Low Carbon Hydrogen Pipeline Surges on a Wave of Announced Projects

This blog was coauthored by Jan Cihlar and Anthony Wang.

Supply, Demand, and Policy Trends Align to Spark a Rapidly Evolving Global Market

Low carbon hydrogen is having a breakthrough year, at least in terms of market hype. In the 9 months leading up to August 2020, the electrolyzer project pipeline quadrupled from an already impressive 3.2 GW el in pipeline in October 2019 to 12.2 GW el. The large increase is the result of rapid acceleration and change on three fronts.

On the supply side, a combination of declining renewable energy costs, improvements in electrolyzer technology, and ambitious net zero commitments from legacy oil & gas companies is driving renewed interest in the sector. At the same time, existing industrial hydrogen consumers are looking at low carbon hydrogen as a way to decarbonize industrial processes. Elsewhere, low carbon hydrogen can complement electrification in hard-to-abate parts of the transport and power sectors, such heavy duty trucking, shipping, aviation, rail, and long-duration electricity storage.

Most importantly, these initiatives are supported by policy direction at national and regional levels. The European Commission, Germany, the Netherlands, Norway, Portugal, Spain, France, Australia, Japan, and South Korea are all part of a longlist of jurisdictions that have released detailed hydrogen strategies to dramatically scale the hydrogen market in their respective regions. How are market players responding to the ongoing developments in the low carbon hydrogen sector, and what are the implications for energy companies looking to scale up low carbon hydrogen businesses over the next decade?

Despite Approximately €70 Billion ($82 Billion) of Planned Cumulative Investment by 2030, More Investment Is Needed

As of June 2020, publicly announced low carbon hydrogen projects amounted to 12.2 Mt/year production capacity (403 TWh hydrogen, LHV) by 2030 according to the International Energy Agency's Hydrogen Projects Database. Approximately two-thirds of these projects will rely on electrolysis to produce hydrogen. Although the specific technology choice remains uncertain for many projects, polymer electrolyte membrane technology is the most commonly cited, especially toward 2030 as new electrocatalysts are expected to increase process efficiency and reduce costs.

Autothermal reforming technology is currently the leading choice for the remaining third of projects delivering low carbon hydrogen through fossil fuel reformation combined with carbon capture and storage (CCS). This choice is driven largely by the H21 North of England project in the UK.

These production capacities translate to an estimated cumulative investment of approximately €70 billion ($82 billion) by 2030, assuming average investment costs as reported by the European Commission in the Hydrogen generation in Europe study.

Despite rapid ramp-up of production capacity, a significant gap remains between production pipeline and the potential low carbon hydrogen demand. At full production capacity, the 12.2 Mt pipeline could decarbonize 16% of 2020’s 74 Mt pure hydrogen production (excluding 45 Mt that is mixed with other gases). Moreover, this production capacity would only cover the refining and ammonia end use sectors. In the Hydrogen Council’s 2050 vision where 18% of final energy demand is met by hydrogen, production capacity would need to increase to 650 Mt.

Low Carbon Hydrogen Installed Capacity Announced Globally: 2020-2030

(Source: Guidehouse, the European Commission, and the International Energy Agency)

Energy Companies Need to Adapt for Systemwide Decarbonization 

Guidehouse Insights recommends that energy companies do the following:

• Understand the multidimensional tensions inherent to systemwide decarbonization: End use sectors have a range of decarbonization options, and hydrogen sits at different levels of the marginal abatement cost curve. The optimal abatement solution depends on energy and carbon dioxide infrastructure availability, the nature and extent of economic pressure on carbon, and the obstinacy of incumbent production technologies.
  
• Adopt a learn-by-doing approach: Early movers in the renewables industry such as Enel and Ørsted have shown that action trumps analysis when entering new markets and developing new products. Companies should create option value by investing in projects across the value chain and, most importantly, engaging with priority customers to begin building a pipeline today.
  
• Bridge the cost gap through subsidy engineering and financing strategies: To make the unit economics of low carbon hydrogen work, energy companies need to understand and leverage a portfolio of policy instruments across the project life cycle. These instruments can include carbon contracts for difference, competitive tenders, cross-border certification schemes for renewable hydrogen, innovative funding schemes, tax credits, and revision of alternative fuels infrastructure directives.