SustainaWeekly - Is green hydrogen the silver bullet?

Economist: Green hydrogen is set to play an essential role in the energy transition with many advantages such as energy security, storage capability, job creation, and the opening up of investment opportunities. Europe could play an important role in electrolyser manufacturing and might become a net exporter if current trends continue. Limited renewable resources, intertemporal capacity allocation, certification, and insufficient private finance could form bottlenecks that limit the full potential for green hydrogen.

Strategist: Last year, at the peak of the energy crisis, we saw that the bond spreads of utility companies that were heavily invested in renewable energy widened less than on the bonds of the peers that did not. However, now that the energy crisis has dissipated, we see that the impact of an issuer having a high share of renewable energy in bond spreads has declined. At the same time, investors seem to be once again more focused on traditional credit metrics, such as financial leverage.

Policy: The EBA published its first report on the monitoring and supervision of greenwashing. According to the numbers, alleged cases of greenwashing have been increasing since 2012. The above-mentioned trend also holds for the EU banking sector. Climate change is the most common topic subject to greenwashing claims in the EU financial sector. However, supervisors do not confirm the alleged cases. They indicate that the lack of a methodology to identify greenwashing cases deters them from reporting such claims.

ESG in figures: In a regular section of our weekly, we present a chart book on some of the key indicators for ESG financing and the energy transition.

Is green hydrogen the silver bullet for the European energy transition?

• Green hydrogen is set to play an essential role in the energy transition with many advantages such as energy security, storage capability, job creation, and the opening up of investment opportunities

• Green hydrogen is gaining support internationally, with expected geopolitical implications that will unavoidably restructure energy markets

• Europe could play an important role in electrolyser manufacturing and might become a net exporter if current trends continue

• Limited renewable resources, intertemporal capacity allocation, certification, and insufficient private finance could form bottlenecks that limit the full potential for green hydrogen

Introduction

One of the key drivers of the energy transition is the switch towards renewable resources to produce electricity. The intermittent nature of renewable energy, like wind and solar, mitigates the full potential of the technology. Thus, there is a need for storage in order to reallocate the excess in power supply and account for the daily and seasonal fluctuations in demand. Hydrogen is on top of the list as a solution to the storage problem.

Hydrogen is labelled according to the source of energy being used to produce it. It is called grey when it is generated through a “steam reforming process” from natural gas, or methane. Steam reforming emits Greenhouse Gases (GHG). However, if these emissions are captured before reaching the atmosphere, through Carbon Capture and Storage (CCS) for example, hydrogen is called blue. Green hydrogen, on the other hand, is produced through an electrolysis process that separates water particles into oxygen and hydrogen. The main condition for it to be labelled as green is to use electricity that is generated by renewable sources.

In this article we dive into the role of green hydrogen in the transition, its technology, the current trends for Europe, ending with challenges and limits associated to green hydrogen.

The potential role of green hydrogen in the transition

As an energy carrier, the advantage of hydrogen is not only as a medium to store the abundant renewable power, but also to unlock the potential to commercialize green electricity beyond geographical and grid limits, and to be traded between non-neighbouring countries. That is, clean energy can be transported between countries that are abundant in renewable resources and those with limited renewable capacity.

As green hydrogen is produced using renewable resources, and as renewable resources are dispersed across many countries, hydrogen could play an advantageous role in energy security since domestic renewable capacities can be complemented by a wider range of potential suppliers than fossil fuels. Moreover, the “cradle to grave” nature of the production process allows mitigating the vulnerability to supply chains and certain suppliers.

Additionally, in an earlier ABN AMRO publication (source), hydrogen was identified as one of the most critical technologies to bring down emissions. That is, green hydrogen does not only contribute to a more flexible grid, it also has an essential role in reducing emissions by replacing fossil fuels in sectors that have high mitigation cost for alternatives, such as hard-to-abate sectors. In that regard, by using green hydrogen in these sectors, dependence on alternative technologies, such as batteries for example, will be reduced, along with the potential vulnerability to critical metals used in the production of these alternatives. Furthermore, there are no clean energy alternatives to green hydrogen for fertiliser production, hydrogenation, and desulphurisation applications. Finally, adopting green hydrogen would create jobs and open new attractive investment opportunities associated to the technology, such as distribution networks and storage opportunities.

The international scene for green hydrogen

The international scene is becoming more and more supportive and convenient for international markets for clean fuels, such as green hydrogen. For example, the G7 announced their clean energy economy action plan (source) on May 20th 2023 pledging for “promoting trade and investment in clean energy goods and services”, along with The Hydrogen Action Pact (G7-HAP) in which the G7 nations commit to (i) speeding up the development of hydrogen (both blue and green), (ii) accelerating associated regulatory frameworks and common standards on hydrogen, and (iii) closing up the existing gaps in the G7 and elsewhere. This support is already materializing, as illustrated in the left hand panel of the figure below, where European investments in clean fuels, of which green hydrogen, are being increasing rapidly since 2020.

All these developments mean that green hydrogen will unavoidably play a critical role internationally and help to solve global problems such like climate change, as seen in the right hand panel of the figure below where hydrogen is expected to mitigate more than 6% of the cumulative global emissions in the IEA’s Net Zero scenario.

This shift in strategy and investments would create geopolitical implications as energy markets will go through major transformations. The negotiation power will shift from countries rich in non-renewable resources towards those abundant with renewable ones. For example, as solar power could be produced in Egypt with minimal interruptions and without seasonal fluctuations, Egypt would have an advantageous position in the international green hydrogen market. Accordingly, the term “hydrogen diplomacy” is being used to capture the strategic dynamics around hydrogen, especially by countries with limited capacity in renewable resources.

An international market for green hydrogen is not expected to be as big as that of the current market for fossil fuel markets. However, with the diversity of renewable resources, which are dispersed around the globe, the fast advancement in the associated technology (electrolysis), and the ongoing efforts to shift away from fossil fuels, such a market would soon take the stage as the most prominent one.

Electrolysers

As mentioned above, green hydrogen is mainly produced using electrolysers with renewable power (wind and solar, for example) as the main input. Accordingly, the cost of green hydrogen is distinguished based on the renewable resource used to produce it, assuming the same capital cost ratio for the electrolyser. For example, IRENA’s estimate for the levelized cost of hydrogen in Europe is ranging between USD 4.60/kgH2 to USD 9.10/kgH2 for solar PV and USD 6.90/kgH2 to USD 9.70/kgH2 for onshore wind.

Natural gas was considered as a transition fuel for Europe with relatively cheap prices that hindered the adoption of hydrogen (according to an earlier ABN AMRO’s analysis (source), hydrogen needed an all-in natural gas price ranging between EUR 0.19 /M3 now and EUR 0.5 /M3 in 2030 to be competitive; electrolyser efficiency is set to rise with promising technologies like the Electrochemical – Thermally Active Chemical). However, the rise in gas prices following the Russia’s invasion of Ukraine changed the dynamics. Green hydrogen became viewed as the strategic transition fuel to achieve climate targets and energy security for Europe. This is reflected in the figure below, where we see an increase in the manufacturing capacity for electrolysers in Europe (left hand panel), and a sharp rise in planned capacity additions for electrolysis projects up till 2026 (right hand panel).

Actually, Europe could play an important role in electrolyser manufacturing with an expected 34% cumulative average growth rate for installed capacity in the upcoming seven years, if all announced projects came to life, according to a recent report by IEA (source). Such projected capacity exceeds Europe’s announced targets for 2030, and if such trends continued, domestic demand could be covered and Europe could become a net exporter for this technology.

Green hydrogen challenges

Even though green hydrogen has an important role in the transition for Europe, there are challenges that limit its potential. These could relate to logistic and operational challenges, such as the needed infrastructure, transportation over long distances, and the losses associated with every conversion. Other more fundamental challenges are highlighted in the following subsections.

Limited European renewable capacity

The potential renewable capacity for European countries is not enough to produce all its needs of green hydrogen domestically, which means that Europe will have to rely on imports to achieve its targets. Based on 2022 IRENA’s analysis for European hydrogen strategic documents, the 2030 target for Europe is to have10 Mt of green hydrogen attributed to domestic production, and 6 Mt to be imported with North Africa expected to be the major trading partner (source). Within the RepowerEU package, these targets are even more ambitious with 10 Mt imports from neighbouring countries. For example, this issue is already flagged in Germany, as the country’s renewable resources are scarce. The country will have to import GH2 products in the medium to long term.

Intra and inter sectoral allocation

As we move along the transition process, capacity is being built gradually and the allocation of this temporary scarce capacity needs to be executed carefully to avoid bottlenecks that slow down sectoral transitions. Questions like: ‘which industries should switch to hydrogen first and at what scale’ become very relevant. In other words, where should renewable or hydrogen capacity be allocated first such that transition in one sector does not affect that of others? For example, if all the capacity of green hydrogen is allocated to heavy industries, the uptake in the transportation sector will be mitigated inducing a slower transition for that sector. That is, even though more emissions will be reduced sooner, long term sectoral transition will be compromised. Such problem is being flagged by the French hydrogen industry in response for the expected update for the French national strategy.

International cooperation and certifications

The international potential role for green hydrogen depends largely on international cooperation. For example, in order to unlock its full potential, access to the technology for developing countries should be facilitated. Moreover, creating a global hydrogen market needs supporting tools to avoid greenwashing. Proper certification, for example, is essential for international trade. However, there are still some inconsistencies that hinder certification across borders.

Financing green hydrogen

Finance has an essential role to play in achieving Europe’s ambitious targets for green hydrogen mentioned above. So far, green hydrogen deployments have been mainly dependent on government support schemes, with private finance lagging behind. The limited accessibility to finance from institutional investors and the lack of alternative investors may create a bottleneck in the scaling up green hydrogen. The lack of private finance could be related to, among others: (i) the perceived uncertainty regarding regulations surrounding this technology, (ii) the long term nature of green hydrogen projects, and/or (iii) to hydrogen technology-related constraints, such as limited renewable capacities. Accordingly, investors may provide cheaper funding as the electrolysis technology becomes more mature and the capacity of renewable resources increase over time. Moreover, diversifying the available funding sources for hydrogen projects could be essential for large-scale deployment of hydrogen projects, along with regulating domestic and international markets for green hydrogen.