I came across a point made by a supporter of low-carbon hydrogen when others were arguing that green hydrogen should be reserved for hard-to-abate sectors, but not for other sectors that can easily decarbonise through a lower-cost pathway instead. The point was that if low-carbon hydrogen was only going to target the hard-to-abate sector, the market size simply isn’t enough to create the scale necessary to drive down the cost of low-carbon hydrogen.
This comes at a time when we are discovering that some of the sectors that could actually pay for low-carbon hydrogen are those with much lower-cost approaches to decarbonisation (for example, food product or food services companies). So why would they be willing to pay higher price for low-carbon hydrogen? Technically, this is where economics starts to break down. Part of the reason is that the end customers are willing to pay – this is especially possible for consumer products where the agrifood industry may be able to differentiate the introduce the food prepared using low-carbon hydrogen. This is exactly what some Seven cafes in Japan is doing.
And to a certain extent, every industry starts out this way; if solar panels were simply looking to the locations with huge energy demand in the day, and also lots of solar resources for power generation, the market is going to be incredibly small. And certainly insufficient to enable the lower cost from economies of scale. So finding use cases and continually expanding them is important. While it might be admirable to keep trying to create premium products and then price it well, the alternative way of getting economics in your favour is actually to keep innovating on use-cases and focus on growing scale in a way that lowers unit cost. This then allows for further expansion of demand and use which improves learning at manufacturing and drives the cost advantage further.
That is the story of China’s manufacturing rise. And Lidar technology is a great example. The original use case for lidar technology was very limited to very specialised fields where great precision was needed in sensing and mapping physical spaces. It was initially used almost exclusively in military applications and would probably have remained so if not for China entering the picture and driving down costs through sheer manufacturing scale. By pushing down prices to particular thresholds, the mass market use case in EVs and other driver-assistance technologies emerges and serves to expand the pool of demand further.
During the hype of low-carbon hydrogen during 2020-2023, people were expecting that the cost of hydrogen production could be pushed down to such levels. Yet if we examine the value chain and recognise that the opportunity cost of using renewable electricity for hydrogen production, we would see that it was difficult for hydrogen production to compete with electrification as a commercially viable approach for decarbonising a lot of low-heat industrial applications.
An alternative path to commercialising low-carbon hydrogen is needed; and it is more about finding other use cases. It could be locations where fuel is needed to run mobile applications, or where transport of liquid fuels were prohibitively expensive and being able to easily produce it make sense. And finally, one of my favourite approach, which I am sure would be the first early commercialisation pathway: colocating green hydrogen facilities with biogas/biomethane production facilities, producing green hydrogen, then use Sabatier reaction (methanation) to produce e-methane, boosting the overall output per unit biogenic feedstock.
Yet even then, it is still necessary to drive costs down in order to be able to produce a product catering to a large and expanding market. Even for that pathway highlighted, the actual demand possible for a single hydrogen project would be limited by the available biogenic carbon dioxide which is limited by the scale of the biofuel/biogas plant. These are all bottlenecks of the renewable industry that needs to be managed. Wind and solar, especially solar is a lot more disconnected from local supply chain and ecosystems in order to pull off a successful project as they are modular and largely plug-and-play. While it means government have less hard work on creating the supply chain, there is less local benefits reaped or job opportunities created from building out solar facilities than if the market starts looking into biofuels and hydrogen.
Ultimately, the economics of hydrogen requires very strong government collaboration and the actual boots-on-the-ground work of creating the supply chain, infrastructure and delivery mechanisms. To tap into some pockets of willingness-to-pay at the moment would help.