Hydrogen: Miracle Clean Fuel, Or A Financial Disaster?
“One of the first major energy planning studies to deal with net-zero carbon emissions was unveiled in the U.K., and it promotes hydrogen as the Superman of clean energy fuels. National Grid ESO presented a strawman case, but it envisioned a significant disruption of lifestyles and the economy. The hydrogen-dominant scenario is presented as a cheaper, less disruptive alternative making it more popular. There is no idea about its cost. ”
Hydrogen – the chemical element with the symbol H and atomic number 1 – is the lightest element in the periodic table and the most abundant chemical substance in the universe. Hydrogen in Greek means “water-former,” which is what happens when the gas is burned, and which was first recognized by scientist Henry Cavendish in 1766. The element is now being touted as the key to our clean energy future. Its importance comes from it being a gas that can utilize the existing natural gas pipeline infrastructure, and comes in various forms – gray, brown, blue and green. The latter two colors are in keeping with the image of clean energy. What hasn’t been resolved is how hydrogen can fulfill its mandate in a cost-effective manner.
Exhibit 13. Hydrogen Comes In Multiple Colors SOURCE: Cedigaz
Hydrogen is being presented as the critical fuel source if net-zero carbon emission mandates by governments around the world are to be met. Critical to hydrogen’s success is its ability to utilize existing energy facilities. That still presents some challenges as hydrogen is notoriously volatile, and in liquid form must be cooled to temperatures twice as cold as for liquefied natural gas (LNG), necessitating rebuilding many storage and transportation assets. Initially, given high transportation costs, the economics of hydrogen production favor on-site production. Tests of various approaches to producing, storing and transporting hydrogen are beginning, but little is known about their cost and/or operational challenges, even though hydrogen has been used for decades in various industrial applications worldwide.
In the United Kingdom, the country’s energy infrastructure operator – National Grid Electricity System Operator (ESO) – issued a 124-page report outlining the nation’s future energy mix as it strives to meet the 2050 net-zero carbon emissions mandate. Hydrogen “could be the solution to many of the hardest parts of the transition to net-zero”, National Grid says, particularly in long-distance freight, shipping and heavy industry. However, the report never addresses the cost of hydrogen in any of the four future energy scenarios it presented for 2020 (FES 2020).
The FES 2020 report continues the U.K. utility company’s study of future energy markets that it has undertaken every year since at least 2012. The report creates multiple scenarios. As the company has done for many years, it developed scenarios based on its own modeling and in consultation with the energy community. This year, there are four new scenarios – Leading the Way, Consumer Transformation, System Transformation, and Steady Progression. A summary chart in the report shows how the four scenarios perform in meeting the U.K.’s legally-mandated net-zero carbon emissions target of 2050. Three scenarios meet that goal with Leading the Way achieving it by 2048, two years early.
Exhibit 14. Three Of Four Scenarios Reach Net-Zero SOURCE: FES 2020
The headline conclusions from the FES 2020 scenarios, presented in the Executive Summary section, are listed in Exhibit 15 (next page). The fact that scenarios show net-zero emissions can be achieved, the urgency of what needs to occur to make it happen becomes uppermost in the thinking, and importantly, in the actions of utility companies, consumers and regulators. Because hydrogen and carbon capture technologies are critical to meeting the net-zero emissions target, industrial-scale projects need to begin immediately to demonstrate their feasibility. Therein lies a potential flaw in these scenarios. What if these demonstration projects fail, or fall short of the successes assumed? Since costs are not considered in the scenarios, the projects may succeed, but at extremely high costs rendering them uneconomic for deployment, but they can still be declared successes.
Exhibit 15. Key Observations From Energy Scenarios SOURCE: FES 2020
The National Grid ESO report is being widely hailed for its progress in addressing carbon emissions. James Brabben, Wholesale Manager at Cornwall Insight, an energy consulting firm, said, "More so than previous years, FES 2020 strikes a more confident tone on the practicalities of achieving carbon reductions. A ramp-up in wind and solar deployment, large-scale hydrogen and CCUS build-out and the digitalization and transparent use of customer data is prevalent across scenarios. Hydrogen is for the first time seen as a front-running technology for heating use, some transport sectors and electricity system flexibility.” That latter observation is key to a discussion about how Europe is embracing hydrogen as the clean gas, as it strategizes over meeting net-zero carbon policies.
National Grid ESO set the stage for its report by setting forth how it approached establishing its scenarios. The report stated: “This year FES uses the lenses of decarbonization and societal change to develop possible pathways for what the future of energy may be and how we could decarbonize our energy system.” With these two lenses as a guide, the report began with a discussion of the changing energy mix from the consumer perspective. The report pointed out: “In a net zero world, fossil fuels need to be replaced by electricity and hydrogen for transport and heating. At the same time, consumers must be willing to change how and when they use energy and be prepared to change to more energy efficient technologies.” In other words, get ready to live differently than you have up to now, but we really can’t tell you the extent of those sacrifices, nor how disruptive they will prove to be for your lives, let alone what the cost will be.
Of the four scenarios, Leading the Way reaches net-zero emissions by 2048, which National Grid ESO describes as the “fastest credible decarbonization” pathway. The societal changes include shifts away from private car use and major improvements in home energy efficiency. They don’t tackle diet or land use, which would involve significant changes to the agricultural sector.
The System Transformation scenario employs the largest amount of hydrogen, which is utilized for home heating, industrial use and vehicles. A key benefit of this scenario is that it is less disruptive of peoples’ lives. For example, it involves less effort to improve home insulation and smaller changes in transportation behavior. These are great selling points for getting people to commit to hydrogen.
Exhibit 16. The Significant Role Of Hydrogen In U.K. Energy SOURCE: FES 2020
The schematic of the flow of fuels and end market uses demonstrates how significant a role hydrogen will play in this scenario’s future energy mix. What is also noteworthy is that natural gas plays a major role in the energy mix throughout the forecast period. Natural gas consumption remains relatively constant at just 16% below 2019 use. This is because natural gas is the primary fuel for producing hydrogen! The greatest challenge in relying on hydrogen, however, is the hefty efficiency losses. Thus, the scenario dictates that hydrogen should be used in applications where there are minimal alternative fuel options, such as heavy-duty trucking, shipping and, in some cases, home heating and heavy manufacturing industries. While these applications will produce clean fuel, it will be more expensive and probably less efficient, further inflating the cost to users.
The role of natural gas in this scenario is significant, as shown in Exhibit 16 (prior page). Almost all the hydrogen is to come from natural gas reforming, with only a small amount from electrolysis, which is the most expensive process. It is envisioned that this latter supply will target markets with few alternative fuel options. Hydrogen produced by electrolysis would utilize excess electricity from renewables, which has little value, to reduce the cost of producing the fuel. This fuel supply will be important for increasing the flexibility in energy markets envisioned and needed in the scenarios. Capacity to produce hydrogen by electrolysis is projected to increase from less than 1 gigawatt (GW) today to as much as 10GW by 2035 and 73GW by 2050. The higher number would mean less natural gas needed to produce hydrogen.
As the volume of natural gas needed by the U.K. remains high, the more important consideration is the country’s dependence on imported supply. This dependency in 2020 is estimated at 55%, but rises steadily to 98% in 2048. This might be an economic vulnerability that U.K. residents will not be willing to assume if they fully appreciate and understand the implications and risks.
Exhibit 17. Imported Natural Gas Will Increase U.K. Risk SOURCE: FES 2020
Another key supply source in all the scenarios is the reliance on electrification of the transport sector in decarbonizing the economy. By 2040-2050, there are projected to be around 30 million electric vehicles (EV), compared to about 100,000 at the close of 2019. At the present time, the U.K. has about 32 million vehicles on its roads. Every scenario reaches a total of 30 million EVs and then remains at that level through 2050. The Leading the Way scenario sees the number of EVs declining from 30 million during 2040-2050, as autonomous vehicles and the abandonment of private car ownership in favor of ride-hailing and public transportation become greater forces in the transportation sector.
National Grid ESO has been a strong proponent of “vehicle to grid” (V2G), as a way to balance the electricity grid. They see V2G supplying as much as 38GW of electricity supply by 2050, during periods of peak demand. That would represent nearly two-thirds of the current peak demand of 58GW.
Exhibit 18. How EVs Will Come To Rule The U.K. Roads SOURCE: FES 2020
The U.K., like its neighbors on the continent, is starting down a road to net-zero carbon emissions with high hopes its plans will work. It will depend on whether the utilities and politicians can convince the residents that radically changing their existing lifestyles and behaviors is necessary and desirable in order to curb climate change. Replying on unproven technologies, or ones that have yet to be done at scale, is a huge gamble. Moreover, the inability, or unwillingness, to explain what the cost of this new energy world will be for residents is setting up the possibility of a serious political revolt. We will be watching closely from across the pond.