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Some markets are more prepared than others for the hydrogen revolution

As more countries publish net-zero plans, hydrogen is taking centre stage to help achieve carbon targets. The EU and the UK have set targets for net-zero emissions by 2050, which involves switching energy consumption across the whole economy to zero-carbon sources. Hydrogen could play an important role in reducing emissions particularly in hard-to-abate sectors such as industry, heating, and heavy-duty transport. Research based on analytical modelling of hydrogen economics suggests that Europe’s appetite for hydrogen will grow eight-fold from today’s 300 terawatt-hours (TWh) to up to 2,500 TWh by 2050. There will be significant demand for low-carbon hydrogen in industry, with this alone doubling to 700 TWh by 2050. In the 2030s and 2040s there is significant potential for hydrogen use in transportation (particularly in heavy-duty vehicles such as buses, trucks, trains and potentially planes) and heating (replacing natural gas). Hydrogen is already used extensively in industrial processes such as ammonia production and refineries, with European demand concentrated in Germany, the Netherlands and France. However, this hydrogen is produced from fossils fuels, mainly natural gas and coal, producing significant greenhouse gas emissions. In this case, where the CO2 from the generation is not captured it is known as grey hydrogen. Though there are numerous ways of producing low-carbon hydrogen, the two most visible and promoted types are “green” hydrogen, which uses renewable electricity in electrolysers, and “blue” hydrogen, which involves reforming natural gas and capturing the CO2 by-product. Today, “grey” hydrogen is the cheapest type of hydrogen, but the costs of green and blue hydrogen could fall significantly. Making blue and green hydrogen more cost-competitive to grey hydrogen will be enabled by reducing the costs of carbon capture and storage (CCS) technology, and increasing renewables investment, respectively. At the same time, government subsidies for green and blue hydrogen, as well as incentives and penalties geared towards decarbonising overall, will further increase the competitiveness of low-carbon hydrogen with its fossil fuel incumbents. Currently, the cost of blue hydrogen is lower than green hydrogen, largely due to the high infrastructure cost of electrolysers. However, as electrolyser technology scales, capital costs are expected to drop quickly. This is similar to the drop in costs seen in solar and wind technology in the past 20 years. On top of this, the cost of electricity will also fall. Beyond 2030, flexibly-operated electrolysers could produce green hydrogen and undercut blue hydrogen prices on a subsidy-free basis. Beyond this, green hydrogen has auxiliary benefits for the power market. Green hydrogen can lift power prices during periods of high wind or high solar generation, as well as absorb solar and wind power that would otherwise be curtailed, which improves the profitability of these assets. Green hydrogen has the greatest potential in a country with a high proportion of renewables or nuclear generation and significantly low-cost power generation. France, Spain and Portugal look likely to emerge as leaders in green hydrogen production, facilitated by a rapid and extensive rollout of wind and solar generation capacity. Solar capacity in Spain is set to increase more than five-fold between 2020 and 2040. This is likely to lead to longer periods of low power prices, which improves the economics of hydrogen. France is targeting 6.5 GW of electrolyser capacity by 2030, with €7 billion earmarked for green hydrogen projects, and the country is exploring hydrogen production from nuclear. The highest blue hydrogen interest is where gas production, CCS, and geological potential for storage intersect. These countries are Great Britain, Norway, and the Netherlands. All three countries have a long history of natural gas production.

HYDROGEN ATTRACTIVENESS

Our gold medal for hydrogen investment attractiveness goes to Germany. It currently has the most developed hydrogen policy, a strong demand outlook and large growth in renewables development by 2040. It is Europe’s largest grey hydrogen market, making up 22% of European production, which suggests that it will become Europe’s largest consumer of green and blue hydrogen by 2050, once it has phased out fossil fuels. Germany is also well-positioned for developing salt cavern storage for hydrogen due to its geological location, and projects to store hydrogen underground are already underway. In terms of regulation, pilot electrolysers do not require land use permits and are planned to be made exempt from grid charges and the renewable energy (EEG) levy. Although commercial power-to-gas plants are considered end-users—and so liable for these levies— this is a common legislative disconnect and does not particularly impact on the rating itself. The Netherlands ranks just below Germany for its overall market attractiveness. Its prospects are furthered by a carbon-reduction subsidy offering financial backing for blue hydrogen projects. Although green hydrogen would promise a considerable boost to capture prices for renewable asset owners, renewables subsidies are to be phased out from 2025 and solar and wind are not covered by the new subsidy programme. Developing a hydrogen economy is a cornerstone of the Dutch government’s emissions reduction strategy—first focussing on blue hydrogen, then building to green hydrogen production through co-location of electrolysers with renewable assets. Despite being one of the few western European countries yet to publish a hydrogen strategy, the UK already has sizeable research hubs, combined with a strong natural gas and wind industry. Currently, the UK ranks eighth in terms of hydrogen demand in Europe, but it has significant growth ahead. This growth is largely due to its reliance on fossil fuels in heating, mainly natural gas, which will need to be decarbonised to reach its 2050 net-zero goal, through both electrification and the use of hydrogen. Denmark’s positioning for green hydrogen is positive. It is on track to achieve a fully renewables-powered grid by 2027 and it does not have the heavy reliance on natural gas that other countries have. It is also further along in the transition to developing green hydrogen and has signed off on a clear hydrogen plan targeting 3 GW electrolyser capacity by 2030 with €4 billion investment. Notable in Denmark is its lack of legal barriers to hydrogen production, transport and transmission. On top of this, an exceptional number of patents for hydrogen have been filed in Denmark during the last 18 months. Although renewables are the ideal, we still have gaps to plug to make a productive journey to net-zero targets and without adjusting the timeline. There remains much to address and perhaps the best proactive answer at this late stage is to implement change progressively. Upcycling our energy grids with hydrogen tackles the biggest footprints more smoothly, as we develop green hydrogen opportunities on a wider scale Hydrogen seems certain to play a pivotal role in decarbonising the economy, but much relies on the costs of low-carbon hydrogen coming down, with the help of improving technology, greater renewables, and government policy.

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