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Green hydrogen could lower stranded asset risk: Carbon Tracker

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A Carbon Tracker report calls for hastening green hydrogen production as high gas prices risk stranding fossil hydrogen assets.

  • A report by independent financial think tank Carbon Tracker claims fossil fuel-based hydrogen assets are at risk of being stranded.
  • The price of fossil hydrogen’s major feedstock, natural gas, has risen 70% since the start of the war in Ukraine, driving up the levelised cost of grey and blue hydrogen.
  • The report calls for the acceleration of green hydrogen production, as it sees a rising risk of fossil hydrogen assets being stranded from prolonged gas price inflation.

Persistently high gas prices could strand fossil hydrogen assets, according to Carbon Tracker. Existing and new production capacity in Asia and Europe is at greatest risk, where high gas prices have reduced the levelized cost of green hydrogen below that of fossil hydrogen. The report recommends ramping up green hydrogen in response.

Scaling up green hydrogen to scale to serve the global economy, however, comes with its own challenges. The process is less efficient than that used to make blue hydrogen, and is also highly water-intense. The former problem awaits the development of technology solutions, while the latter will remain a risk of deploying green hydrogen, especially in water-stressed countries.

The report recommends focusing green hydrogen use on certain industries. Hard-to-abate sectors, like transport, agriculture, and steel are suggested as primary candidates. The justification here is that these have a necessity, and few strong alternatives to decarbonisation. Using green hydrogen cells to backup intermittent power generation is proposed as a secondary use.

Fossil hydrogen assets in Europe and Asia most at risk from higher gas prices

Carbon Tracker expects natural gas prices to remain inflated in the near-to-medium term. The commodity is the major feedstock in the production of fossil-fuel based hydrogen, or fossil hydrogen. Prices are up 70% since the war in Ukraine began this year, which has driven up the levelized cost of fossil hydrogen.

As a result, fossil hydrogen prices are up by 50% in Europe in 2022. Even a sooner-than-anticipated end to the war would keep gas prices high in the medium term, jeopardising plans for new fossil hydrogen capacity.  In a new report analysing clean hydrogen’s place in the transition to net zero, Carbon Tracker estimates that over $100 billion worth of fossil hydrogen assets could be stranded in Europe and Asia by 2030. 

Assuring the supply of gas has also become a prime concern for fossil hydrogen production. In Eastern and Western Europe, gas price volatility has jeopardised the operation of 20 existing plants, accounting for 2 million tons of annual hydrogen production, according to the report.

At stake is new planned hydrogen capacity, like the four H2H Saltend projects planned by Equinor, totalling 1.2 million tons in annual hydrogen capacity. Tapping gas supplies from other sources, like Africa, may become necessary after Russia suspended gas supply to Nord Stream 1, Europe’s main source of gas.

Fossil hydrogen production in Asia also faces similar challenges. Carbon Tracker estimates new fossil hydrogen produced would cost 35% more per kilogram than the base average cost of hydrogen produced using renewables, or green hydrogen. 

The US market remains less affected. A lower cost of gas production there means fossil hydrogen (grey or blue) is still cheaper than green hydrogen. The cost of gas in the US is estimated by Carbon Tracker to be three times lower than the price in Asia.

Differentiating between fossil (grey and blue) hydrogen and green hydrogen

Fossil hydrogen has been in use in internal combustion engines for over 200 years. A hydrogen fact sheet produced by Columbia university claims that 76% of hydrogen is produced from natural gas by Steam Methane Reformation (SMR), while 22% is produced by coal gasification and 2% from electrolysis. This varies by country, with some like the US producing 95% of its fossil hydrogen using natural gas. 

Grey hydrogen is produced through SMR or AutoThermal Reforming (ATR). It involves splitting natural gas or methane into hydrogen and CO2, with the latter being emitted into the atmosphere. Blue hydrogen involves storing and trapping the CO2, via a process called carbon capture and storage (CCS).

According to the Carbon Tracker report, the efficiency of SMR and ATR systems ranges between 74% and 85%.

Electrolysis is the process used to produce green, or low-carbon hydrogen. The process uses electrolysers which run on electricity. In the case of green hydrogen, this electricity would be generated by renewable energy sources. The average efficiency of hydrogen electrolysers is between 40% and 70%, according to Carbon Tracker.

Rapid deployment of green hydrogen faces technology, environmental challenges

Green hydrogen is being hailed as key to the transition to green energy. Technological and environmental challenges, however, confront scaling up capacity to the levels of demand needed for it to contribute meaningfully to global net zero goals.

A basic technological challenge is its reduced efficiency compared to blue hydrogen. According to research from the World Economic Forum (WEF), 30-35% of energy is lost in producing green hydrogen by electrolysis. Other sources of energy loss in its supply chain include liquefying hydrogen to other forms, like ammonia, for transportation, and the use of hydrogen in fuel cells. 

Green hydrogen also poses environmental challenges. Producing it is a water-intense process, requiring fresh or desalinated water, the latter being highly carbon-intensive until renewable energy is developed to scale.

This will make scaling green hydrogen difficult in water stressed countries. The World Resources Institute has flagged 17 countries, home to a fourth of the world’s population, as facing extreme water stress. This includes all of the so-called petrostates of the middle-east and North Africa.

Focus on hard-to-abate industries while innovation improves efficiencies

The Carbon Tracker recommends green hydrogen use be focused on a few industries. It cautions governments and investors to be aware of the technological and environmental challenges currently inherent in its deployment. 

Hard-to-abate sectors are suggested as perfect candidates for the use of green hydrogen. Such sectors, including agriculture, heavy transport, and steel, are all sectors that need to decarbonise their operations, and yet have few available options due to the nature of their carbon intensity. 

Using green hydrogen fuel cells to back-up intermittent power from renewables is also suggested. Whether that makes sense from an economic standpoint remains to be seen. Carbon Tracker does not see green hydrogen being deployed on a large scale in non-essential applications in the short-to-medium term.


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