If you’ve been following developments in the global economy and financial markets this year, it would be an understatement to say that a lot has happened. With the world in disarray due to the global pandemic, most of us have probably been focused on the here and now, trying to figure out how bad the virus will get, when a vaccine might be available, how much economies will contract, how many people will lose their jobs, and what will happen to our investments. But with all the focus on what will happen today, it’s likely many have missed the European Union’s plan for a hydrogen-fueled tomorrow.
After announcing the €7 trillion EU Green Deal last December that aims to achieve a climate neutral economy by 2050, the EU Commission doubled-down on their commitments with the €750 billion Next Generation EU recovery fund to mitigate the negative economic shock of the pandemic. Together with the long-term EU budget for 2021-2027, this brings the total financial firepower of the EU budget to €1.85 trillion over the next seven years, with significant provisions for green investments. But what followed in June to little fanfare was the EU Hydrogen Roadmap, which outlines plans to make “green” hydrogen investment a cornerstone of European economic development for decades to come.
Hydrogen – A Primer
Hydrogen is not only the most common element in the universe, it also serves as an energy carrier, capable of delivering and storing a tremendous amount of energy. It serves as an essential feedstock for a range of industrial processes. In the EU, total demand for hydrogen in 2018 was 8.3 Mt, led by the oil refining sector (3.7 Mt or 45% of demand) and the ammonia industry (2.8 Mt or 34%), ammonia being a key feedstock for fertilizer production. Together with its uses in other chemical products, these industries are responsible for around 93% of total demand for hydrogen in Europe.
Currently, the production of hydrogen is anything but green. The majority hydrogen is produced using fossil fuels, with less than 0.7% coming from fossil fuel plants equipped with carbon capture use and storage (CCUS) or from renewables. Production using fossil fuels is done through steam methane reforming, a process in which steam (produced using natural gas turbines) reacts with hydrocarbon fuel to produce hydrogen and CO2. It’s estimated that in 2017, the hydrogen production industry was responsible for 830 Mt of CO2 emissions globally, more than the carbon footprint of the German economy (797 Mt) or the global shipping industry (677 Mt).
One way that these emissions may be mitigated is through the production of “blue” hydrogen, i.e. the same steam methane reforming process with the added element of using CCUS technology to prevent the resulting CO2 emissions. This process, however, still requires natural gas, for which the EU is entirely reliant on from imports and is subject to price fluctuations, and is dependent on the development of cheap and effective CCUS to make it economically viable.
The other path to low-carbon, “green” hydrogen is through the process of electrolysis, which uses electricity from renewable sources to split water into hydrogen and oxygen. What’s the catch? The process requires a lot of electricity from renewable sources. Estimates vary, but power demand for electrolysis alone could double European electricity consumption by 2050 in order to meet all the end demand.
Source: Ballard Power Systems
Apart from these already significant hurdles to adoption, neither “blue” nor “green” hydrogen are cost-competitive against fossil fuel-based, “grey” hydrogen today. Estimated costs for “grey” hydrogen are around 1.5 €/kg for the EU, but are highly dependent on natural gas prices and disregard the negative externality costs of CO2. Estimated costs today for “blue” hydrogen are around 2 €/kg, while “green” hydrogen 2.5-5.5 €/kg.
Despite the current situation, the outlook for the future is positive. On the policy side, proactive measures to tax CO2 emissions will help narrow the cost gap. And as with any new technologies, prices can be expected to decline thanks to economies of scale and further developments in streamlining production and improving efficiency. The costs of both wind and solar power have declined significantly over the past decade, to the point that solar power and onshore wind are now the cheapest sources of new-build electricity generation for at least two-thirds of the global population. The same can be expected for low-carbon hydrogen, with electrolyzer costs having already been reduced by 60% in the last ten years, and expected to halve in 2030 compared to today. In regions where renewable energy is cheap, like solar power on the Iberian Peninsula, “green” hydrogen should be able to compete with “grey” hydrogen by 2030.
Given this outlook, the potential for low-carbon hydrogen is enormous. Because of its versatility and ability to act as an energy carrier, hydrogen has the potential to help decarbonize sectors of the economy that cannot be electrified and require alternative solutions.
For one, hydrogen’s use as a feedstock for ammonia production is absolutely essential to the global economy and life as we know it. Ammonia’s main use as a nitrogen fertilizer has been crucial to the increased productivity of agriculture over the second half of the 20th century. Apart from increased automation of farmland equipment, it is the main advancement that has freed people from subsistence farming and allowed increasing urbanization and economic development that has changed the way people live across the world. Unfortunately, the process also contributes greatly to CO2 emissions, but here advancements in low-carbon hydrogen production could be a true game-changer.
Heating, particularly here in Northern Europe, is also something we cannot live without, but which is largely dependent on the burning of natural gas. Apart from better insulation and improved efficiency or using geothermal energy where it is available, there is only so much that can be done to limit the need for gas for heating, which accounts for nearly 30% of global energy-related emissions. But hydrogen might have a promising role to play, as it can be blended with natural gas for use in the existing energy infrastructure. While this can’t decarbonize the sector entirely, it’s a step in the right direction.
In the power sector, hydrogen can serve a number of important functions. Absent the development of new nuclear reactors, for which there is little public appetite, and the accelerated development of tidal power systems, which are ultra-reliable but currently five times more expensive than wind power, green electricity generation will largely come from solar and wind power. Problematically, peak solar production occurs during the middle of the day and during summer months (when it’s not cloudy), exactly when demand for electricity is at its lowest. And wind, although generally more powerful at night, is also variable and therefore is not always a dependable source to meet a stable and growing demand. This problem of intermittency is one of the main drawbacks of renewable energy. Batteries for their part can provide electricity storage to balance this variability, but only for a few hours at best. Hydrogen on the other hand, can store this energy over weeks, months or even years and then be converted back into electricity using hydrogen fuel cells, with zero emissions (apart from water). As a result, it can be used for off-grid electricity systems (e.g. backup generators for hospitals, data centers, etc.), balance electricity systems and shift oversupply of electrical energy seasonally and geographically.
Fuel cells powered by hydrogen also have important use cases in the transportation sector. While battery-powered passenger vehicles and micromobility options like e-scooters will continue to gain traction, there are limits to the application of batteries due to their weight-to-power ratio. Hydrogen fuel cells just make more sense for heavy-duty vehicles that travel longer distances like buses, trucks, trains, ships and even airplanes.
The EU 2030 Hydrogen Strategy
With its commitments to become carbon neutral by 2050, the EU has set out lofty goals that will require a drastic reconfiguration of the continent’s energy systems and across all industries of the economy. And at the heart of this strategy is the deployment of green hydrogen. From the current installed electrolyzer capacity of 0.1 GW, the EU plan calls for the build-out of 6 GW of hydrogen electrolyzers by 2024 and 40 GW by 2030, as well as an additional 40 GW in neighboring countries. In the long-term, the working assumption is to have 500 GW by 2050.
In the first phase through 2024, the EU plans to decarbonize existing hydrogen production through the installation of at least 6 GW electrolyzers. This hydrogen would then mainly be used to lower the carbon footprint of the oil refining sector and in the ammonia industry.
In the second phase through 2030, EU targets the installation of least 40 GW of renewable hydrogen electrolyzers by 2030 (plus 40 GW in neighboring countries) to be able to utilize up to 10 million tons of renewable hydrogen. In this phase, hydrogen is expected to be increasingly used in industrial processes (e.g. steel) and in transport (e.g. trucks, trains, shipping). Hydrogen would also start playing a role balancing a renewable energy electricity system by providing flexibility and by being used for daily/seasonal storage.
Rolling out this “green” hydrogen infrastructure won’t be cheap. The strategy targets total investments of up to €400 billion through 2030, with €47 billion earmarked for electrolyzers alone. Looking further out to 2050, an estimated 1,000-1,300 GW of dedicated renewable energy capacity will be need to meet the power demand required for 500 GW of hydrogen electrolyzers, equivalent to a €1.4 trillion investment just in these renewable energy systems. A study released by ten of the largest European gas transport system operators also estimates €27-€64 billion of investment needed by 2040 to reconfigure gas pipelines to create a dedicated hydrogen infrastructure to move hydrogen across Europe.
Will this be easy? Absolutely not.
Will many of the targets laid out in the plan likely not be met? Almost certainly.
Is there a clear roadmap for how this hydrogen revolution will actually take place? Not at all.
What is clear though, is that there will be a lot of money spent and fortunes made in financing Europe’s green hydrogen revolution. When economic needs for new technologies appear, particularly when backed by government incentives to adopt those technologies, investment capital quickly finds its way to financing these technological shifts. Add to that the growing investor demand for sustainable investments and greater scrutiny of the worst environmental offenders and you have what could be one of the most tectonic shifts in investment capital in history.
Next week, I’ll dive deeper into some of the companies that might stand to benefit the most as this shift occurs.
 Hydrogen Europe, 2020
 International Energy Agency, 2019