So hydrogen is not taking off despite it being so integral in the energy transition and the low carbon economy. What is the problem?
Hydrogen often gets peddled around as the wonderful element or molecule (if you think of it in terms of the gas) that will enable us to transition to zero carbon. It can be combusted or reacted in a fuel cell to produce just hot water – which reflects how unpolluting and clean it is. It can be produced by electrolysing water, and the byproduct is just oxygen, which is again wonderful in terms of the way we think about cleanliness.
Green hydrogen today is costly to produce, mostly because the electrolysis process isn’t particularly efficient and very pure water is needed to reduce the deterioration of the electrodes used in the process. Hydrogen is not easy to capture and store by itself as it isn’t really stable in the atmosphere (quick to recombine with oxygen). The cost of producing was about $3-6/kg but of the spike in natural gas prices recently, the cost of grey hydrogen itself already outstrip those levels of green hydrogen costs. The only tricky part is that because the corresponding electricity costs has also risen due to the energy crisis, diverting renewable electricity to producing green hydrogen has naturally become more expensive.
So it seemed that green hydrogen by itself is caught in a bind where its price rises when its ‘grey counterpart’ rises in price; while not exactly falling as much in price when the grey counterpart is cheap. With such features, it is difficult for potential adopter to embrace it wholly at this point. To the extent that demand for it right now is typically short term and no one is able to commit to buying at the high prices over long periods of time as they believe that prices should fall as technology improves.
So we get into a self-reinforcing feedback loop where the lack of adoption keeps prices high which itself keeps adopters at bay. Developers of hydrogen projects are facing challenges financing these projects since they are not able to secure long-term demand for the products of their project. Hydrogen council’s latest update of the market situation indicates that there are many more projects announced but the conversion rate of projects from ‘being announced’ to ‘final investment decision’ remains startlingly low. In fact so low that there seems to be an ever-growing pipeline of projects partly because projects simply don’t get through the pipeline!
There are very specific opportunities where hydrogen production can make some kind of sense at the moment but they remain limited. For example, when large utility scale wind or solar power needs good, longer term storage due to lack of load demand during periods of strong production. Or perhaps renewable electricity production capacity outstrips local supply either due to population departures or long-term planning of power capacities that did not materialise.
Hydrogen can also be useful when the grid is not strong enough to take high productions of these variable renewable electricity and hence the production gets curtailed (ie. they are not allowed to inject into the grid). Hydrogen storage can be viable at scale and it is also cleaner to the extent that it doesn’t have to be replaced as frequently as Li-ion batteries and hence produce less waste from an environmental footprint perspective.
Outside these opportunities, it is difficult to justify producing green hydrogen; and even with such opportunities, it is not clear how long they would last. Curtailment events are undesirable and not exactly what renewable electricity project developers or owners would wish for. Likewise, it doesn’t make sense for more power capacity than required to be built if the local demand is insufficient.
Green hydrogen projects can really only properly materialise when there’s a clear definite demand for green hydrogen. And for this, a couple of things must happen; which I’ll address in my next post.