rather than regular steel would add just €200 to the price. That suggests premium markets could be developed for consumers willing to pay 1% to 3% more for products manufactured using green hydrogen.
Danish power company Orsted recently announced that its bid in an offshore wind auction in the Netherlands includes the production of green hydrogen for industrial use. That shows that new business models are being invented as we speak, raising the possibility of positive surprises ahead.
Energy policy can clearly make a big difference through measures such as minimum CO2 prices. Another important factor is the way in which the authorities can foster the energy transition.
The Dutch government has announced the broadening of its low-carbon program. At the moment, it’s restricted to subsidies for producing renewable energy, but it will soon be expanded to include all possible cost-effective ways to reduce CO2, including CCUS. This will help the market-driven activation of blue hydrogen projects and, depending on how costs evolve, hopefully that of green hydrogen projects in the near future.
France’s hydrogen strategy includes indicative targets for greening the current use of grey hydrogen in industry. The French government has set a target of 10% green hydrogen use in industry for 2022 and 20% to 40% for 2027.
A proposal from some industry players in Germany (Shell, Siemens, Tennet) aims to organise combined auctions of offshore wind fields for electrolysis, which would imply connecting the value chain in one single tender.
Zero emission standards for vehicles are increasingly popular in many cities and countries. They are a powerful driver of clean hydrogen applications in transport, where diesel and petrol are rapidly becoming less acceptable. This may help bring down the cost of electrolysis even faster.
Many current discussions in Europe also involve proposals such as an obligation to blend clean gas (including hydrogen) into the gas grids. This would help kick-start the clean hydrogen market in Europe, even if we begin at low levels.
Other important policy instruments include the doubling of R&D in clean hydrogen, as agreed in the Mission Innovation initiative; removing fossil fuel subsidies; guarantees of origin for blue and green hydrogen; favourable implementation of the European Renewable Energy Directive (REDII); common quality and safety standards; and aligned regulatory approaches on what roles different market participants can play in this new market.
We can expect to hear much more about policies to stimulate the creation of a single clean hydrogen market in Europe in the months to come. The clean hydrogen future has already begun.