How to take the brakes off hydrogen and realise its potential

The fact that hydrogen has a wide range of potential uses has led to the optimistic but largely mistaken view that hydrogen was the answer to the many challenges thrown up by the energy transition, writes Steve Horrax, head of department - energy transition UK at Ramboll.

The result of this view was that investment in hydrogen has arguably been spread across too many different technologies, to the detriment of the areas where hydrogen can make a real difference. The effect of this has been particularly pronounced in skills development and technology infrastructure, where investment is needed most.

Interest in the ‘fuel of the future’ remains strong, as evidenced by the number of national and regional hydrogen strategies. These looked good on paper – literally thanks to some impressive illustrations and graphics outlining hydrogen’s potential – and had an important role to play in educating politicians and investors on the opportunities that might exist for hydrogen.

However, it is also essential if this potential is to be realised to begin moving away from overarching strategies and to start confirming where investments should be made.

This process has not been entirely straightforward. Rather, it has required a great deal of learning from industry stakeholders, including developers, consultants, engineers, investors and the government. But the result has been a growing body of evidence on the power-to-X value chain – whether that is capital cost analysis, supply chain lead-in times and levelised costs for hydrogen derivatives.

We are now increasingly in position to take advantage of these efforts, but alternative technologies, including industrial scale heat pumps and battery technology have also made progress in that time – perhaps more so than hydrogen and hydrogen derivatives.

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Against this backdrop, it is not entirely surprising that investors are facing up to a challenge when looking to invest in hydrogen. Government support, for instance through the national targets established in the UK, has helped to ensure that significant investment opportunities are still available.

That said, the due diligence requirements when balancing risk appetite against the potential returns are typically complex. This has also acted as a deterrent to  the progress of hydrogen and the power-to-x market.

Research has shown that Final Investment Decisions (FIDs) for green hydrogen projects have been incredibly few and far between. This is mainly attributable to the complex project challenges such as increasing costs across supply chains, an asymmetrical supply and demand model (including non-competitive PPAs and a skewed off-taker demand), underdeveloped transport and storage infrastructure, and the potential for long lead in times.

Inexperience in the EPC sector, the risk avoidance that accompanies new technologies, as well as difficulties in determining and applying appropriate commercial models and pricing agreements have also contributed to the challenges facing hydrogen. The advancements mentioned above in heat pumps and electrification also present counterfactual uncertainties for investors in hydrogen.

Remembering hydrogen’s potential

It is important to note, however, that the overall outlook for hydrogen remains positive – a fact that can sometimes be lost in the noise surrounding hydrogen’s challenges. Incremental progress is being made which now needs to be translated into a greater number of FIDs and, ultimately, functioning projects.

It is important not to become caught in a rigid focus on hard-to-electrify and energy intensive industries. Whilst hydrogen’s deployment across these industries, such as shipping, refineries, and fertiliser manufacturing offers the greatest value in carbon reduction, for hydrogen to continue to make progress in the UK, it would be a mistake to limit the horizons for hydrogen too far. Particularly because this could result in an opportunity to invest in improving engineering capabilities and exporting technology and skills across the globe being neglected.

Currently, as the hydrogen ecosystem begins to develop, the UK market is witnessing four types of project archetypes:

1. direct supply and demand project models,
2. masterplan clusters,
3. cluster-enabling projects and
4. research-led projects.

But to expand hydrogen’s horizons and unlock its full potential, particularly in the face of investment challenges and the relatively slow pace of change, further support will be needed.

In the power generation context, many UK energy business houses have or continue to plan their decarbonisation journey with an aim to achieve net zero.

The hydrogen solution in this journey is unfortunately not so simple. Green electrolytic hydrogen is not an effective approach as a sole solution to reduce emissions in the power sector due to inefficiency and opportunity cost of using clean electricity to produce electrolytic hydrogen. Power generation from electrolytic hydrogen produced from renewable power has a whole system efficiency of 20-40%.

Large scale utilisation of green hydrogen in the power sector will require a long duration energy storage (e.g. salt mines) and transport distribution network like the equivalent for natural gas. As such, the choice of locations and efficiency of value chains will be critical for enabling cost-effective options, which will be an integral part of the future energy system with high renewable intermittency.

A future fully decarbonised grid might be a combination of various clean dispatchable power generation technologies, battery storage and hydrogen playing a part during times of surplus power generation to either generate new revenue streams via e-fuels or as a medium for Long Duration Energy Storage with power generation.

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A promising beginning?

The new UK government was recently delivered into office on the back of a manifesto promising change. A key part of that promise of change is a commitment to taking the brakes off investment to stimulate economic growth.  The early signs have been encouraging.

The first King’s Speech included a commitment to meeting net zero targets and building on the progress made by the previous government. £500 million ($640 million) was also earmarked for green hydrogen by the new National Wealth fund. But almost certain to be most important is the establishment of Great British Energy.

The model can work – as demonstrated by a number of other nationally owned energy companies which have been launched successfully in Europe. With an initial budget of £8.3 billion ($11 billion) dedicated to owning and operating, as well as investing in, clean energy projects, Great British Energy could de-risk hydrogen and power-to-X projects that may otherwise have been shelved by private investors. Instead, Great British Energy could well enable additional private investment and accelerate the delivery of projects. That is certainly what the new government will be hoping for.

It is also to be hoped that this will result in a more coordinated approach to investment, including its location and timing. The priority will likely remain projects that promise immediate rewards in terms of carbon reduction, but a longer-term view should also be taken to ensure the UK remains well-positioned to continue attracting investment.

Ultimately, when discussing funding support and investment into hydrogen, it has to be recognised that it is not ‘the Swiss Army knife’ of the energy transition. But equally, that does not mean that it has nothing to offer.

On the contrary, hydrogen has a number of critical applications that stand to make a significant difference to meeting net zero targets and climate goals. The key now is to ensure support targets the right areas and unlocks hydrogen’s full potential.