Hydrogen: Obligation or hype in global energy transition

By Hrishikesh Chinchkar, M.SC. – Researcher in Renewable Energy and Stakeholder Engagement at Kelso Institute Europe

We are living in a time of unprecedented technological advancement, making our lives increasingly comfortable. However, have you ever considered how our growing luxurious lifestyles impact the environment? Between 1970 and 2019, approximately 11072 weather, climate, and water-related disasters were reported resulting in 2.06 million deaths and $3.64 trillion in economic losses. These incidents underscore the urgent need to transition from fossil-based energy systems to renewable ones, aiming to keep the global average temperature rise well below 2°C while striving at limiting it to 1.5°C.

The adoption of the Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs) has catalysed the global energy transition. Investment in renewables by both developed and emerging economies has significantly increased the share of renewables over the last decade. The European Union (EU) has emerged as a global leader in fostering clean energy, increasing the share of renewable sources from 16.5% in 2013 to approximately a quarter of total energy consumption in 2023.

However, decarbonizing energy-intensive industries (EIIs) is paramount to achieving the Paris Agreement goals. The steel and chemical industries, responsible for 7% and 5% of global CO₂ emissions respectively, face significant challenges in decarbonisation due to the need for high process temperatures, capital-intensive and long-lived assets, significant infrastructure upgrades, and lack of conducive policies. Hydrogen has emerged as the frontrunner in decarbonising EIIs, prompting 61 countries to unveil national hydrogen strategies. Globally, 1600-1800 hydrogen projects are in development, signifying the critical role of hydrogen in transforming the energy system. Transitioning from fossil-based hydrogen to clean hydrogen offers an opportunity to save a gigatonne of global CO₂ emissions annually.

Why Investment in Hydrogen is an Obligation and Opportunity, Not Hype

The global energy landscape is undergoing a profound transformation to address severe threats of climate change, ensure energy security, and fostering economic growth. The Russian invasion of Ukraine exposed the EU’s vulnerability due to its high dependence on fossil fuels, prompting reforms to reduce reliance on Russian gas. Similarly, many countries are formulating energy policies to lessen dependence on fossil fuels. Hydrogen has emerged as a key player in advancing the future global energy system.

Although the share of renewables is rapidly increasing in the global energy mix, certain sectors require special attention for decarbonisation. The steel and chemical industries are crucial to the global economy, providing employment to millions and serving as the backbone for many dependent industries. Currently, no mature alternative technologies exist to decarbonise these sectors. Blast furnaces are widely used for crude steel production is primarily rely on fossil fuels. Coke derived from fossil fuels, is used as a reducing agent to convert iron ore into molten iron, resulting in significant emissions. Immense research is underway to use renewable hydrogen as a substitute for coke in blast furnaces. The Swedish company H2 Green Steel has demonstrated that using hydrogen can reduce emissions by up to 95% compared to traditional blast furnace technology. Refurbishing existing blast furnaces to inject hydrogen offers significant potential to reduce process emissions. For instance, producing one tonne of hot rolled coil emits 1850 kg of CO₂ via the traditional route while the hydrogen-based route emits only 196 kg of CO₂.

Similarly, using renewable hydrogen to produce ammonia has the potential to save approximately 2-2.5 tonnes of CO₂ per tonne of ammonia produced. The Haber-Bosch process is widely used for ammonia synthesis and primarily relies on hydrogen derived from natural gas, coal, and oil responsible for significant GHG emissions. Various processes, such as electrolysis powered by renewables, biomass-derived hydrogen, biological hydrogen production, and nuclear-powered electrolysis, offer alternatives to produce green or low-carbon ammonia. Therefore, low-carbon or green hydrogen presents immense potential to decarbonise EIIs.

Additionally, renewable energy sources depend on natural resources like solar insolation, wind speed, and biomass. Hydrogen offers numerous opportunities, such as storing excess electricity produced from renewables, facilitating sector integration, and optimizing the grid. The rising share of renewables makes the existing grid infrastructure vulnerable to surplus generation. Moreover, substantial investment and digitalization are required to optimize renewable energy consumption. Hydrogen plays a crucial role in optimizing renewable energy use and prolonging investment in upgrading the grid infrastructure.

Key Risks and Challenges in Clean Hydrogen Investment

Despite the promising potential, clean hydrogen projects face significant risks and challenges, particularly in Emerging Markets and Developing Economies (EMDEs). Key deterrents for public and private financial institutions include:

1. Uncertain Market Demand: The lack of credible off-takers and price volatility creates uncertainty deterring investment.
2. High Cost of Finance: Political risks and market uncertainties elevate the cost of finance, making projects less attractive.
3. Infrastructure and Technology Risks: Significant investment is required for infrastructure development and technology adoption adding to financial risk.

Economic and Risk Mitigation Instruments

To mobilize private capital and help projects achieve Final Investment Decision (FID), several economic and risk mitigation instruments should be developed:

1. Off-take Guarantees: Ensuring demand by guaranteeing purchase agreements.
2. Political Risk Insurance: Protecting investments against political instability.
3. Technology Performance Guarantees: Assuring investors of the reliability and efficiency of new technologies.
4. Foreign Currency Guarantees: Mitigating risks associated with currency fluctuations.

Governments, international financial institutions, and insurance companies like Swiss Re are well-positioned to develop and implement these instruments.

Supporting International Financing Initiatives

Governments and International Finance Institutions (IFIs) can support the coordination of international financing initiatives for clean hydrogen by:

1. Creating Joint Financing Partnerships: Collaborating with multiple stakeholders to pool resources and share risks.
2. Establishing Multi-Stakeholder Platforms: Facilitating transparent interactions and harmonizing processes among various actors.
3. Standardizing Contracts: Streamlining transactions and creating governance accountability to spur market growth.

Conclusion

The rising threat of climate change, increasing energy demand, geopolitical conflicts, and pressure to meet decarbonisation goals have prompted countries to adopt sustainable energy policies. Hydrogen is seen as a prominent alternative for the global energy transition. The enthusiasm for hydrogen in the global energy market is justified in many ways. However, issues surrounding the exploitation of resources required for hydrogen technologies, such as the displacement of indigenous communities and energy colonialism, need to be addressed to ensure a just transition. Additionally, the massive investment required to facilitate hydrogen transport and storage presents a challenge.

Hydrogen is not just an obligation but an opportunity to meet climate targets and ensure energy security in the face of growing geopolitical conflicts. It is a critical component in the global energy transition, with the potential to revolutionize the energy landscape and contribute significantly to a sustainable future.

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Picture courtesy of the author