(Ghost-written for senior engineering staff at Mott MacDonald)
Links to first two:
https://www.mottmac.com/views/hydrogen-the-key-to-a-zero-carbon-energy-system
https://www.mottmac.com/views/getting-the-hydrogen-show-on-the-road
Third is not yet published – unedited version below.
3. Cost, economics and speed to market maturity
Essentially, the heavy lifting is done in terms of getting cheap renewable wind and solar power, which is the raw material for hydrogen, along with water (methane may play a transitory role). The main challenge now is to get conversion (from power to hydrogen) costs down. Already, the cheap renewables1, combined with seasonal/daily gas and power price variations provides the basis for a commercial case for hydrogen production – which is further enhanced by carbon penalties and the costs of curtailing renewable power when supply is too high (see below).
“For investors, it comes down to the bottom line… Once achieved, it is expected to be a relatively cheap and efficient system, but it needs a push to get there as the technology is expensive to develop and roll out, and this must be done across the whole hydrogen cycle,” said Guy Doyle, Chief Energy Economist at Mott MacDonald. Eventually, balanced supply and demand around a well-designed market should make a hydrogen economy commercially viable across multiple sectors.
The eventual benefits would not be limited to lower CO2 emissions, but would also include full energy security (provided the country has a source of renewable power), and would cut the flow of petrodollars to Russia, Saudi Arabia and other oil, gas and coal exporters (although they may wish to switch to exporting hydrogen). These are benefits (to the UK and other more heavily dependent energy importers) that are difficult to quantify in cash terms and with clear geopolitical implications.
Affordable alternative
Now that wind and solar costs have fallen significantly, a move to a hydrogen economy is unlikely to require massive subsidies. In its Hydrogen Roadmap report, the European Commission says that during the scale-up of the hydrogen industry towards 2030, it estimates annual investments of just EUR8 billion across the EU in its ‘ambitious’ scenario (where hydrogen development is most extensive). This is equivalent to only a third of the renewable feed-in tariffs (FiTs) paid in Germany, less than one-tenth of the investments the International Energy Agency (IEA) expects for the energy transition in Europe, or less than 5% of the total annual investments in energy and automotive assets in Europe.
Recently, Dutch gas company, Gasunie and grid operator TenneT produced their first 2050 zero-carbon energy plan2 (required to meet Dutch carbon reduction commitments) which points to a wholesale adoption of hydrogen from surplus renewables in heating and power as the optimum (and by far the cheapest) means of achieving the goal. The two companies, along with grid operator Thyssengas, are also involved in similar plans in Germany.
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, although at the moment electrification appears to have the upper hand here commercially (in the form of EVs) relative to hydrogen vehicles, at least for passenger cars. Heating has a lowish value currently because the competitor is natural gas, which is surprisingly efficient in domestic boilers, while coal and now renewables limit value in the power sector.
But in a low carbon world, low carbon heat (from hydrogen) is more valuable than low carbon power3, because there are few alternatives – electrifying heating systems is very expensive – whereas power generation has cheap renewables, (although when they are not available, higher power prices will incentivise hydrogen for balancing). 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, rather than natural gas, along with the cost of converting all boilers to electricity.
Europe’s Hydrogen Roadmap says that even with current technology, blending hydrogen at modest concentrations would not increase gas prices substantially. And as carbon prices (£18/tonne floor in the UK, and currently about EUR25/tonne on ETS) and/or other emissions penalties rise further, the commercial incentive for generators and industrial users to cut CO2 emissions will rise, making hydrogen more attractive.
Lowering hydrogen costs
Hydrogen technology has been in development for decades, and has only accelerated recently because of policy supporting additional funding, according to Mr Doyle. However, more “incubation costs” will be required before the full potential cost reductions from economies of scale and new technology can be realised. Next generation electrolysis, for example, is still being developed and requires funding to get costs down far enough to make business sense to invest.
Conventional hydrogen production processes are only commercially viable at small scale (mostly for industrial uses), and not for the massive volumes required in heating or power sectors. To be a viable option those costs need to come down. Dr Klaus-Dieter Borchardt, Director of the Internal Energy Market4 at the European Commission, thinks this will happen just as it has with solar PV and wind energy. As an example, he mentions the EU-backed H2Future project of Siemens, Voestalpine, and others that will become operational soon. “Once these projects become successful, more will follow,” he said. Denmark’s Ørsted has also promised to establish green hydrogen projects linked to the company’s Dutch offshore wind farms.
Capturing the surplus
The frequency of opportunities for lowering the cost of hydrogen production with power that is currently curtailed (surplus renewable power – either free or negatively priced) is already on the rise, which could provide a major boost: For example, on 24th March 2019, negative system prices in the UK’s Balancing Mechanism occurred for 13 consecutive settlement periods, as low electricity demand and high levels of wind output led the system operator to reduce generation output from a variety of wind, combined cycle gas turbines and biomass power stations.
In a hydrogen system, that curtailed renewable energy could instead be stored in the form of hydrogen – saving on the cost of curtailment and the lost renewable energy. Initially, Dr Borchardt says hydrogen projects would be close to renewable power sources and only likely to serve customers nearby, with development of local demand and distribution.
The frequency with which system prices turn negative is expected to increase, with latest forecasts from Cornwall Insight5 predicting an increase to 14% of half-hourly settlement periods on average by 2034. That is a lot of cheap, green power that will go to waste unless hydrogen or batteries can rise to the challenge; and batteries are currently looking expensive and problematic in terms of life cycle environmental costs.
Incorporating gas into the energy system of the future also makes use of existing infrastructure, reducing expense and stranded assets. A transition, with hydrogen produced from methane through reforming (as in the HyNet proposal), would smooth costs even further. The pipeline network has to be upgraded in the short term for higher levels of hydrogen, and new localised systems may need to eventually be installed, but the process is gradual and progressive, which should spread costs and maximise the use of existing assets.
Another issue with potential cost implications is the ability of hydrogen to carry energy, which is about a tenth of methane. It is difficult to compress hydrogen so there would be much less energy in gas grids, so appliances would need to be far more efficient than today.
While all the right policies are not yet in place, and the economics may not add up completely in all areas, the transition towards a hydrogen/renewables system is benefitting from an increasing number of investors acting on non-commercial priorities (or perhaps some would see it as assessing future value differently from the market): A quarter (or $20 trillion) of the world’s professionally managed investments are now ESG (environmental, social and governance) investments, which preclude fossil fuels. In addition, the risk premium for holding hydrocarbon stocks is rising with every extreme weather event.
Notes
1.Including any carbon taxes, which effectively makes renewables relatively cheaper. The UK’s £55/MWh for offshore wind in late 2017, and recent record low prices from solar in auctions around the world, have underlined the continued fall in renewable costs.
2.https://www.tennet.eu/fileadmin/user_upload/Company/News/Dutch/2019/Infrastructure_Outlook_2050_appendices_190214.pdf
3. Generally speaking; at specific times it may be more valuable.
4. Term lasts until summer 2019.
5. Cannibalisation. https://www.cornwall-insight.com/insight-papers/wholesale-power-price-cannibalisation