Sep 21

Renewable Hydrogen Takes Center Stage in New EU Strategy

Stephen Bierman
Aug 5, 2020

Renewable hydrogen received a boost as a carbon-free fuel after a European Union strategy outlined as much as $9 billion in investment in its development over the next five years. This may be a first step towards overcoming the fuel’s notorious cost problem.

The strategy did not detail who exactly will be making these investments or further specifics. The EU has sought to fight global warming by reducing greenhouse gas emissions and pledging to become carbon neutral by 2050. EU subsidies have driven a boom in wind and solar development over the past decade, and hydrogen’s future is seen in the same light.

The cost of hydrogen

Hydrogen is the most abundant chemical element on earth, yet it only occurs naturally in compounds. Producing hydrogen requires breaking those bonds. Current industrial production of hydrogen mainly relies on steam reforming natural gas. However, a more expensive method involves using an electrical current via an “electrolyser” to separate the hydrogen. The price of that process may determine the future of global energy use.

An “electrolyser” is important because it can use wind or solar generation to produce the hydrogen rather than natural gas, which is a fossil fuel. The product, a fuel which resembles gasoline, solves reliability problems with wind or solar generation, which rely on the elements. It is also carbon-free throughout the production and use cycle.

In many ways, hydrogen production is an analog to battery storage as a means to convert electricity generation (increasingly renewable electricity) into a form that can be used by the consumer. Regarding battery storage, Elon Musk’s Tesla, for example, has been quick off the mark, marrying increased battery performance with automotive quality.    

The EU strategy includes the formation of a Clean Hydrogen Alliance, which specifically builds on the success of the European Battery Alliance in mobilising investment. While the EU aims to achieve its environmentally critical goals, it will face an uphill battle on cost as traditional fossil fuel production enters a period of fierce competition.

Hydrogen vs. hydrocarbons

The world’s top three oil and gas-producing nations – Saudi Arabia, Russia and the United States – have all idled production after the Covid-19 crisis led to a collapse in demand. The result has seen the world supplied with energy at some of the most consumer-friendly prices in decades. And given the scale of the global oil supply glut, that pricing may continue for some time.

The initial hydrogen plan is not going to replace hydrocarbons. The EU strategy seeks to achieve at least 6 GW of renewable hydrogen “electrolysers” in Europe by 2024, and further envisions 40 GW of renewable hydrogen electrolysers by 2030. The scale of success beyond that will depend on technological abilities to reduce costs.

Estimated costs today for fossil-based hydrogen are around 1.5 €/kg for the EU. This number is highly dependent on natural gas prices, and disregards the cost of CO2. Estimated costs today for fossil-based hydrogen with carbon capture and storage are around 2 €/kg, and 2.5-5.5 €/kg for renewable hydrogen, according to the EU document. But the strategy also envisions that the cost of creating electrolysers will plummet in future decades.

Promising projects

One new project working in that direction is a Danish partnership to develop sustainable fuel that includes Copenhagen Airports, A.P. Møller-Maersk, DSV Panalpina, DFDS, SAS and Orsted. The group seeks to develop a renewable hydrogen as fuel production facility with a 10 MW electrolyser as soon as 2023. The project sees potential capacity to 1.3 GW by 2030, enough to supply 250,000 tonnes of fuels annually.

The project aims to be powered by an offshore wind farm, and in initial phases, will fuel buses and trucks. The project could potentially replace 30% of fossil fuels at Copenhagen Airport by 2030, Orsted said in its statement.

Elsewhere, CrossWind, a consortium comprising Shell and Eneco, has announced plans to build and operate the third unsubsidised wind farm in the Dutch North Sea, in the Hollandse Kust (noord) Wind Farm Zone (HKNWFZ).The project will potentially include building facilities to produce hydrogen as fuel.

The EU envisions renewable hydrogen fuel potentially reaching air, sea, rail and automotive transport, as the world experiences dynamic shifts in energy use. The scale of wind and solar production in place today was unimaginable 10-15 years ago. Wind now produces 15% of Europe’s power and even has subsidy-free auctions for generation projects.

Europe’s association of wind producers has thrown its weight behind renewable electricity-based hydrogen, calling its role “crucial” in creating a green, climate-neutral, economic recovery, according to a July press release.

And while Tesla’s battery-fueled stock market gains have been hard to miss, producers in the hydrogen chain have also experienced a mini boom. The share prices of 11 firms, including Canada’s $4.6-billion Ballard Power Systems, Britain’s $1.8-billion ITM Power and Norway’s $3.3-billion Nel, have reportedly risen by an average of more than 300% over the last year, according to a Reuters report.

Investors still face the question of which part of the industry to back, however. ITM Power, Nel, Siemens and many others make the electrolysers that supply the raw hydrogen. Ballard Power, along with the U.S.-based Bloom Energy and Britain’s Ceres Power, develop different types of fuel cell which generate electricity from hydrogen. The existence of various entry points for investment into the hydrogen chain will create a need for more analysis and expertise in this promising sector.

The successor to wind and solar energy

While it remains vague on investment, the EU strategy doesn’t lack vision or scope. Analysts estimate that clean hydrogen could meet 24% of global energy demand by 2050, with annual sales in the range of €630 billion, according to the EU document.

From now to 2030, investments in electrolysers could range between €24 and €42 billion. In addition, over the same period, €220-340 billion would be required to scale up and directly connect 80-120 GW of solar and wind energy production capacity to the electrolysers to provide the necessary electricity. Investments in retrofitting half of existing plants with carbon capture and storage are estimated at around €11 billion. In addition, investments of €65 billion will be needed for hydrogen transport, distribution and storage, as well as hydrogen refuelling stations, the EU said in the document.

That’s a big bill. It will require significant mobilisation in the investment and corporate community in addition to subsidy guarantees from government budgets. Given that all have been hit hard by the Covid-19 pandemic, it’s hard to imagine something of scale happening very fast. That said, the EU’s declaration of support and strategy shows determination on behalf of the legislative body. And this is not to be ignored.

If the gains in wind and solar generation of the past decades are to be taken as pretext, hydrogen has a bright future. Indeed, in most instances renewable hydrogen already factors into earlier EU-led carbon reduction strategies. In the wind and solar industries, advances in efficiency and price reduction have gone hand in hand with development. Hydrogen looks like it will have the opportunity for the same.

Stephen Bierman

Stephen Bierman is a finance and energy reporter with over 15 years of experience, including at Bloomberg News and Energy Intelligence.

Tweets at: @StephenBierman1

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