A hard road ahead to a hydrogen economy?

The “hydrogen economy” has been held out as one of the best prospects for decarbonising our industrial societies. The catch-all term encompasses hydrogen produced from “green” sources such as electrolysis powered by renewables and put to use in everything from steel or cement making to vehicle transport, electric storage and space heating. The team at Bloomberg New Energy Finance (BNEF) have released analysis of what will be required to make hydrogen cost-competitive in their Hydrogen Economy Outlook.

The headline figures are eye-watering at first glance: $150bn (figures all in $US) of cumulative subsidies by 2030, allied with legislated net zero targets, sectoral targets for take-up of hydrogen options, tough transport emissions standards, harmonised standards and investment co-ordination. Broken down, the subsidies are $15bn a year spread across the many countries and regions that are pursuing hydrogen economy goals, and so likely comparable to those enjoyed by other energy vectors such as renewables and oil/gas (depending on how a subsidy is defined…). How much appetite governments will have for a major new round of subsidies when they are trying to balance their books post-COVID-19 remains to be seen, though.

Even so, where this gets us by 2050 if these policies successfully bring carbon down the cost curve, is a hydrogen cost that may be competitive with natural gas in some gas importing countries such as Germany and India, and where the premium for using hydrogen over fossil fuels in most major industrial processes is equivalent to a carbon price between $50-90/tCO2, with steel at the lower end and glass and aluminium at the higher end. Large road vehicles such as buses and trucks ae expected to be the first fully cost-competitive uses of hydrogen. Europeans may look at such carbon prices and shrug their shoulders as what they expect to be paying by then. Here in Australia where carbon pricing remains verboten as a policy tool, we’d have to provide ongoing subsidies to hydrogen production or industrial use facilities to compensate for the lack of carbon price.

On the positive side, Australia is among the countries with the land and other resources to host enough renewables to produce power for both hydrogen and end-use electricity in BNEF’s 1.5-degree decarbonisation scenario. This entails a global increase in renewable electricity output to double the output from all electricity generation today and. Additionally the large East Asian economies are not in this position and so would need to be hydrogen importers. Australia’s strong wind and solar resources plus some large-scale storage options also mean that it is expected to become one of the lowest-cost sources of hydrogen, with up to a 20-25 per cent discount to BNEF’s benchmark projected cost. If this can be realised, the effective carbon prices noted above are somewhat overstated for Australia.

Like any modelling, the BNEF analysis is highly dependent on a range of input assumptions. They are generally bullish on the growth of clean energy technologies, so their projections are likely to fall on the more optimistic side. Nothing in the analysis suggests that hydrogen development initiatives should be curtailed, rather that we should be realistic about the time and scale of support that will be required for this industrial transformation to succeed. Even then, hydrogen will face significant economic headwinds if the emissions of its competitor fuels are not fully recognised. For Australia this means we need to find a way to talk about carbon pricing again if we want to realise the hydrogen dreams set out in multiple state and national roadmaps.