Hydrogen Hype: Balancing the Equation – Part 2

So why be sceptical of hydrogen?

First and foremost, the global demand for hydrogen as a fuel source is low. Very low.

The vast majority of global use of hydrogen (currently around 85Mt/annum) is for industrial use, with growth in this space forecast at just 2% per year over the next three decades.

Therefore, almost all of the forecast fivefold increase in demand for hydrogen touted for the next decade is linked to heating and transport – largely replacing fossil fuels.

However, there is no guarantee of this, and hydrogen as a fuel source suffers from a very fundamental issue of physics – it has low volumetric energy density.

‘INEFFICIENT’

It is inefficient. Converting the world from fossil fuels to a low volumetric energy density alternative is going to be cripplingly expensive, and would deliver a less optimal outcome than the status quo.

In addition, for a vast number of touted uses for hydrogen, there are a number of alternative ‘clean energy’ options, many of which are more commercially viable. This is especially true if one considers ongoing technological development (which is always assumed for hydrogen production and use).

Thus the problem is that hydrogen in general fails the physics viability test.

The second challenge, should one somehow address or ignore the physics, is the issue of ‘green’ hydrogen.

First and foremost, we need to be clear that green hydrogen is not commercially viable at present, and – at best – won’t be for a while to come. Hydrogen, irrespective of ‘colour’, is a homogenous molecule. In its ‘green’ form, it is still many years, at best, away from being cost competitive with other forms of the same.

To conduct a like-for-like comparison, one needs to consider other low-or-no greenhouse gas (GHG) emission alternatives. Two such alternatives exist. Firstly, a low-GHG option, being hydrogen from fossil fuels with carbon capture, and secondly, a no-GHG option – hydrogen from nuclear energy.

The United States Department of Energy says: “With carbon capture and storage, hydrogen can be produced directly from coal with near-zero greenhouse gas emissions.”

THE COSTS

Given that brown/grey/black hydrogen can be produced at 50% to 60% of the cost of green hydrogen, and that emissions can be brought close to zero (and with technology development constantly improving carbon capture), the cost difference between green and grey/brown/black hydrogen (converted into ‘blue hydrogen’ through carbon capture) in terms of cost-per-unit of GHG, becomes extreme.

However, while low GHG options are potentially more viable than green hydrogen on a cost-per-unit of GHG basis, nuclear is zero GHG, and can be produced at 60% of the cost of green hydrogen.

Moreover, with nuclear, there is a fallback option – if the hydrogen hype dies, as it may, one is left with useful baseload energy, not hectares of intermittent energy supply to complement existing middle-of-the-day energy surpluses. So, the second problem is one of commercial viability. Green hydrogen fails this test.

So why does this lack of viability matter? Firstly, it means that the production and use of hydrogen must be subsidised for the world to move to this energy source at scale. Conceptually, there are a few ways in which this could be done.

Firstly, a straight subsidy on the production or use of the product. Secondly, public provision of specific infrastructure for the sector, ensuring that not all of the sector costs are borne by the industry itself.

Thirdly, through taxes and disincentives to use alternative energy sources, for example, carbon taxes and similar.

SUBSIDIES

So, who will pay these subsidies? The western part of the northern hemisphere, most specifically western Europe, is the primary envisaged market for green hydrogen by 2030 and 2045, as the economies of Europe push to get to ‘net-zero’ emissions as quickly as possible in a desperate attempt to reduce climate change.

Thus, the expectation from Namibia seems to be that Europeans and other Westerners would therefore be willing to pay almost any price to source clean fuels, such as green hydrogen. The zeitgeist assumes they will be the ones to subsidise non-viable GH2 production.

However, great caution needs to be exercised here. After a multi-decade foray into solar and wind energy in Europe, the fundamental challenges associated with overreliance on these forms of energy are becoming increasingly clear to the general public, despite being obvious to technical persons for decades.

Firstly, they are not baseload and are, at best, complementary to baseload. As a result, system availability and stability require complementary base-load generation and spinning reserve, most of which isn’t strictly ‘green’.

This includes coal and nuclear, or more ‘green’ options like hydro or ‘transition’ fuels like gas. Secondly, while solar and wind energy may be relatively cheap per unit of energy produced, when combined with the additional baseload capacity and spinning reserves needed, these become relatively expensive.

Other options, such as nuclear and coal, can be materially cheaper.

The eastern section of the northern hemisphere understands this well, so while places like China produce vast inputs for the world’s solar and wind energy industry, relatively little is installed locally, with just 8% of China’s total energy coming from solar and wind, compared to over double this in Germany, according to Our World in Data.

Because energy is so central to human development, productivity and growth, relative energy costs are fundamental to national politics, geo-politics, global trade balances and beyond.

OVERRELIANCE

Because of the economic problems with overreliance on large-scale solar and wind, and because of the geopolitical complexities of reliance on external suppliers of inputs fuels for many forms of baseload energy, particularly gas, energy prices and energy availability in western Europe, Germany specifically, seem to have started a political shift away from ‘green’ and the ‘green’ parties, towards more centre-right parties, with generally more economically sound energy policies.

Of course, this is not to say that the move will disregard environmental concerns, but more likely see a pivot to the other form of low/no-GHG emission energy, namely nuclear energy.

The idea of ‘green’ at any price may well be shifting.

As we often explain, bad economics tends to be highly latent.

‘BACK TO EARTH’

One can get away with bad policy for a while before it comes back to haunt you. However, at the end of the day, the old adage runs true: “Economics is to politics as gravity is to jumping – it brings you back to earth.”

The political shift being seen across western Europe certainly suggests that policy drives dissatisfaction among the populace and will drive political change.

The big risk here is that this trend, or one similar, would engulf the green hydrogen (and perhaps hydrogen in general) movement, before it really takes off.

Because of the relative cost of hydrogen compared to fossil fuels, the ultimate question is: What extra cost are the electorates of the world willing to pay, directly or indirectly, if at all, for the movement away from fossil fuels to a homogenous molecule produced in one of the manners that results in low GHG emissions?

As the zeitgeist on solar and wind as the solution to the world’s environmental problems crumbles (in favour of the likes of nuclear energy), and as the public starts to declare en masse that the emperor is unadorned, the answer to this question is inevitably going to move towards ‘zero’.

• * Rowland Brown is the co-founder of Cirrus Capital.