Dating back to the nineteenth century as an energy fuel, hydrogen has recently emerged as the Swiss army knife of the green transition. While neither an energy source nor a like-for-like fossil fuel alternative, the most abundant chemical element on the earth’s surface can be used to decarbonize hard-to-abate sectors, at least if produced from renewables.
Although it is today still predominantly produced using fossil fuels, the falling price of electrolysers and the concomitant falling price of renewables-generated electricity have introduced the green production of hydrogen as a bankable concept — where wind and solar are used to power electrolysis (splitting of water into oxygen and hydrogen).
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Tied to governments’ net zero targets, top-down policy directives have given way to a spate of moonshot green hydrogen investments as long-term policy commitment remains the enabling element for a technology whose competitiveness has yet to come of age. Starting with Japan in 2017, over 30 countries have issued hydrogen strategies, from the sustainable frontrunners in Europe to outsiders like Oman and Uzbekistan, which gives the industry a chance to avoid since its outset the overconcentration of production that has historically been the typical trait of oil and gas.
The overall value of the existing pipeline of announced projects in green hydrogen has reached an estimated $500bn through 2030, according to estimates from the Hydrogen Council.
Off the back of the hydrogen hype, accelerated by the pandemic, investors announced FDI projects into hydrogen produced from renewable energy for a record $25.2bn in 2021, from $8bn in 2020 and $3.3bn in 2019.
But proof of concept has yet to come through. Beneath the hype, there is not one utility-scale green hydrogen project that serves as an example of how green hydrogen works in practice. Above all, there is uncertainty over what the future demand for hydrogen will be from industrial users or hydrogen fuel cell developers and what infrastructure will be needed to transport it. The question of how green hydrogen production can be certified internationally also needs to be addressed. This is all set in a context where the cost of producing green hydrogen (renewable-fed electrolytic hydrogen) is still high, mainly owing to the cost of equipment and to the large amount of energy needed per kg of hydrogen produced. Nevertheless, economies of scale driven equipment cost reduction and cheaper and cheaper renewable energy could bring green hydrogen on par with fossil originated hydrogen well before 2030 and below 1$/kg by 2050.
Besides, at pixel time the current volatility in the gas market caused by the Ukraine war is already weakening the competitiveness of blue hydrogen vis-a-vis green hydrogen.
Green hydrogen heats up in 2020-2022
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Born at the heart of the renewable energy boom, green hydrogen has emerged as a global phenomenon from the outset – at least with regards to deployed capacity, while a handful of countries, mostly in Europe, are clear frontrunners in the manufacturing of electrolysers. Of the total $25.2bn invested in 2021, 35% flowed into Europe, 24% went into Latin America and the Caribbean, 22% went into Africa, 14% into the Middle East and 5% went into Asia-Pacific.
In terms of single countries, the emerging contours of the green hydrogen map tell a tale of two business models. Some countries are pursuing a capital-intensive, exports-driven model that borrows a leaf from the oil and gas book; others are adding the green hydrogen component to their ongoing renewable energy plans to meet domestic demand.
Big ticket, exports-driven projects propelled the likes of Brazil, Saudi Arabia and Namibia at the top of the list of countries that received the highest level of announced FDI into green hydrogen. Between 2016 and 2022, foreign investors announced green hydrogen projects worth $6.1bn in Brazil, and $4.4bn in Namibia.
These inflows are heavily, if not entirely, weighted towards single utility-scale green hydrogen projects, like Australian company Enegix’s $5.4bn, 3.4GW project in the port of Pecem, Brazil; and Germany’s Hyphen Hydrogen Energy’s $4.4bn, 2GW bet on Namibia. Both the state government of Ceara’, where Pecem is located, and the national Namibian government are aiming to take advantage of their wind and solar resources to create green hydrogen hubs.
The hydrogen hype has carried into 2022 with several countries now willing to leapfrog the green transition by going straight into renewable energy-based green hydrogen production. In Morocco, Total Eren announced in 2022 that it will invest $10.3bn in a hydrogen and green ammonia project in the south of the country with a 10GW capacity using wind and solar. Even African countries that have been at the margin of energy markets and global value chains are willing to seize the green hydrogen opportunity. Mauritania, for example, signed an MoU with Australian developer CWP Global to develop a green hydrogen project that could mobilise as much as $40bn, although lack of details still make it a very far-fetched outcome.
Beyond large-scale, exports-oriented projects, whose feasibility and business model have yet to be tested in real life, several developed countries with major domestic markets and RES capacity have launched green hydrogen strategies balancing domestic needs with exports opportunities or imports needs.
Australia published a National Hydrogen Strategy in 2019, in which it outlined its ambitions to create domestic demand for hydrogen so as to develop its exporting capabilities. The Australian government has also signed deals with both Japan and South Korea to export hydrogen. The Australian Renewable Energy Agency predicts that demand for hydrogen exports could surpass 3 million tonnes per year by 2040, worth $10bn annually.
Overall, foreign investors announced 13 green hydrogen projects in Australia worth $1.9bn between 2019 and 2022. In 2019, Neoen, a subsidiary of French Total, kicked off feasibility studies for a $500m ($355.1m) hydrogen superhub at the Crystal Brook Energy Park in Australia. It will include up to 125MW of wind and up to 150MW of solar PV generation, up to 130MW of lithium-ion battery storage capacity. Other investors have added to their existing operations. In 2021, UK-based Eco Energy World is investing AU$500m ($388.4m) into a 200MW hydrogen plant at its solar plant in Raglan in Australia. It expects to produce 33,000 tonnes of green hydrogen annually.
With support from the federal and state governments, Australia has come to be one of the key players in the global pipeline of green hydrogen projects, according to consultancy Rystad. Australia sits alongside Western Europe, Central Asia, West Africa and the Middle East as the top five regions by planned green hydrogen capacity.
On the other hand, the EU is also keen on adding green hydrogen to the energy mix, yet it will not be totally able to rely on internal production.
Spain and Germany have led the way in green hydrogen developments in Europe, while 22 EU members and Norway signed a manifesto in 2020 which committed to launch ‘important projects of common European interest’ (IPCEIs) in the hydrogen sector.
In 2020, Spain released a hydrogen roadmap in which it laid out that it is targeting 4GW of electrolysers by 2030 – a tenth of the total targeted by the EU before REPowerEU re-targeting. It also outlines that Spain is betting on boosting the hydrogen value chain through the creation of technology clusters. It counts five publicly funded clean hydrogen projects and nearly 30 others. Foreign investors have taken note with the country tracking $4.1bn over 17 projects in 2021.
In 2022, a consortium of 33 companies and organisations, led by Spanish oil giant Repsol, has invested €3.2bn ($4.4bn) to target 500MW of green hydrogen capacity by 2025 and 2GW
by 2030.
As the beating heart of European industry, Germany was early to present a hydrogen strategy in 2019 – even before the EU – and has even bigger ambitions than Spain. It has set aside $10bn to develop electrolyzers and plans to build a production capacity of 5GW by 2030. In 2021, the German government announced it will invest €8bn into large-scale hydrogen projects.
But as explained above, Germany and the EU are also aware that they cannot domestically meet all of their internal demand at competitive costs. In December, the European Commission approved a €0.9bn ($1bn) German scheme to support investments in the production of renewable hydrogen in non-EU countries to then be imported and sold in the EU.
Without enough resources to domestically meet the internal demand at a competitive cost, it is possible that part of the green hydrogen produced in geographies like Africa is sent to Europe. In its 2020 Hydrogen Strategy, the European Commission targets 40GW of installed renewable hydrogen electrolysers within the EU by 2030, and another 40GW in what it calls the “EU neighbourhood” with export back to the EU. A large proportion of this neighbourhood is expected to be in North Africa, due to the latter’s geographical proximity to the bloc, the availability of excellent renewable resources and, in the case of Morocco, the already well developed renewable market.
Even with imports need to be met, it is still a glass half full for Europe as the region is the world’s main supplier of electrolysers. As it stands, the region has 40% of global installed capacity in the production of electrolysers. Global capacity of electrolysers doubled over the previous five years to reach just over 300MW by mid-2021, according to the IEA, and this could reach up to 54GW by 2030.
The geography and level of feasibility of green hydrogen developments will heavily hinge also on the availability of its main production input – water. A 2021 Rystad report points out, the locations of planned green hydrogen projects, like Australia, Saudi Arabia or Namibia, are to a large extent in areas constrained by water shortages, meaning that an additional desalination market needs to be created as water is the main input of electrolysis. In such instances, even in regions far from the coastline, water transport could be considered in addition to desalination. This will of course increase the cost of water supply, but it will still represent a relatively small share of the total hydrogen production cost, reaching levels as low as $0.05/kgH2 and representing 1-2% of the energy consumption of the electrolyzer.