Transition to a hydrogen-based energy system is environmentally and socially desirable, and technically practical. The key hurdle to overcome is making it affordable, says chief energy economist Guy Doyle.
With renewable energy now competing on price with fossil fuels, and costs still falling, it is realistic to envisage a near future in which wind and solar photovoltaic electricity generation has grown so much that supply regularly exceeds demand. The key challenge is to reduce the cost of converting power to hydrogen, for storage and transport.
For investors, the decision to back hydrogen comes down to the bottom line. When the hydrogen system has developed scale and is mature, it is expected to be relatively cheap and efficient, but it needs a push to get there. Like all new technologies, at present the infrastructure is expensive to develop and roll out – and new or repurposed assets are required across the whole hydrogen cycle.
Affordable alternative
‘Ambitious’ development of an extensive hydrogen system across the European Union over the next decade would cost just €8bn a year, the European Commission estimates in its Hydrogen Roadmap report. To give this scale, €8bn a year is equivalent to only a third of the renewable feed-in tariffs (FiT) paid in Germany. It is less than 10% of the costs associated with the energy transition taking place in Europe, as estimated by the International Energy Agency (IEA). And it is less than 5% of the total annual investments in energy and automotive assets in Europe.
Dutch gas company, Gasunie, and grid operator, TenneT, produced a joint 2050 zero-carbon energy plan in 2019, as required under Dutch law. It weighs and costs different options it could pursue, and points to wholesale adoption of hydrogen from surplus and low-cost renewables as the optimum means of achieving its goal.
Value varies by sector
The value of hydrogen energy in mobility is currently greater than in power and heating because it competes head-on with gasoline and diesel. At present, electric vehicles have the technological and commercial lead over hydrogen vehicles, but it is important to see the development of low and zero carbon transport as an opportunity for both.
Hydrogen for heating has a low value due to the dominance of natural gas, which is surprisingly efficient in domestic boilers. With tightening carbon legislation and the requirement to curb emissions, that will change.
Low carbon heat from hydrogen will become more valuable than low carbon power because there are few cost-competitive alternatives: electrifying heating systems is very expensive, while the UK’s National Grid recently pointed out that installed generating capacity would need to increase six-fold if peak winter heating demand were to be met by the power grid. Hydrogen is a practical replacement for natural gas, providing necessary modifications are made to networks and appliances over a transition period. The EC’s Hydrogen Roadmap says that even with current technology, blending hydrogen at modest concentrations (~20%) would not increase gas prices substantially.
Plentiful renewable electricity generation means that hydrogen is unlikely to compete on price as a primary power source, but it will come into its own for back-up power (for example when wind and solar experience several successive days of low output) and for providing inter-seasonal storage.
In the medium term, the ability to convert surplus power to hydrogen as part of a joined-up energy system offers commercial advantages to renewable energy producers. The frequency at which surplus renewable power is supplied either free or negatively priced has been rising. On 24 March 2019, negative system prices in the UK’s balancing mechanism occurred for 13 consecutive settlement periods, due to low electricity demand and high output from wind, combined cycle gas turbines and biomass power stations. The incidence of negative pricing is expected to increase well into the 2020s which means that there should be a lot of cheap, green power available for conversion to H2 that would otherwise go to waste. Ultimately, the increasing contribution of demand-side response, smart electric vehicle charging, increased electricity interconnection capacity and hydrogen electrolysers themselves will soak up any surplus of renewables. This will have a levelling effect on the price of electricity from different renewable and storage sources.
Falling costs
Hydrogen technology has been in development for decades. Policy has supported additional funding, accelerating the pace at which solutions and applications have become market-ready. However, more incubation investment will be required to advance next generation electrolysis, for example, while financial support would support evolution of the energy market to achieve significant cost reductions from economies of scale, providing the incentive for businesses to invest in and sustain the hydrogen system, as has been the case with renewables.
At present, hydrogen production from fossil fuels is commercially viable only at small scale (mostly for industrial uses), not for the massive volumes required in heating or power sectors. Dr Klaus-Dieter Borchardt, director of the internal energy market at the European Commission, sees projects like the EU-backed H2Future, being developed by a partnership of Siemens, Voestalpine and others, as key to developing awareness and confidence – and bringing costs down. Danish energy firm, Ørsted, is to establish green hydrogen projects linked to the company’s Dutch offshore wind farms. UK transmission network operator Cadent is trialling blended hydrogen/natural gas supply, linked with carbon capture and storage from hydrogen production. Hydrogen fuel cell and direct combustion taxis, buses and light freight vehicles are now running on the streets of London and other cities worldwide. The first hydrogen trains have been in service in Germany since summer 2018.
There are real cost issues to address. One is the ability of hydrogen to carry energy, which is about a tenth of methane by volume. It is difficult to compress hydrogen, so there would be much less energy in gas grids and appliances would need to be far more efficient than today. But the nascent hydrogen industry is confident of resolving this these challenges.
Meanwhile, existing gas storage, transmission and distribution infrastructure can be repurposed for hydrogen, reducing expense and stranded assets. A transition period will enable the system to be upgraded in step with asset maintenance and renewal cycles, in many instances. Worries that hydrogen embrittles steel and cast-iron networks are overblown, particularly at the low 350-700bar pressures for domestic gas supply. Cadent has obtained consent from the Health & Safety Executive to mix 20% hydrogen into the natural gas piped to customers in the area of north-east England covered by its HyNet trial. For greater hydrogen concentrations, some pipelines may have to be replaced, but it is a matter of assessing the metallurgical response.
Investors on the move
While policy and economic development work is needed to speed change, the transition towards a renewables-hydrogen system is benefiting from the increasing number of investors acting on traditionally non-commercial priorities. A quarter (or $20trn) of the world’s professionally managed investments take account of environmental, social and governance criteria. Fossil fuels increasingly do not meet them. Meanwhile, investors and insurers are looking to reduce their exposure to climate risks. The risk premium for holding hydrocarbon stocks is rising with every extreme weather event.
Security service
A comprehensive hydrogen system, encompassing domestic and industrial power and heat, plus transport, would support full energy security. This would be achieved by building up stores of hydrogen to ride out inter-seasonal fluctuations in renewable energy output, reducing reliance on fossil fuels imported from abroad.