Europe’s Hydrogen Economy Regardless Of The Economics
“Hydrogen is being pushed as the climate solution despite evidence it will be very expensive and disruptive.”
Europe is leading the charge into the Age of Hydrogen. This charge is predicated on the belief hydrogen is the best alternative for the economies of Europe to deal with its carbon emissions. One might liken this charge, however, to the famous one from the 1854 Battle of Balaclava during the Crimean War. In that case, it is believed that a misunderstanding between the commander of the 600-strong Light Brigade and his superiors led to the British cavalry unit nearly being destroyed. Having been ordered to secure Turkish cannon from possible seizure by the Russians, the cavalry instead charged a well-armed and prepared Russian and Cossack artillery unit. Although the cavalry unit broke through the canon ranks and killed some the artillery soldiers, the British were forced to withdraw with devastating losses. Their bravery was immortalized in Alfred, Lord Tennyson’s poem, “The Charge of the Light Brigade.”
So why do we suggest that the arrival of the Age of Hydrogen might suffer the same fate as the British cavalry? It is because few people have a clear view of the cost of hydrogen, let alone what such a switch might cost due to the inefficiency of generating hydrogen energy and then converting it back into a useful form of energy, most likely electricity. Thus, just as the Light Brigade was successful in completing its task, the cost was devastating.
Substantial work needs to be done to better estimate the true cost of the hydrogen economy, if that is possible now. That is why there are so many pilot projects being announced and conducted. Interest in hydrogen as an energy factor cannot be dismissed out of hand, however, because the goal of eliminating carbon emissions has become a significant political and social commitment, especially in Europe. Hydrogen has the flexibility to be used in virtually every energy market as it can be a gas or a liquid. With electricity targeted to be the structure of the future energy system, decarbonizing it is critical, and here is where hydrogen can play a role.
Green hydrogen, which is generated from renewable energy, is the siren song of environmentalists, and is being pushed by multiple governments who are announcing hydrogen strategies. Hydrogen can be produced from natural gas, known as blue hydrogen, but that is less clean. A new research paper suggests that green hydrocarbon produced from electrolysis (electricity) will always be more expensive than blue hydrogen due to the higher cost of the electricity needed for the green process. The announcements of hydrogen initiatives are often key parts of government plans to stimulate economic recovery following their shutdowns due to the spread of the coronavirus. The magnitude of the government hydrogen push can be seen in Exhibit 5 (next page) that shows the dates of announced initiatives.
Exhibit 5. Interest In Hydrogen Is Growing Daily SOURCE: OGE
Hydrogen is believed to be the best alternative for decarbonizing energy systems. In the case of Europe, its success will be helped by the existence of Europe’s highly interconnected energy infrastructure. This will allow the harnessing of existing renewable energy sources that can produce hydrogen and store it as an energy source that can be utilized in many different applications within economies. The hope for hydrogen’s success is tied to projections for a steady reduction in the cost of new renewable energy capacity that will lower the cost of electricity. Additionally, hydrogen offers cost savings by avoiding having to build new electricity transmission eyesores, since existing pipelines can be utilized.
Exhibit 6. Emissions Trajectory Needs Carbonless H2 SOURCE: Climate Action Tracker
As Paris Agreement carbon emission reduction pressures weigh on European governments, as well as others around the world, the hydrogen solution is being pushed regardless of its cost. Exhibit 6 (prior page) shows the gap between where emissions are and where they need to go to meet the goals from the Paris Agreement. Thus, for the greater good, politicians expect the public to meekly accept the cost of a hydrogen-based clean energy system, whatever that cost may be. We would caution that this view may ignore economic pressures that are overtaking European citizens, which have been manifest in the recent riots against revived Covid-19 lockdowns in various cities on the continent. Given this reaction, it may be a mistake to assume the public will acquiesce to higher energy bills in the name of fighting climate change.
Two presentations during a webinar on hydrogen and Europe provided much needed guidance on the rationale for why energy companies are pushing hydrogen as the preferred solution for the continent’s carbon emissions challenge. The European Commission (EC), which establishes policy targets for the 27 European Union (EU) member countries, recommended in early March a proposal to enshrine in legislation the EU’s political commitment to become climate neutral by 2050. In its release, EC President Ursula von der Leyen wrote:
“We are acting today to make the EU the world's first climate neutral continent by 2050. The Climate Law is the legal translation of our political commitment, and sets us irreversibly on the path to a more sustainable future. It is the heart of the European Green Deal. It offers predictability and transparency for European industry and investors. And it gives direction to our green growth strategy and guarantees that the transition will be gradual and fair.”
As the statement went on to explain, the European Climate Law sets the 2050 target and the evolutionary direction for all EU policy. However, the Commission needs to consult with the public on the future of the European Climate Pact. So, while the EU may embrace certain policies, without the agreement of all 27 members, the resulting policy may need to be modified. This may be necessary as member countries decide to how best to fight climate change through carbon emission reduction policies for their particular country. Those policies may have to be less onerous for their economies and citizens in order to gain public support.
The EU’s policy targets for reducing carbon emissions are laudable. Their impact is displayed in Exhibit 7 (next page), which shows the projected carbon emissions trajectory under the EU policy versus those for the next few years under a “business-as-usual” approach. People are always seeking policies that will produce graphs sloping downward for things that are considered “bad,” while applauding upward sloping ones for things that are considered “good.” In the case of carbon emissions, which are seen as harming society, the faster they decline, the better. Always left out of such graphs, however, are details about the economic cost and the impact on lives from embracing the policies necessary to achieve the targets.
Exhibit 7. What The EU Wants Out Of Clean Energy SOURCE: International Monetary Fund
While people may be in favor of the policy dictating reducing carbon emissions, they often don’t care for the actual rules and regulations governing how they must live and work. This is akin to people hate watching sausage being made, but they love the idea of sausage for dinner. The dichotomy between policy and rules is becoming a greater issue in Europe as the future challenges become clearer. To better understand this dichotomy, it is helpful to begin such a discussion by understanding the EU’s current energy situation.
Exhibit 8. A Lot Of Carbon To Get Rid Of From EU Energy SOURCE: Kehler
Dr. Timm Kehler, Director of Zukunft ERDGAS, an initiative of the German natural gas industry, showed that electricity accounts for 21.6% of the EU’s final energy consumption, but only a third of it is derived from renewable energy sources. Clearly, the industry will need to invest substantially in new renewable power facilities in order to transition the current European electricity business to a carbon-free status, let alone what will need to be invested to move the balance of the continent’s energy demand to electricity. With petroleum accounting for nearly 40% of final energy consumption, one can understand the increased focus on electrifying the transportation sector, but merely banning internal combustion engine vehicles is only an initial transition step. All forms of transportation in Europe will need to be powered by carbonless fuels for a net-zero emissions environment to be achieved.
While electrifying the European economy is the goal, and governments, with the support of activists, are aggressively pushing policies to achieve it, the reality is that renewable energy is unable to ensure 100% power on demand. Backup power will be necessary to deal with the intermittency of renewable energy, but that comes at a huge cost and a risk of failure to meet the needs. Achieving a zero-emissions target may be possible if the costs and disruptions of such a transition are ignored, but even that potential remains in doubt. In the United States, Rich Powell, Executive Director of ClearPath Action Fund, a Republican Political Action Fund (PAC) supporting candidates who back greater support for global warming policies and environmentalism, offered an insightful observation.
“Any plan to have carbon-free electricity by 2035 is wonderfully unrealistic. Even if it were economically and technically feasible, which we doubt, it is undoubtedly not permit-able under current regulations. The private sector is making big bets they’ll reach net-zero carbon dioxide (CO2) emissions by 2050. We need to work towards making sure the private sector has the technology needed to get them all the way to net-zero.”
In other words, timetables for achieving net-zero carbon emissions need to become more realistic, given today’s technology. Policies and goals are important, but technology is critical if we are to achieve net-zero emissions targets. At the present time, many of the projected technologies enabling a net-zero emissions world remain in research mode. Hydrogen is not quite in the research mode, as producing and using it has been underway for decades, but primarily tied to unique and limited applications. What is unproven for hydrogen, both technically and financially, is generating and using it at sufficient scale for electrifying meaningful economic sectors.
The current push for hydrogen is tied to the realization that the growth of renewable electricity in creating operational and financial challenges for utilities. Because wind and solar are intermittent, generating capacity must be overbuilt in order to ensure the delivery of the consistently desired volumes of electricity. When the wind blows strong and steady, and/or the sun is bright for hours, substantial surplus power may be produced, increasing the challenge for utility companies to manage their grids. These conditions often necessitate utilities paying renewable power producers to stop shipping their output, especially when electricity demand is low. Alternatively, utilities may require the producer to essentially dump the surplus renewable electricity into markets not served by the utility, which can upset power pricing. As a result of the growing surplus power potential, renewable power producers and utilities are searching for opportunities to use that surplus power, which presumably has an extremely low cost, to increase energy storage for those times when renewable power is not available. With many wind and solar facilities located offshore, where presumably the amount of intermittency is less than onshore, the idea is to install electrolyzers that can break water into oxygen and hydrogen molecules. The latter can be used as an energy storage source for later conversion back into power.
Daniel Muthmann, head of Strategy, Policy and Communication at Open Grid Europe (OGE), offered some views about the economics of hydrogen. OGE is the pipeline business of E.ON Gastransport, which was renamed in 2010. In 2012, it was sold to a consortium of international investment funds. Today, it operates one of the largest European gas pipeline networks, making it an integral part of the continent’s energy system. As Mr. Muthmann highlighted in his presentation, his pipeline network can move any type of molecule, either hydrogen or natural gas, meaning that development of a hydrogen-based economy can avoid having to invest in a new energy infrastructure system. He acknowledged that in order to complete a European-wide hydrogen economy, there would need to be additional pipelines added to the existing OGE system. We also don’t know how much of OGE’s current pipeline network might need to be replaced with new pipe to overcome possible failure due to the pipe becoming brittle due to interaction with hydrogen.
Exhibit 9. Why Hydrogen May Become Less Costly SOURCE: OGE
Exhibit 9 (prior page) shows the many locations of wind and solar energy projects that can be used to produce hydrogen. Besides using offshore water sources, hydrogen can be created by breaking down the methane molecule of natural gas, which can be imported into Europe either in liquefied form (LNG) or via pipeline. The resulting hydrogen output is labeled “blue hydrogen,” but it is not as environmentally friendly as “green hydrogen,” which is produced entirely from renewable energy and water. Based on the plans for new renewable energy projects, it would appear that there would be substantial capacity to produce blue and green hydrogen.
To meet Europe’s hydrogen demand in 2050, Mr. Muthmann showed the amount of new renewable energy investment necessary. To supply the 1,300 terawatt-hours of annual green hydrogen demand, assuming a 50/50 split between wind-generated and solar-supplied power, the energy industry will need to add 23,000 wind turbines and 4,650 square kilometers of solar panels. To put these investments in perspective, the estimated number of new wind turbines would equal all the offshore wind turbines already in place worldwide. With respect to solar panels, the presentation said that the area they would cover would equal just under one-half of one percent of the combined surface area of Spain, Portugal, Italy and Greece. Those four countries contain 398,315 square miles of surface, meaning the required solar panels would be spread over 1,792 square miles. Can all of these facilities be built? Sure. But one needs to also recognize that both wind turbines and solar panels have relatively short lives – 20-25 years. That means the generating capacity will need to be replaced frequently – in reality, constantly, given the scale of annual replace work. The presentation did not offer any estimate of the magnitude of the investment necessary to build all the additional wind turbines and solar farms.
Based on cost projections for wind turbines and solar panels, we estimate the following costs for a renewable energy system to produce hydrogen: between $687-$916 billion for the wind turbines and $1.374 trillion for the solar panels. Together, that totals approximately $2-$2.25 trillion. The cost projections we used came from marketcap.com for wind turbines and Solar Power Now for solar panels. We believe the wind turbine estimate is for a typical onshore turbine. Offshore turbines will be more costly, especially depending upon the water depth in which the projects are installed, although they are generally more productive. When Professor Gordon Hughes completes his study of the cost of the U.K. offshore wind farms, we will be in a better position to estimate the wind turbine share of the required investment. The cost estimates relate only to the cost of producing the renewable power generating capacity, and do not include any costs associated with generating the hydrogen, nor transmission and storage costs.
Exhibit 10. Contribution To Hydrogen From Renewables SOURCE: OGE
In pitching the advantage of hydrogen over relying entirely on renewable energy, Mr. Muthmann pointed out that one 48-inch natural gas pipeline has the transportation capacity of 24 gigawatts of energy. That is the equivalent of the amount of power moved along eight high-voltage power lines. If the pipeline were repurposed for hauling hydrogen, it would still have the energy-equivalent capacity of 80% of the natural gas pipeline, or six high-voltage power lines. Since pipelines are underground, they eliminate the high-voltage power line transmission towers. Quite possibly, a significant selling point for the hydrogen solution is its ability to be stored. The existing natural gas storage caverns in Germany are able to store sufficient supplies for three months of gas demand. This compares with all the current electricity storage (battery and pumped-water) capacity that totals less than one hour of power.
Exhibit 11. The Pipeline Advantage Over Power Lines SOURCE: OGE
These are all positive selling points for hydrogen as opposed to a totally renewable-based electric energy system. But, as pointed out in Dr. Kehler’s presentation, decarbonizing the heating demand within Germany will be a massive undertaking. All the existing renewable energy capacity in Germany, if devoted just to replacing building heating needs, accounts for less than 25% of the market. Even with adding insulation to buildings and heat pumps, there will need to be about a tripling of the existing wind and solar generating capacity in Germany. That will consume significant land area, besides representing a massive financial investment. It still doesn’t address the need for renewable generating capacity for all other energy needs such as electricity and transportation, let alone industrial power needs.
Exhibit 12. Germany’s Massive Heating Energy Problem SOURCE: Kehler
While we understand the push from the EU for hydrogen and the aggressive support of the gas industry, the economics remain a challenge that receives little current attention. Most of the studies for hydrogen’s potential focus on comparative economics in 2030 or 2050. For example, a recent Bloomberg New Energy Finance (BNEF) study says that renewable hydrogen could be produced for $0.70 to $1.60/kilogram (kg) in most parts of the world before 2050. BNEF said those prices would equate with natural gas priced at $6-$12 per million British thermal units (MMBtus). According to Hydrogen Tools, a hydrogen analysis web site run by Pacific Northwest National Laboratory, one kilogram of hydrogen is equivalent to the energy of 421.66 cubic feet of natural gas, which reflects the fact that hydrogen has only about one-third the energy density of natural gas. While we will not speculate on the price of natural gas in 2050, at today’s approximately $3/MMBtu price, hydrogen is nowhere near being competitive.
Possibly more interesting are observations from a paper by Armin Schnettler, the executive vice president and CEO of the New Energy Business at Siemens Energy, a company actively pioneering the development of hydrogen power. He discussed his company’s efforts to promote hydrogen R&D projects. In characterizing the state of hydrogen, he wrote: “As time moves on, hydrogen can become as big as wind and solar, but in terms of maturity (market and technology), it is 15 to 20 years behind the more established renewable technologies.” In his and his company’s view, the real future for hydrogen is likely in the transportation sector. Hydrogen offers a competitive advantage over batteries for electric vehicles (EV) in both recharging times and driving range. He sees this as especially compelling in the medium- to high-duty transportation market. “Hydrogen’s low weight, long driving range, and fast recharging is especially relevant for heavy-duty vehicles and trains.”
According to Mr. Schnettler, for hydrogen to meet the critical price points to be competitive with alternative fuels, he sees three primary challenges. They are: the cost of electricity, the loading factor of the electrolyzer plant, and the capital and operational costs. Pointing to the issue of the cost of electricity, which represents 70% of operational costs, the development of renewable energy sources will help overcome that hurdle. He suggests that in areas that have advantageous renewable energy conditions, the costs to produce green hydrogen could already be about €3 ($3.54) per kilogram. While appearing attractive, the cost is nowhere near competitive with current transportation fuel costs. As pointed out by energy consulting firm RBN, the cost to fill up a fuel-cell powered vehicle in California, essentially the only market for these type vehicles, it costs about $15/kg, at the low end.
Furthering his argument that hydrogen is better suited for reducing transportation carbon emissions, Mr. Schnettler commented on the view of some proponents for the fuel’s use in the electricity market. He wrote:
“Today, there is probably no economically viable business case for producing hydrogen specifically for having it re-electrified directly afterward in a hydrogen-capable gas turbine – and efficiency wise, today it would not make sense either, because there are more applications with higher CO2 reduction potential at lower total cost.”
He does see the potential for hydrogen to be used for backup power when renewables, such as wind, are unavailable. However, he sees that solution as a mid- to long-term future for hydrogen, as the drive to decarbonize the economy needs to focus on the transportation sector, because more than half of global emissions come from industry (manufacturing processes), transportation, and the construction (cement) business. In Mr. Schnettler’s view, these sectors offer greater near-term potential for hydrogen, and probably can handle the more expensive fuel due to the greater concern over cutting carbon emissions. This may be a more realistic outlook for where and how the hydrogen economy will evolve. However, his assessment, which we believe is also Siemens Energy’s position, of hydrogen’s market and technology maturity being 15-20 years behind wind and solar energy, is sobering. Mr. Schnettler’s final comments are important in assessing the development of the green hydrogen market. He wrote:
“Going forward, green hydrogen will command a premium price when compared to its less environmentally friendly hydrogen counterparts – blue and grey. The early stages of any technology curve must have some support, much as was seen in the early days of wind and solar power. But in the medium- to long-run, hydrogen must and will stand on its own legs and be viable without external support. When exactly that will happen, depends on several factors, including the adoption rate, economies of scale, and the regulatory frameworks.”
The EU is working hard on the regulatory framework to ensure that the financial support for hydrogen is in place, such that adoption rates are quick, which will help create economies of scale that should lower the fuel’s future cost. Without that happening, people will be saddled with energy costs consuming a greater portion of their incomes, and weighing down the pace of industry and commerce that will slowly sap economic growth. We are just now entering that phase, and the public will increasingly be challenged to either accept or reject the high cost of hydrogen. However, ignoring the development of a hydrogen economy would be foolish. Expecting it to end fossil fuel use anytime soon would also be a mistake. The energy market transition is well underway, but much like every past transition, the old fuels will retain a significant position in the future energy slate. This is a critical point missed by those believing fossil fuels will disappear in the next 20 years.