Hydrogen: Near Term Challenges & Long Term Opportunities
The need for renewable fuel sources is accelerating. The potentially existential threat of climate change has been compounded by geopolitical factors, ever-present, but now laid bare by Russia’s invasion of the Ukraine. Fuel prices are escalating, fossil fuel reserves are shrinking faster than production, and the drum beat for de-carbonization and electrification is getting louder. While it is clear that we will continue to be dependent on fossil fuels, at some level, well beyond our lifetime, there must be an intentionality in the ongoing development and diversification of renewable resources if we are to retain and ideally improve energy security in the future.
Solar and wind, even with the storage technology that would vastly improve reliability, are limited as atmospherically influenced resources. Biofuels of one type or another have been in use for some time, but the current technologies are not always environmentally friendly, although more recent innovation seems promising. Hydro and geothermal are not particularly efficient and are geographically limited natural resources. Nuclear certainly checks the box as a zero-carbon and reliable resource, but for the moment at least, nuclear development is hindered by public perception and lack of awareness of transformative innovations that lessen potential concerns – as well as the high level of capital investment. Hydrogen, however, has the potential to be one of the key solutions in our shift to “greener” energy. The industry certainly recognizes this. During the UN Climate Change Conference in the UK last November, hydrogen was named as one of the five breakthrough technologies needed to cut emissions. Similarly, in the results from Womble Bond Dickinson’s 2022 Energy Transition Survey of executives, legal counsel, and investors, hydrogen, along with battery storage and “efficiency improvements,” ranked as one of the top three most appealing growth areas according to industry C-suite executives.
Dense, Clean, and Abundant
The concept of hydrogen as a fuel isn’t new. The Energy Policy Act of 1992 defined hydrogen as an alternative source of energy. The Act’s purpose was to address energy security and the need for air quality improvement. The sources listed were indeed cleaner, but far from being free of GHG emission, with the exception of hydrogen when produced from water through electrolysis using renewable resources (green hydrogen). Hydrogen (green or blue) is a clear standout in the list that included E85 (ethanol) gas, propane, natural gas, and coal-derived liquid fuels.
Hydrogen is recognized as being potentially the cleanest of alternative fuels with materially higher energy density than other combustibles. It is the most abundant element in the universe and, when used for fuel, the waste product is simply water. From the perspective of transportation, hydrogen can produce 3x the energy of gasoline. It is considered to be part of the long-term solution for a carbon-neutral energy grid. It can be distributed in the same way as natural gas and our existing natural gas terminal and pipeline infrastructure may be leveraged toward hydrogen distribution when it is combined with natural gas to some limited degree.
What’s Taking So Long?
So why is the hydrogen industry still relatively nascent, given the vast appetite for renewable energy—accelerating in the last few years—and the abundance of hydrogen in our ecosystem? Unfortunately, we cannot just drill a hole in the ground for it to pour out like fossil fuels. The earth is nature’s storage tank for natural gas—not so with hydrogen.
As of now hydrogen production is expensive. There are four key methodologies:
Brown hydrogen is produced by breaking down carbon-rich fossil fuel (typically coal) using a process called gasification. This process is the simplest and cheapest method using existing technology, but is just as environmentally unfriendly as fossil fuels. Every ton of brown hydrogen produces 10-12 tons of carbon dioxide. Clearly, this is counterproductive to net zero goals. Fossil-based hydrogen costs roughly $1.80/kg.
Currently, grey hydrogen is most commonly deployed for industrial use. Natural gas is combined with water through “steam reforming.” Grey hydrogen is still relatively dirty; the ratio of CO2 to hydrogen is 9:1.
Blue hydrogen is similar to grey, except the CO2 is captured and stored. Emissions are produced, but in a much lower quantity than in the production of brown or grey. The cost for blue hydrogen is $2.40/kg.
Green hydrogen is produced via electrolysis to split water into hydrogen and oxygen gas. Electrolysis is a clean, renewable technique in which electric current is used to divide water into its component hydrogen and oxygen gases. The hydrogen gas then is captured and compressed. Provided the electrolysis is powered with renewable energy, green hydrogen is produced with zero carbon emissions. It is the holy grail of hydrogen fuel—but also the most difficult and expensive to produce. And cost estimates vary widely – with the mean hovering around $6/kg.
Current technology and infrastructure limitations make green hydrogen production roughly 10 times as expensive as natural gas production – a non-starter for consumers. Electrolyzers are scarce, and the renewable energy required to make the process carbon free remains limited.
However, a Bloomberg NEF report found that the cost difference could be reduced greatly through efficiencies of scale as well as new technologies currently in development. Electrolyzer costs have declined 40% in the last 5 years with economies of scale driven by increased demand.
“Hydrogen has potential to become the fuel that powers a clean economy. In the years ahead, it will be possible to produce it at low cost using wind and solar power, to store it underground for months, and then to pipe it on-demand to power everything from ships to steel mills,” said Kobad Bhavnagri, head of industrial decarbonization for Bloomberg NEF and lead author of the report.
The Cost Reduction Chicken or the Demand Creation Egg?
For hydrogen to see widespread adoption, costs need to come down considerably. For costs to come down considerably, we need widespread adoption. Herein lies the rub.
According to the Hydrogen Council’s report A Path to Hydrogen's Competitiveness, “90% of cost reduction for non-transport applications are from scaling up of the supply chain,” inclusive of cheaper clean energy, equipment and storage.” The same report suggests that 70% of the decline in costs of hydrogen for transport will come from economies of scale in component manufacturing.
Highlighting this, executives and investors who responded to hydrogen-related questions in our aforementioned Energy Transition Survey ranked distribution complexity (41% of executives, 74% of investors), inconsistent supply, lack of infrastructure and, cost curve uncertainty (21% of executives yet 56% of investors) as impediments to mainstream deployment.
Typically, government takes on the capital risk associated with developing infrastructure for an industry considered foundational to economic development. When the US government created the interstate highway system in the 1950’s, for example, it was envisioned as critical to the nation’s logistic security while at the same time providing benefits to the general public in the form of enhanced, easier travel. Those benefits made it easier for the public to absorb the cost over time in the form of higher taxes, including fuel taxes. In order to garner that type of widespread public support for hydrogen energy, industry and government champions need to clearly articulate its benefits to the American public. This is where The Infrastructure Investment and Jobs Act comes into play. Governmental intervention can be positive if the technology pans out, but it risks the government picking winners and losers in terms of locations, skill sets, and technological advancements. Intervention can help an industry overcome financial barriers, create pubic acceptance for a nascent industry, and motivate innovation, but it can also create a commitment to future additional government spending. Boston’s “Big Dig” took more than 15 years to complete and saw costs balloon from $2.6 billion to $14.8 billion. It is a prime example of how this type of commitment may become an albatross for taxpayers over time. (In fairness, once the project finally was completed, the “Big Dig” did achieve its goals of alleviating traffic congestion and reducing travel times for Boston motorists, while providing the ancillary benefit of extraordinary economic development in the surrounding area - albeit at a much higher price than originally estimated.)
"Hydrogen has potential to become the fuel that powers a clean economy. In the years ahead, it will be possible to produce it at low cost using wind and solar power, to store it underground for months, and then to pipe it on-demand to power everything from ships to steel mills." - KOBAD BHAVNAGRI, BLOOMBERG NEF
Congress and the Biden Administration recognize hydrogen’s potential to address the clean energy imperative. This past year, The Infrastructure Investment and Jobs Act appropriated $8B of spending to build out clean hydrogen hubs in order to demonstrate the potential of the fuel, $1 billion for a Clean Hydrogen Electrolysis Program to reduce costs of hydrogen produced from clean electricity; and $500 million for Clean Hydrogen Manufacturing and Recycling Initiatives to support equipment manufacturing and strong domestic supply chains. In February, the DOE published a request for information from key stakeholders to inform a strategy to generate green hydrogen for $2/kg by 2026. Later this year, DOE is expected to select at least four geographically diverse regions, two of which must be in regions with abundant natural gas reserves to test different ways to produce and use hydrogen, demonstrate its viability as an alternative fuel source and assist in garnering public support. These sorts of initiatives have been a focus for many countries for several years. If anything, the US is behind in its efforts. In a recent podcast, the head of Womble Bond Dickinson’s UK energy practice, Richard Cockburn, suggests: “We need to get demand going. The way we are doing that in the UK is focusing primarily on clusters. That’s building clusters, carbon capture clusters, regular industrial commercial areas where there is existing demand, and where hydrogen is either being produced or could be produced to serve those customers.” There are numerous industrial applications for hydrogen that will drive the economies of scale needed to make hydrogen cost competitive.
From Point A to Point B
The infrastructure required to enable hydrogen ubiquity is expensive and is still in need of considerable innovation as the fuel presents unique “last mile” challenges regardless of whether that last mile is reached via hubs or centralized manufacturing.
Natural gas is 8.5x denser than hydrogen. As such, hydrogen simply needs more room. For that reason, it must be stored as a compressed gas, cryogenic liquid or via some material based storage such as metal-hydrides. There are, as always, cost and benefit implications to each with the latter two being more expensive.
Further, hydrogen flows 3x faster than natural gas and our existing natural gas pipelines can technically handle only up to about 15% hydrogen when blended with natural gas, and the US currently has only 1,600 miles of dedicated hydrogen pipeline – not nearly enough. As far as storage goes, the element’s low density is a key factor. Pressurized containers will always be limited in volume, cryogenics are expensive, and storing hydrogen in ammonia is relatively cheap, but requires processing for deployment in downstream infrastructure.
Bloomberg NEF has estimated that if hydrogen replaced natural gas, $600Bn of storage investment will be required by 2050. In a February 2022 report from Goldman Sachs, analyst Zoe Clark estimates that “$5 trillion of (global) investment is needed in the clean hydrogen supply chain to achieve net zero, as policy, scalability, and affordability come together.”
Even as we begin to address investment, we have the question of regulation. Who is in charge? The main agencies with the ability to influence the development of hydrogen industry and infrastructure include: the DOE, the Federal Energy Regulatory Commission (“FERC”), the Pipeline and Hazardous Materials Safety Administration (“PHMSA”), and the Environmental Protection Agency (“EPA”). Each of these agencies have some form of authority over hydrogen development, deployment, and use, but there is no comprehensive regulatory regime and existing regulations dedicated to hydrogen tend to address hydrogen issues only incidentally. For example, most environmental regulations on hydrogen deal with hydrogen’s properties, such as flammability or explosiveness (which often requires it to be regulated as a hazardous substance). These regulations are scattered throughout the Code of Federal Regulations, and are not organized in a cohesive manner to specifically address hydrogen.
Currently, the federal agencies with the most developed regulations addressing hydrogen are the Occupational Safety and Health Administration (“OSHA”), EPA, and PHMSA. But, hydrogen regulations to date have not been central to any of these agencies’ missions.
What Will the Neighbors Say?
As is the case with all forms of what can broadly be termed “economic development,” hydrogen projects will also need to overcome NIMBY (“Not in My Backyard”) objections. The natural gas industry in particular is a frequent target of NIMBY opposition. For example, the development of the Permian Highway Pipeline in central Texas has led to fierce opposition from residents who say they support the planned 430-mile natural gas pipeline project – just not near their property. And, when there is public objection to an infrastructure project, development can be tied up in litigation and stymied for decades under the National Environmental Policy Act or NEPA. The proposed hydrogen hubs and other infrastructure and hydrogen projects that must be built for broad based hydrogen deployment may well be wholly or partially financed by federal agencies and will require a federal permit or other regulatory decision, which will subject them to NEPA. So, it is imperative that the public understand and get comfortable with hydrogen technology if we are going to have the hydrogen economy develop.
Hydrocarbons displaced coal as the dominant fuel (in the US and Western Europe) between 1940-1970. It is perhaps surprising and instructive to note that what seems so common today actually took 30 years to implement. Yet we now handle natural gas in our homes with relative ease, and it is a widely used source of heating and cooking fuel because it is cheap and burns efficiently. The same is true for the gas we use in our cars, the fuel we use in our planes, and the diesel that powers our engines. The issue at hand is, of course, the GHG emissions that result from their use.
Similarly, the public has been relatively slow to adopt battery electric vehicles (BEVs). GM launched the EV1 in the late 1990s. It has taken thirty years for BEV sales in the US to reach 608,000 units in 2021, a 100% increase from 2020. Globally that growth has increased on average 50%/year since 2015. Realistically, US consumers are drawn to electric vehicles not just because of their environmental benefits, but also because they like the convenience of being able to charge while they sleep. They like the performance aspects too; the Tesla Plaid, amazingly, can accelerate from 0-60 mph in 2.07 seconds. Or they are drawn to the luxury features of some models. The EV industry and other clean energy advocates have worked hard to communicate these benefits, even as they struggle with the limited – albeit increasing - driving range of EVs and the lack of charging station infrastructure.
Approximately 2.2 pounds of hydrogen in a fuel cell EV (FCEV) can produce energy equivalent to one gallon of gasoline. A hydrogen-powered car can be refueled in around five minutes and tanks can be located at traditional gas stations and convenience stores. These will be key selling features to consumers, as the experience of refueling a hydrogen-powered vehicle is largely the same as refilling a standard gas tank, whereas EVs still require longer “refueling” times that are somewhat less than practical. The US DOE estimates that there are around 50 hydrogen refueling stations in the U.S. Even as that network and as hydrogen costs decline, the industry needs to communicate the benefits of FCEVs as loudly they have done with BEVs. FCEV sales reached just about 13,000 units at the end of 2021. The auto industry has done a terrific job with its EV advertising message, and the fact that EVs are powered by a grid using mostly GHG-emitting natural gas to generate power tends to fade into the background. It is tempting to believe that as costs decline, demand for FCEVs will skyrocket, as those vehicles powered with green hydrogen will truly be GHG emission-free.
For broad adoption of hydrogen across industrial and consumer applications, it is clear the concerted effort of all stakeholders including government, developers, and the energy industry as a whole need to build consensus for clean hydrogen as a potentially transformative energy solution. This will involve engaging with naturalists and environmentalists, as well as residents and community leaders. There is no doubt that this is a global movement. Over 40 countries have adopted a “hydrogen strategy” and demonstration projects number in the hundreds. As climate change concerns have heightened in the collective consciousness, certainly public acceptance will grow, especially as those consumer products obviously powered by hydrogen (BEVs) become increasingly available. Much progress on hydrogen energy development has been made, but time and significant additional investment (public and private) will ultimately solve the technological and infrastructure barriers, especially as the end use becomes clear. The benefits on the other side of these challenges including energy security and a cleaner and more protected environment are well worth it.