New Energy Solar’s mandate to invest in renewable energy means we regularly monitor new technologies to ascertain when they might become commercially viable and to determine their investment potential and ability to offer attractive risk-adjusted returns. In this Insight we briefly describe hydrogen and its uses and then examine the current challenges to its widespread deployment.
Hydrogen as a fuel has significant appeal, but alongside its appeal there is a lot of hype. As the authors of a recent paper on the role of hydrogen in the energy system noted “Hydrogen technologies have experienced cycles of excessive expectations followed by disillusion”.1
However, advances in technology, commercialisation driving down cost and strengthened political will to address climate change have brought renewed focus to the potential of hydrogen to contribute to de-carbonising the energy system, particularly in complex sectors like heat and transport. So while challenges around cost and technology remain and considerable progress is required before hydrogen is truly competitive, “such competitiveness in the medium-term future no longer seems an unrealistic prospect”.2
Hydrogen as an energy solution is a very popular notion for a number of reasons. Firstly, hydrogen is plentiful, being the most basic and common element on earth. Unfortunately, it doesn’t exist in its pure H2 form on Earth, but combined with oxygen, it is water and combined with carbon, it forms compounds such as coal and methane3. Secondly, it is also one of the most potent fuels we use today, having the highest energy per mass of any fuel4. Finally, it has significant environmental advantages over fossil fuels in its end-use application because the by-products of hydrogen use are heat and water.
Current use and production
Today, useable hydrogen can be separated from water, biomass, coal or natural gas. Approximately 70 million tonnes is produced globally, including approximately 9 million tonnes in the US which used in refining and treating metals, in food processing and also by NASA in the space program5.
Hydrogen is predominantly (76% of production) produced by a process called steam reforming which involves separating hydrogen atoms from carbon atoms in natural gas, while approximately 23% is produced from coal. This process is currently the most cost-effective production method and the hydrogen produced is referred to as “black H2”.
Production by steam reforming produces carbon dioxide (CO2) and requires large quantities of heat, normally generated by burning gas. Different fuel bases have differing outputs of CO2:
- 10 tonnes of CO2 per tonne of hydrogen from natural gas;
- 12 tonnes of CO2 per tonne of hydrogen from oil products; and
- 19 tonnes of CO2 per tonne of hydrogen from coal.
As a result, global hydrogen production today is responsible for 830 million metric tonnes of CO2 per year – corresponding to the annual CO2 emissions of Indonesia and the United Kingdom combined6. It is estimated that black H2 carries embodied emissions of the order of 85kg CO2-e/GJ, which is 66% greater than the emissions intensity of natural gas7. Accordingly, hydrogen produced through steam reforming offers no advantage as a low emissions fuel unless carbon capture and storage becomes more effective and viable8. Hydrogen produced via a production chain employing carbon capture and storage is referred to as “blue H2”.
Alternatively, hydrogen can be produced from water using electrolysis employing renewable energy sources such as electricity from wind and solar. Hydrogen produced through this method is referred to as “green H2”. This method generates zero carbon emissions and accordingly, avoids the embedded emissions of black H2. Less than 0.1% of global dedicated hydrogen production comes from water electrolysis9.
Hydrogen as a fuel
How does hydrogen actually become energy?
- Direct combustion – hydrogen can be used in a simple combustion to create heat, motion and eventually electricity, with no emissions.
- Hydrogen fuel cells – an electro-chemical fuel cell facilitates the combination of hydrogen and oxygen to produce electricity and water, with no emissions. Such fuel cells can be used in vehicles or stationary devices.
- As a component of synthetic fuels – synthetic fuels are hydrocarbons, but unlike petrol and diesel they can be produced from non-fossil carbon derived from biomass or biogas plants, or the air and low-carbon hydrogen, in which case they result in low or zero net greenhouse gas emissions.
Hydrogen is also used as a feedstock in the manufacture of products such as plastics and fertilizers.
The challenges – production cost, storage and transportation
While there is broad consensus that hydrogen has significant promise, technical challenges remain and these are broadly around the cost of production and the storage and transport of hydrogen. Each of these challenges detracts from the efficiency of hydrogen, particularly for specific applications. For example, for use in electricity production the process of electrolysis, transportation, pumping and fuel cell conversion back to electricity leaves about 20-25% of the original electricity10.
Cost of production
Black H2 from natural gas is the most cost-effective method of hydrogen production. In its production, fuel is estimated to account for between 45% and 75% of the cost of production and hence cost depends on access to and cost of natural gas and coal. Costs for black H2 from natural gas with no carbon capture technology vary considerably across regions but can be as low as US$1/kg in the Middle East and the United States11.
Blue H2 production, incorporating carbon capture and storage technology, is estimated to be approximately 50% more expensive than black H212. Clearly, the technology is also in the early stages of commercialization and, for carbon dioxide storage, needs to overcome public resistance.
Currently, green H2 production is very energy intensive and accordingly, relatively expensive. Using water electrolysis to produce the current global production of hydrogen, 70 million tonnes, is estimated to require 3,600 TWh of electricity, more than the total annual electricity generation of the European Union13.
Production costs for hydrogen from water electrolysis are influenced by technical factors like conversion efficiency, annual operating hours and the cost of electricity. In addition, capital costs for electrolyser units are very high, although it is thought that commercialization and innovation in the technologies themselves will lead to significant reductions in production cost. The graph below is extracted from the International Energy Agency report “The Future of Hydrogen” and demonstrates the relationship between the cost of electricity, rates of electrolyser utilization, and operating and capital costs.
As can be seen in the above graph, the current ‘most favourable scenario’ for production with existing technology would result in green H2 prices of approximately US$8-9/kg of H2. The key cost challenges in making green H2 more viable lie in developing electrolyzer technology that is much larger scale, 100 to 300 MW units versus the 5 to 10 MW units in use today, and in increasing the levels of utilization for hydrogen production units. The latter challenge would require consistent energy, rather than the use of excess renewable power.
In a Boston Consulting Group publication the authors write “hydrogen is arguably one of the least cost-effective power generating options available today. This is true even if one were to take the often-touted approach of setting up an electrolyzer to run only when there is excess renewable – and therefore free – power”14.
While on a mass basis, hydrogen has nearly three times the energy content of gasoline, on a volume basis the situation is reversed. The storage challenge is primarily around developing storage that is light-weight and low volume. For example, when considering the use of the existing transport infrastructure of petrol stations for storage, one of the considerations is that compressed hydrogen gas has only 15% the energy density of petrol, so refuelling stations require more physical space to supply the same amount of fuel15. This could be managed by increasing underground storage at refuelling stations, but in densely populated urban areas many existing refuelling stations would not be suitable for hydrogen.
Storing hydrogen in a compressed state requires a lot of energy to compress the gas and then there are safety issues around the use of high pressure tanks, particularly in applications like transport. Pressurised and cryogenic tanks can provide hydrogen storage capacities of between 100 kilowatt hours (kWh) (pressurised tanks) and 100 GWh (cryogenic storage) and both are mature technologies. Storing hydrogen in metal hydrides or carbon nano-structures are also promising options for achieving high volumetric densities, but are in the early stages of development16.
Further research is needed to determine the preferred storage options for the future use of hydrogen, much of which will depend on which applications are best suited for hydrogen, which will in turn depend on the costs of production and transportation.
Transporting hydrogen faces similar challenges to storage due to its low density. The International Energy Agency states that if hydrogen has to travel a long way before it can be used, the costs of transmission and distribution could be three times as large as the cost of hydrogen production17.
Options for transport generally come down to liquification, compression or combining hydrogen with larger molecules that can be more readily transported as liquids. Liquification is seen as a logical option because it is more energy efficient than transporting compressed gas – one ship of liquid hydrogen is equivalent to five ships of 200 bar hydrogen gas – and the experience of the LNG industry is cited as a successful solution to transporting gases. However, while natural gas liquifies at -162°C, hydrogen doesn’t liquify until -253°C and cooling to that temperature requires a lot of energy. Liquifying hydrogen takes 12kWh of power per kilogram of hydrogen, equivalent to about 25% of the energy that the hydrogen would release in a fuel cell18.
Alternatives forms of transportation include converting hydrogen into hydrogen-based fuels and feedstocks, such as synthetic methane, synthetic liquid fuels and ammonia, which can make use of existing infrastructure for their transport, storage and distribution. However, the benefits of using these feedstocks have to be weighed against the costs of converting hydrogen into these products and then extracting it for end use. Many of the technology pathways to produce these substances are at very early stages and hence are costly, both in a monetary and an energy sense.
Ammonia is one of the most progressed options as a carrier for hydrogen. At the end point, hydrogen is released by passing the ammonia over a hot catalyst to give a mixture of residual ammonia, nitrogen and hydrogen. Australia’s national research agency, CSIRO, recently demonstrated a membrane technology that uses selectively permeable tubes of palladium and vanadium to extract a stream of hydrogen pure enough to be fed directly into a fuel cell. However, the technology is still to be demonstrated at scale – and the fact remains that ammonia production is very energy intensive.19
Narrowing the applications for hydrogen
Given the cost and technological advances required to deploy hydrogen across the energy landscape, many commentators recommend targeted investment in hydrogen applications that mitigates investment risk20 as opposed to widespread investment to achieve the so-called “hydrogen economy”.
Some commentators suggest that effort must be focused on hydrogen uses where cheaper technologies are not suitable and where low-carbon hydrogen can be deployed at scale and using existing infrastructure. In a paper titled “The Real Promise of Hydrogen”, Boston Consulting Group recommends governments focus investment on the use of hydrogen in industrial processes such as ammonia, steel and chemical manufacturing, and potentially heavy transportation. For example, certain heavy or captive vehicle uses like bus and truck fleets which have back-to-base or central refuelling depots, and accordingly don’t require comprehensive refuelling infrastructure necessitating multiple instances of storage and transportation, could provide the high utilisation and demand certainty needed for investment. In these areas, hydrogen as a fuel is likely to be viable in the near-term and pursuing development is less commercially risky.
Australia’s hydrogen strategy
On 22 November 2019, Australian state and federal energy ministers adopted a National Hydrogen Strategy based on that prepared by chief scientist Alan Finkel. The federal release announcing the adoption and funding of the Strategy stated “The Strategy sets a path for Australia to become a major global player in the hydrogen industry by 2030…… The Strategy looks to encourage the creation of ‘hydrogen hubs’ – clusters of large-scale domestic demand that will help to establish the skills and investment needed for Australia to develop a globally competitive hydrogen export industry.21”
In introducing the report, Alan Finkel writes:
“Energy is the foundation of civilisation. To meet future demand while avoiding the by-products of our current energy sources we have to find alternatives. These will be a mix of primary energy sources such as solar and wind electricity, and secondary energy carriers, of which hydrogen will make an essential contribution as a high-density, zero-emissions fuel.22”
The COAG energy council agreed to Finkel’s vision on the basis that hydrogen production is ‘technology neutral’, with federal Energy Minister Angus Taylor specifically blocking ACT Energy Minister Shane Rattenbury’s efforts to secure a commitment from the COAG energy council to produce hydrogen using only renewable energy sources. Federal resources Minister Matt Canavan said after the meeting that the government would be encouraging all forms of hydrogen creation, including production using brown coal23.
Globally, there are 19 other clean hydrogen strategies and roadmaps including initiatives in Japan, the Republic of Korea, China, Germany, Britain, the European Union and New Zealand. Among the key points that are common across these plans is that access to low-cost and low-emissions electricity is critical to the hydrogen export trade in the medium-term, along with the availability of carbon capture and storage24.
Many countries are focused on using hydrogen and accordingly demand is anticipated to be significant. Fewer countries are focused on producing hydrogen and Australia is perceived to be well-placed on this basis for the following reasons25:
- World’s best wind and solar resources – based on the quality of wind, solar and hydro resources alone, Geoscience Australia estimates about 11% of Australia could be suitable for hydrogen production, although the need for a large water resource reduces suitable land areas to 3% of Australia. This is calculated to more than cater for global hydrogen demand in 2050.
- Water – while the water required could be significant, it is not unusual when compared with other industrial uses and to be a major supplier of a large-scale global hydrogen industry in 2050 may require the equivalent of about one-third of the water used now by the Australian mining industry.
- Fossil fuels and carbon capture and storage – production sites would need to be close to coal and gas sources and to feasible subsurface storage for carbon dioxide. Assuming costeffective feasibility for carbon capture is achieved and assuming successful community engagement, such areas could potentially include the Carnarvon Basin; offshore Western Australia, the Gippsland Basin, offshore Victoria and onshore near the Cooper Basin and Surat Basin.
- Supportive industry and accommodating development finance facilities such as the Clean Energy Finance Corporation, the Northern Australia Infrastructure Fund and various state initiatives.
- Growing hydrogen expertise – Australia has more than 30 pilot projects developing capability in producing, storing, transporting and using hydrogen supported by Commonwealth, state and territory governments.
- Gas and renewable energy expertise – the Australian LNG industry has become one of the world’s biggest exporters of LNG and more recently Australia has become a leader in renewable energy deployment, principally with respect to household solar.
It is important to note that the National Hydrogen Strategy states that a successful hydrogen future relies on: achieving significant breakthroughs in technology; significantly reducing the costs of hydrogen production; and global demand not being substantively met by improving and costeffective existing clean energy technology together with hydroelectricity storage or rapidly emerging battery storage solutions.
Hydrogen as an investment proposition for NEW
Hydrogen has significant potential, as a low-carbon source of energy, but is clearly in the early stages of development. While the mandate of New Energy Solar would permit investment in this form of energy technology, we are unlikely to investigate investment propositions until green H2 is commercialized at economic rates sufficient to earn attractive risk-adjusted returns. At this stage hydrogen is the fuel of the future, but hopefully it won’t always be thus.