‘Meaningful state support’ needed for hydrogen’s ‘third time lucky’

Hydrogen power has attracted both hype and disillusion before. But with increased realism, policy support and the pressing need for carbon-free energy, will it be third-time lucky?

There is no easy answer. Despite being the universe’s most abundant element, pure hydrogen on earth is difficult to source and contain, making its journey towards being the ubiquitous fuel bumpy at best. False dawns – the 1970s oil crisis and the 1990s when climate change initially shot up political agendas – have left some jaded. The sheer difficulty and cost of producing, transporting and containing hydrogen also previously put it in the “too difficult” basket. But complex geopolitics impacting energy security and growing intent around carbon emissions have transformed the debate, causing many observers to believe that “this time it’s different”.

Evidence gives credence to this hope; recent analysis noted over 1,000 hydrogen projects currently underway globally. The private equity industry alone committed nearly $8 billion to hydrogen investments in 2022. The possibility of “low carbon hydrogen” is a tantalising prospect for those looking to promote prosperity without damaging the environment.

This comes in the form of “green hydrogen” produced from water via renewable energy powered electrolysis or “blue hydrogen” produced by separating hydrogen from natural gas and capturing and storing the carbon dioxide. The technology exists, but it is currently expensive, and, like other sustainable technologies, the costs will only come down with deployment at scale.

We remain years – and a string of technical breakthroughs – away from green or blue hydrogen becoming a commercially viable replacement for fossil fuels. The argument has also shifted from creating a “hydrogen-based economy” to understanding the potential role hydrogen can carve out in the global push to decarbonise.

The emerging consensus is that the clearest use case for hydrogen will be in hard-to-decarbonise areas of the economy. Steelmaking is a key example; the industry is responsible for 7-9 percent of global emissions and, as manufacturers move towards electric arc furnaces, there appears few sustainable alternatives to hydrogen.

Perhaps the greatest obstacle hydrogen faces is that current renewable energy capacity is nowhere near large enough to create the amount of green hydrogen required for 2050 climate goals. The European Commission came up with 10 million tonnes of hydrogen being produced by 2030; it’s a huge ask.

Energy security concerns have also concentrated minds on the need to ramp up renewable energy production. The EU wants renewable power to make up 42.5 percent of its energy mix by 2030 but the share stands at 23 percent as of 2022. Again, it’s a huge ask.

Where that production happens will also be of interest. China, for example, is already big in electrolyser production and will get bigger. They are the one to watch.

Another key challenge is the difficulty of transporting hydrogen gas, meaning projects either require major infrastructure upgrades, to be built on the doorstep of end-users, or require hydrogen to be blended into and out of another form so that transportation can feasibly occur.

To succeed, industry players require meaningful state support to attract capital and manage project risk until markets and supply chains can develop. There has been progress with 41 governments announcing hydrogen strategies by 2023. The most striking example is in the US, where the Inflation Reduction Act offers a generous $3/kg in subsidy for green hydrogen projects. The UK is also moving forward with its approach of running competitions for Government support.

Ultimately, we also need clarity on the regulation that will underpin and support this new industry. Policy support and targets need to be turned into workable regulation and subsidy schemes to stimulate supply and demand and de-risk investment, while also making the industry safe and investable.

Such thinking reflects a newfound pragmatism; hydrogen is not the sole elixir to decarbonise the world. Its appeal is as a targeted, tactical part of the energy transition: a specialist role that becomes vast if applied globally. The mistake is to assume it will succeed overnight. It still requires vast amounts of support from government and commitment from industry.

The author is Lewis McDonald, co-head of Hebert Smith Freehills’ global energy practice.