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Green hydrogen hurdles complicate Southeast Asia’s net-zero goals

With the hydrogen economy gaining momentum in Europe, the industry is also stimulating interest in other regions of the world where power systems are more reliant on fossil fuels. However, green hydrogen in Southeast Asia has different questions that need answering

The energy price crisis in the second half of 2021 could provide green hydrogen with an opportunity to showcase its decarbonisation potential at a lower cost to users


SIMPLE SOLUTION
Southeast Asia’s reliance on gas makes the transition to renewables more expensive. Converting to green hydrogen might offer an alternative

PRICE POINT
Green hydrogen could reach price parity with other forms of hydrogen in the coming decade but will still be more expensive than LNG over a longer time frame

KEY QUOTE
The recent natural gas and LNG price hikes in both Europe and Asia could help close the LNG-green hydrogen cost parity time frame


The Southeast Asia region has seen steady economic growth for more than a decade, which is projected to continue as the region battles back from the Covid-19 pandemic. The International Monetary Fund recently forecast that the top five Association of Southeast Asian Nations (ASEAN) economies will expand 5.8% in 2022, which would exceed the 5.6% growth prediction for China. ASEAN states, however, still have their hands full managing economic growth in arguably the world’s most competitive region, which includes economic and geopolitical powerhouses China, Japan and India, while also trying to power that economic expansion. Historically, ASEAN states have relied heavily on coal for thermal power production. Indonesia—the bloc’s largest economy—is the world’s eighth-largest carbon emitter and consumes around 130 million tonnes of coal annually to fuel 60% of its 73 gigawatt electricity generation capacity. It also ships about three times that amount, making it the world’s largest exporter of thermal coal, according to the 2021 BP Statistical Review of World Energy. Due to political backlash over their collective carbon footprint, several ASEAN members thought they found a solution by both developing liquefied natural gas (LNG) infrastructure and signing several LNG supply deals with key gas producers and exporters, including Australia, Qatar and the US, the world’s top three LNG exporters, respectively. Given LNGs carbon emissions across the entire value chain it can at best be considered a transition fuel to help the region pivot away from coal and as a backup fuel for variable solar and wind generation. But LNG usage is under growing international pressure, adding a further layer of complexity to Southeast Asia’s energy diversification plans.

MOVING GOALPOSTS Some are quick to note they are busy simply trying to push through LNG projects to help offset coal usage. Now, some in the region argue that they are being pressured to pivot away from gas just as they are completing Capex-intensive LNG projects. ASEAN members are also developing wind and solar power projects, but to date, these still represent only a small fraction of their respective energy generation mixes. Moreover, scalable electricity production from these resources faces stiff challenges due to current practices of system integration. Grid curtailment is a problem across ASEAN countries particularly in Vietnam, which leads the region in both solar and onshore wind project development but also still relies heavily on coal for power production. Fixing this issue is a major hurdle that must be addressed before Vietnam can further incorporate renewables into its final energy mix. Similar problems in other ASEAN states could see otherwise bankable solar and wind power projects unable to obtain the necessary funding to proceed. Alternative routes to net-zero are therefore being considered.

DISPARATE COST PARITY As such, the IEA, UN Climate Change and others are increasingly pointing to green hydrogen as an alternative to the challenging renewables development environment. Green hydrogen is produced by splitting water into hydrogen and oxygen using an electrolyser fed by clean energy sources. In contrast, blue, grey and brown hydrogen all rely on fossil fuels for production. However, for ASEAN members to fully get on board the green hydrogen push, questions over the technology still need to be answered. Namely, is it the right fuel choice given that cost parity with fossil gas is still years away? While the exact cost parity time frame varies greatly depending on the analysis and modelling used, it still casts a long shadow over the region’s likelihood to embrace green hydrogen. Boston Consulting Group, an American business consultancy, estimates that blue and green hydrogen will be competitive with grey hydrogen early in the next decade, with green hydrogen becoming the lowest-cost option thereafter. Commodities data provider S&P Global Platts, meanwhile, says green hydrogen production would have to drop at least 50% in price before it reaches fossil-fuel cost parity. The International Renewable Energy Agency (IRENA) forecasts that it could take another ten years for green hydrogen to compete with the cost of fossil fuel alternatives. Others see an even longer time horizon for LNG-green hydrogen cost parity. Green hydrogen production does not reach cost parity with LNG-fired power plants even over the next 20 years in our current outlook,” says Zhi Xin Chong from IHS Markit Southeast Asia, a market analysis firm. The LNG value-chain is already fairly mature and there have been improvements in liquefaction modularisation and the resource base that has brought down the average cost of production. On the other hand, the hydrogen value chain is just beginning and there is no standard established even for hydrogen transportation,” he adds.

ENERGY CRISIS However, the recent natural gas and LNG price hikes in both Europe and Asia could help close the LNG-green hydrogen cost parity time frame. The cost of LNG on the spot market in Asia has been hovering around the mid-$30 per million British thermal unit (MMBtu) price point after reaching as high as $50/MMBtu in October 2021, amid supply outages in several key producing countries. LNG importing heavyweights China, Japan and South Korea were refilling inventories ahead of winter and countries in the region staging economic comebacks from the Covid-19 pandemic also put more upward pressure on LNG prices. Suddenly, the cost of green hydrogen is not the deal-breaker it once was.

DIFFERENT PATHWAYS Some ASEAN member countries will be able to develop green hydrogen resources more quickly than their less-well-off neighbours. The different levels of wealth distribution across the region mean some markets will benefit from taking advantage of developing a green hydrogen market before others. As a result, a type of energy haves and have-nots scenario is unfolding, which could be exacerbated as the world recovers from the Covid-19 pandemic. Antonio Della Pelle at KBR-Singapore, an advisory firm, says ASEAN members will embrace green hydrogen with different timelines, pointing to the disparity in each one’s individual economic growth. Energy importing countries [in the region] may have reasons to move earlier than energy exporting countries,” he adds. At the same time, renewables-rich countries should start looking at green hydrogen as a business export opportunity instead of looking at hydrogen as a domestic energy vector,” he says. [These states could] generate revenue from green hydrogen and then re-invest to build a sustainable domestic hydrogen/clean energy infrastructure. Adopting this approach would help those ASEAN countries that today generate revenues from fossil fuels,” Della Pelle adds.

FOSSIL FUEL REVENUES However, the problem may be more complicated than it first appears. Indonesian and Malaysian hydrocarbon exports, for instance, provide substantial amounts of revenue for both governments. In 2020, Indonesia was the world’s largest exporter of coal by weight and the seventh-largest LNG exporter, while Malaysia remained the region’s second-largest oil producer and the world’s fifth-largest LNG exporter, according to data from the US Energy Information Administration (EIA). In the first six months of 2021, Indonesian coal exports netted some $38 billion in export revenue—an economic reliance that will be hard to break. Meanwhile, Singapore, a major oil and petrochemical refiner and LNG distribution hub in the region, is leading other ASEAN members in its green hydrogen development plans. However, implementing those plans are still several years away according to Singapore planners. Fellow ASEAN member states Thailand and Indonesia are now in initial research and collaboration stages looking at green hydrogen use within the power and industrial sectors, according to IHS Markit’s Chong. He points to upcoming pilot projects and testbeds in these countries, which if successful, could help green hydrogen use become more widely adopted.

POLITICAL DISCOURSE While the private sector is studying the potential of green hydrogen, lawmakers are yet to take note. A report by The National Bureau of Asian Research (NBR) finds that in the ASEAN region, as opposed to Japan and much of East Asia, green hydrogen has yet to formally enter the policy agenda as an alternative fuel. ASEAN leaders can promote hydrogen adoption through several actions, including demonstrating a strong commitment to promoting a hydrogen society through energy policy, developing a clear strategy for how to promote hydrogen use in the transportation, power and other hard-to-abate sectors like the iron and steel industries, the report suggested. It also recommended helping reduce the overall cost of managing the energy system by improving the electricity governance system among ASEAN developing countries. Another way to help more ASEAN states implement their own green hydrogen plans would be direct funding by international organisations like the World Bank, Asian Development Bank (ADB) or Japan International Cooperation Agency (JICA) to help these countries first incorporate green hydrogen in their respective energy plans, then obtain investment. These projects could more quickly replace not only coal power projects that have been scheduled to be phased out over the next 20-30 years but also postpone or cancel planned LNG or gas-to-power projects that have yet to be built. Increased financing could even potentially put the brakes on LNG development in much of the region. Failure to take innovative steps, however, could not only put the region’s net-zero plans in jeopardy but also create stumbling blocks for the entire global emissions agenda. If the world is going to achieve net-zero emissions by 2050 or earlier then green hydrogen is a must to have in the future energy mix,” says Della Pelle. Without hydrogen, it will be impossible to fully decarbonise certain sectors and industries.” •


TEXT Tim Daiss