Hydrogen: New Ambitions and Challenges

March 08, 2024

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(S&P Global) In addition to its role in the oil refining and chemical industries, hydrogen is now emerging as a vector of clean energy delivery. There is genuine interest and investment worldwide as governments and businesses seek to develop this budding industry as part of their energy transition goals. Nevertheless, significant challenges lie ahead to bring this industry up to scale.

Low-carbon hydrogen requires innovation from industry, a pragmatic and cooperative approach to classification by governments and customer commitments to a premium product.
There are currently positive signals, but challenges remain in each of these areas to reduce development costs and thus deploy capacities at scale.
The transition to low-carbon hydrogen is unlikely to happen at a speed and scale to transform the business environment for European regulated gas infrastructure companies in the coming five years.
With the emergence of a low-carbon hydrogen economy and looming regulatory resets (post 2030), gas network operators may already be adapting their balance sheets to navigate a more uncertain environment.

Introduction

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A striking characteristic of this emerging industry is that interest and investment are genuinely worldwide: there is scope for some part of the hydrogen supply and value chain in advanced, industrializing and developing countries alike.

This cross-divisional report by S&P Global Commodity Insights and S&P Global Ratings describes the opportunities and challenges facing the nascent clean hydrogen industry. While the opportunity is genuinely global, there are significant challenges. There are specific implications for gas infrastructure operators in the European market in particular.

These challenges fall into three main categories: cost reduction and elimination of bottlenecks, definition and classification, and customer commitments. All must be overcome to realize a global vision in which hydrogen plays a vital part in a transformed energy system.

The global vision

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Manufacturing hydrogen today accounts for about 2% of the world’s energy consumption. It is essentially an industrial gas, the majority of which is made from fossil fuels (natural gas, and to a lesser extent, coal) in a highly carbon-intensive “steam reforming” process. Some hydrogen is a by-product of oil refining and chemical processes and can be fed back for the benefit of other processes in the plants where it is sourced.

However, there is a clear vision to transform this into an industry that delivers energy to a wide variety of uses. Technologies to decarbonize the making of hydrogen could transform it into a vector for delivery of low-carbon energy to its new customers. Chart 1 shows the ambitious scale of this transformation, as hydrogen moves from being mainly an industrial gas to becoming a low-carbon energy carrier.

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The pattern of hydrogen trade could emulate the current international trade in the major fuels: coal, oil and gas.

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Prominent among these are the United States, with its three-pronged support of the Inflation Reduction Act, the Bipartisan Infrastructure Law and the hydrogen component of the Energy Earthshots Initiative; India, with its Green Hydrogen Policy (February 2022); and China, whose Hydrogen Development Plan (March 2022) is delivering results that include what is currently the world’s largest “green hydrogen” facility: the 260 MW electrolyzer set in Kuqa, Xinjiang, supplying hydrogen to the nearby refinery at Tahe. While Europe currently lags China, installed capacity is expected to grow strongly as production support auctions around the continent get underway.

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For this highly diverse vision to succeed, three serious challenges must be overcome: cost reduction and elimination of bottlenecks; harmonization of definitions and classification of low-carbon hydrogen; and lining up robust customer commitments to buy.

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Challenge 1: Reducing costs, overcoming bottlenecks

General cost conditions

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Supplying primary energy for hydrogen manufacture — Future risks

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Direct competition for renewable sources with all other much-needed electrification needs: For example, in the EU, we estimate that producing 5 million metric tons of green hydrogen per year would require about 35 GW of electrolyzer capacity (plus 50-150 GW of renewable generation capacity, which may in turn absorb one-eighth of total EU renewable capacity). Renewable power feed will compete directly with the higher-ranking goal of electrification of final demand.

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Even as plans come to reality, and with costs declining, the principal challenge for low-carbon hydrogen production via electrolysis is the sheer scale of new renewable generating capacity that is required.

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(In other words, seven nuclear power plants of 1 GW each, or over 12 million homes each with solar panels of 4 kW capacity, would supply enough electricity for just 1 MMt of hydrogen.) These are huge numbers, and bear in mind that a primary call on new electricity capacity in most parts of the world will be to support the direct electrification of customers’ final energy uses.

Separately, it is clear that methane reforming, with carbon capture, will be a part of the low-carbon hydrogen future, alongside electrolysis.

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Planning bottlenecks

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Challenge 2: Classification, definition and harmonization

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How can it be known that the dedication of a low-carbon electricity source to manufacturing hydrogen will not deprive another sector of the energy economy of the same low-carbon electricity? Will the “deprived” customer be obliged instead to consume high-carbon energy, such that there will be no overall reduction of emissions?

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Chart 6 compares the carbon intensity of various technologies for making hydrogen — reforming of gas (or coal) with and without carbon capture, or with different levels of carbon capture, and electrolysis using electricity from dedicated (implicitly “additional”) renewable or nuclear power, or with electricity “from the grid” — acknowledging that different grids have different carbon footprints depending on the mix of generating capacities.

Consultations have been underway for several years, yet there is little indication of what common international standards might be agreed.

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Challenge 3: Finding customers

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If production costs can be reduced, there will still be a geographical issue; hydrogen produced at this cost far from the end-use point will not stimulate demand.

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Consumption mandates, such as European policies around RFNBOs (renewable fuels of nonbiological origin) or Japanese rules on cofiring of power plants, move the dial further — and give clues as to which sectors (in industry and transport, for example) may become first movers.

The critical test will be when customers sign up for long-term offtake, and with appropriate guarantees or assurances.

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A closer look at Europe: Credit implications for gas network infrastructure

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Conclusion

Low-carbon hydrogen is a business that has already started to grow. It has strong political support and industry interest across the world. But the challenges identified above — cost and scale, planning bottlenecks, defining rules for what is “green” and lining up customers willing to commit to a product at a premium cost — mean that the transition to hydrogen is unlikely to happen at a speed and scale to transform the business environment for regulated European infrastructure companies. READ MORE