Green hydrogen (H2) has become a key topic on the agenda of policy makers and industrial players, driven both by the global decarbonization push and the commercial opportunities that it could bring.
Although ambitious targets have been set and multiple projects announced, the road toward the green H2 economy is contingent on several critical conditions across the policy, supply, infrastructure, and demand front, which we explore in this Viewpoint.
The case for green hydrogen
Ever since the Paris Agreement in 2015, there has been an increased focus on decarbonization globally. Green H2 has been identified as a key technology to bridge decarbonization ambitions and, in particular, support the transition toward a greener future in hard-to-decarbonize sectors.
To this end, over 45 countries have enacted ambitious policies and plans to boost hydrogen use, which has generated myriad commercial leads across the globe and driven interest similar to the early days of solar PV.
The H2 economy is touted to become a US $700 billion economy by 2050 with green H2 expected to take a dominant share. (Source: Bloomberg).
A diverse set of players are currently repositioning and exploring opportunities in the green H2 paradigm, and many investments are underway with a plethora of projects being announced monthly across the globe.
Despite this momentum, the path to green H2 is not straightforward. Many requirements are needed to enable successful deployment.
In this Viewpoint, we investigate the conditions necessary for successful deployment across four value chain elements: (1) steering policies and regulations, (2) competitiveness and reliability of supply, (3) availability of adequate transport infrastructure, and (4) demand pull.
Steering policies and regulations
Supranational, national, and regional policies supported by adequate regulatory and incentive instruments are at the cornerstone of the green H2 economy and imperative in the short to medium term to establish conditions for success and to fast-track deployment given the cross-sectorial nature of hydrogen applications and the need for economic-financial support in the short term.
In fact, while most supranational and national H2 policies initiated by the EU, Japan, Germany, Australia, and other countries are clearly targeting the decarbonization of their economies, there are at least two additional reasons why they might advocate for green H2.
First, it offers an opportunity for economic development and energy supply diversification; KSA as well as UAE are examples of diversification away from hydrocarbon dependency.
The other objective is to maintain or achieve technological leadership with an associated positive GDP along with employment impact; one such example is Germany, which might be willing to reaffirm its technological supremacy in the electrolyzer manufacturing business.
A key reinforcing element for the green H2 economy is foreign policy, and, in particular, the formation of a synergic, bilateral, or multilateral agreement, such as those observed recently.
In 2021, Germany and KSA announced a strategic alliance on green H2 development to collaborate on the generation, processing, use, and transportation of clean hydrogen for the benefit of both countries.
This partnership will help Germany maintain its technology leadership as well as attain targets set in its policy.
As for KSA, the alliance will help bolster it as a global producer of green H2. Another example is the Memorandum of Understanding signed last year between Singapore and Australia to share knowledge and collaborate on new low-emissions technology.
On top of traditional subsidies, demand-side measures, and green procurement policies, several regulatory/incentive instruments are available (see figure below), such as the carbon tax and emissions trade system (ETS); research, development, and innovation (RDI) funding; green H2 certification; and contract for differences (CFDs):
o Carbon taxes and ETS remain a key lever for deployment of green H2 as this bridges the economic gap with grey H2.
Recently, EU ETS carbon price reached its highest level (over 50 EUR per metric ton), driven by investors that foresee an increase in demand in the long term. (Source: Bloomberg).
The EU also plans to bolster its current ETS mechanism with a carbon border adjustment mechanism to eliminate unfair advantage outside Europe, creating more advantage for green H2.
o RDI funding is another instrument being consistently deployed across developed/developing markets with the objective of stimulating innovation in H2 technology. For example, A*STAR in Singapore offers a low-carbon energy R&D fund with one thematic area focused on H2 supply, storage, and downstream usage.
oThe development of a green H2 certification scheme provides a guarantee of origin for hydrogen and its derivatives. Such certification is important as offtakers seek to develop zero carbon products due to increased environmental awareness and regulatory pressures.
Certification programs are being discussed at policy levels in Europe and Australia and are expected to roll out soon.
o CFDs, employed previously with wind farms, are yet another tool that can accelerate the deployment of H2 supply facilities. In Germany, this instrument is being discussed in conjunction with the concept of a market maker (MM).
The idea is basically to have an entity, the MM that tenders longterm supply contracts on one side and demand contracts on the other. CFDs will then be used to compensate the difference between the two in order to help fast-track the creation of a global green H2 market.
Competitiveness and reliability of supply While policies and regulations remain a key consideration for successful deployment of green H2, investing into green H2 supply is contingent on three critical factors: (1) cost-competitive production of green H2, (2) ability to deliver H2 to customers in a reliable manner, and (3) supply risk hedging to increase willingness of investors to embrace the embryonic green H2 opportunity (see figure on right).
The production of green H2 is a high energy-intensive process. Roughly, each kg of green H2 produced via electrolysis requires 50 kWh of electricity. This translates to a cost structure where electricity often exceeds 60% of the production cost with CAPEX representing 30% and other OPEX representing the rest.
Securing a location with access to an affordable, abundant, and stable feed of electricity from renewable sources directly or through an existing nearby grid infrastructure is key.
This is often a bottleneck. The availability of a dual source of renewable energy for large periods enhances feasibility. While many locations have an abundance of a single source of renewable energy, not many can offer more than one to provide electricity to run an electrolyzer plant at a 50%+ capacity factor, which is often the minimum requirement to ensure commercial attractiveness even in areas with low renewable electricity prices.
One example is NEOM in KSA, where the joint venture of NEOM, ACWA Power, and Air Products is developing the largest GW-scale green H2 plant in the world, capitalizing on its access to abundant and inexpensive renewable energy.
The availability of both solar and wind renewable energy in NEOM is expected to yield an estimated combined electricity cost of US $2-$3 ct/Kwh, which will drive the total cost of producing green H2 to the vicinity of $2/kg.
Another example, which benefits from its close vicinity to the European market, is Morocco, with its abundance of both solar and wind.
Another important cost driver is CAPEX, which is expected to continue decreasing from the current $1,000/kW for commercial scale alkaline technology electrolyzer plants and $1,400/kW for proton exchange membrane electrolyzer plants. (Source: IRENA).
The expected cost decrease will be from both learning (in the range of 5%-10% by 2030 due to innovation and standardization) and scaling with GW-scale plants expected to yield additional scale economies of over 10% compared to the 100-1,000 MW plants.
Another important condition for successful deployment of H2 is the reliability of supply (i.e., the ability to provide continuous, uninterrupted supply to customers).
For many applications, H2 will be in constant demand mode, with no tolerance for supply interruptions, which may create heavy economical losses on the demand side in industries like chemicals, petrochemicals,
Competitiveness and reliability of supply
While policies and regulations remain a key consideration for successful deployment of green H2, investing into green H2 supply is contingent on three critical factors: (1) cost-competitive production of green H2, (2) ability to deliver H2 to customers in a reliable manner, and (3) supply risk hedging to increase willingness of investors to embrace the embryonic green H2 opportunity.
By Arthur D. Little