The cost of producing green hydrogen is one of the biggest obstacles that may prevent carbon-intensive sectors from meeting global warming goals.
It is expected that there will be a shortage of green hydrogen supplies, due to the limited electrolysis capacity scheduled to be operational in the short term, as well as the high cost compared to fossil fuels, according to a report seen by the specialized energy platform.
This may hamper efforts to reduce emissions, as various industries place high hopes on green hydrogen, in an attempt to achieve their climate goals, away from polluting fossil fuels.
“The way we see it, the price will follow emissions,” says Pierre-Germain Marlier, investment director at the hydrogen-focused Hy24 fund.
He justified this by saying that the European Union’s emissions trading scheme reduces the maximum allowed greenhouse gas emissions each year, making carbon emissions more expensive for industries over time.
He added: “We will start first with the easiest thing to get, where we get rid of the most carbon dioxide with each kilogram of green hydrogen, and then we will deal with the sectors one by one.”
The best uses of green hydrogen
HY24 Investment Director Pierre-Germain Marlier pointed out that the first wave of European hydrogen projects that are scheduled to receive public and private financing are in heavy industries such as steel, as direct reduction of iron using clean hydrogen could replace blast furnaces. , carbon dense.
The fund invested in the Swedish startup company H2 Green Steel, which is close to making a final investment decision regarding its pioneering project in Boden, at the end of this year (2023).
Investor and analyst Michael Liebrich echoed this perspective in a speech a few days ago, pointing to green steel as the only use case for hydrogen that would reduce emissions enough to justify drawing limited renewable electricity, away from direct use in electricity or transportation, according to what was reported by the platform. “Hydrogen Insight” (Hydrogen Insight).
However, this characterization of the highest emitting sectors as the most obvious acquirers was disputed by Marlier’s colleague on the panel, head of the energy transition group at commodity trader Trafigura, Margot Moore.
“We look at the current consumption of these industries and at what price, and what gap will be filled by a low-carbon offtake agreement, we need to talk about the green premium,” Moore said, adding: “Not all industries have the same willingness to pay.”
“A lot of times, people focus on replacing hydrogen with natural gas, which in terms of value is probably the most expensive green premium,” she continued.
The following infographic – prepared by the specialized energy platform – explains the method of producing green hydrogen, among other types:
Steel industry crisis…little profits
Margot Moore, head of Trafigura’s energy transition group, noted that while some heavy industries, such as chemicals, are “great end users” of hydrogen, “steel has very limited profit margins today with coal and gas, and displacing hydrogen requires higher costs.” capital, in addition to raising operating expenses.
She added: “It is not surprising that these industries are highly supported by local governments and at the European Union level. So, I think one of the reasons why H2 Greensteel projects are getting a lot of attention is because they are also getting a lot of subsidies.”
While she agrees that the benefits of reducing emissions are “clearly there” for sectors that are difficult to mitigate, “these will also be very expensive industries to decarbonise”.
For his part, analyst Michael Liebrich said: “If you look at the profits of steel companies, you will find that they are very small, and they cannot say, they will do the right thing.”
He noted that in order to move away from carbon-intensive furnaces at all, subsidies to cover the green premium for renewable hydrogen must be guaranteed for more than a decade.
Given limited government budgets and taxpayers’ patience with their money toward ineffective climate solutions, Liebrich predicted that the steel industry will begin to move away from Europe to regions where the process will be cheaper, such as Australia, Brazil, India, China or the United States.
“Ultimately, the problem is that politicians cannot spend the money to make the European steel industry switch to primary green steel, and they cannot admit that they are closing down,” he said.
Green hydrogen production cost gap
In this context, the high cost of producing green hydrogen will push developers to look for other markets more willing to pay, because the best climate option has not been the winner.
“I think there are a lot of other, smaller target markets that we don’t talk about enough,” says Margot Moore, head of the energy transition group at commodity trader Trafigura, according to the report seen by the energy platform.
She pointed to diesel, which is heavily taxed in Europe, as its cost is similar to the cost of producing green hydrogen in some regions, so mobility may represent an easier transition from fossil fuels to clean hydrogen.
She continued: “We need to target more of these diesel operations. In Rotterdam, there is a nearby port that uses tons of diesel, and it is very difficult to electrify those uses. Why don’t we look to convert them to hydrogen today?”
While the cost gap between hydrogen and diesel may be closer than that of gas, Marlier noted that the economics of hydrogen mobility are burdened by costs that exceed production.
“When you get your hydrogen from a hydrogen station, 75% of the price of that hydrogen has nothing to do with the hydrogen molecule,” he said, as the capital expenditures and maintenance costs of the fueling station, as well as the cost of compression and distribution, all add significantly to the price. Final at the pump.
He added: “I strongly believe in the possibility of hydrogen mobility in specific sectors, some of which will operate entirely on an electric battery, and some of which will operate on hydrogen.”
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2023-10-15 23:15:57
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