Governments, investors and at least one billionaire are betting big that humble hydrogen, the simple ‘H’ in ‘H2O’, can accelerate a global energy transition as the world increasingly scrambles for alternatives to oil and gas. As potential importers grow impatient, the race to become export heavyweights is on. Jacob Atkins reports.
It’s 2050. Dozens of purpose-built vessels criss-cross the globe, energy giants in Saudi Arabia, Australia and Chile adjust production to match fluctuating demand in Europe and Asia, while traders at commodity houses haggle over cargoes and bankers closely track price movements.
Welcome to the future global market for green hydrogen – as imagined by many in the nascent industry’s ever-swelling crowd of experts, investors and cheerleaders, who believe it is the key to slashing global greenhouse gas emissions.
Produced by passing an electric current through water to split hydrogen from oxygen in water molecules, hydrogen gas can be used to power cars, heavy vehicles, ships, trains, to heat buildings and even to replace coking coal in steelmaking. When the splitting process – electrolysis – is powered by a renewable energy source such as wind or solar, it is termed green hydrogen.
Hydrogen, with the electrolysis powered by fossil fuels, is already part of oil refining and chemical production, and its use has remained fairly stable. But it is green hydrogen which energy consultancy Wood Mackenzie said in October last year that “in a net zero 2050 world” could make up around a third of all seaborne energy trade.
According to the EU’s hydrogen strategy, green hydrogen could meet almost a quarter of global energy demand by 2050, with annual sales of €630bn. Goldman Sachs, in a September 2020 research report, estimated green hydrogen “could give rise to a €10tn addressable market globally by 2050 for the utilities industry alone”.
Wood Mackenzie forecasts that global demand for hydrogen will increase between two and six-fold between 2021 and 2050, depending on the energy transition scenario. Under a 1.5 degree Celsius warming scenario – the aim of the Paris climate change agreement – annual green hydrogen demand could reach 530 million tonnes (mt) by mid-century.
Early supply contracts for seaborne green or low-carbon hydrogen are already being signed. A government-backed initiative in the Australian state of Victoria, the Hydrogen Energy Supply Chain, will see hydrogen exported to Japan early this year. In that case, the hydrogen will be split using brown coal, with the emissions abated through carbon capture. When produced through this method, it is known as blue hydrogen.
So far, green hydrogen’s most powerful backer is Australia’s second-richest person, Andrew “Twiggy” Forrest. The mogul made his A$27bn fortune on the back of China’s insatiable demand for Australian iron ore, but since 2020 has reportedly jetted to more than 50 countries in a quest for both new hydrogen customers and production sites.
Despite not yet producing even one molecule for export, Forrest’s Fortescue Future Industries (FFI), a spin-off of his Australian-listed Fortescue Metals Group, in November inked supply deals with UK construction firm JC Bamford Excavators and local hydrogen company Ryze.
FFI has also signed agreements, mainly memoranda of understanding and framework deals, on potential production sites in countries including Argentina, Brazil, India, Jordan, Papua New Guinea and in the Australian states of Tasmania and Western Australia.
It is a remarkable strategy shift from a company that in the most recent financial year belched out 2.2 mt of carbon dioxide from its direct operations and was indirectly responsible for a further 252.2 mt – slightly higher than the entire reported carbon dioxide emissions of Spain.
But the firm believes hydrogen can help squash those emissions to net zero by 2040.
Who’s going to make it?
Setting up green hydrogen production is expensive, and generally requires swathes of undeveloped land.
In addition to the facility in which the electrolysis occurs, a source of renewable energy is needed to power it. Most production sites envisaged so far include the construction of a solar array or wind farms, or plan to tap hydro power.
Electrolysis also consumes vast quantities of water. Because areas with a large number of sunny days are also likely to be dry, many developers are planning to build coastal desalination plants.
These prerequisites dim the prospects of meaningful production in some countries keen to become major hydrogen consumers, such as Japan, South Korea and populous nations in northern Europe, creating the potential for hefty international trade corridors.
“On a bad day in Australia, in the middle of winter, a solar panel will produce 50% more than it would on a fantastic day in Germany, for example,” says John Söderbaum, science and technology director at consultancy Acil Allen, which produced a 2018 report on hydrogen export markets for the Australian government.
Australia is identified by most as being the first country with the potential to realise large-scale exports of hydrogen. Not only thanks to Fortescue and strong government interest, but also expansive tracts of undeveloped sunny coastline, a deep pool of natural resources talent and long-term relationships with key buyers.
“For Australia, I think the first mover advantage definitely will be there,” says Abhinav Bhaskar, a hydrogen expert with Norwegian energy consultancy Rystad.
For similar reasons, Saudi Arabia and other sun-kissed Middle Eastern countries with energy exporting expertise are keen to be early beneficiaries of a predicted hydrogen gold rush.
Saudi Aramco, the world’s biggest oil producer, is developing a US$5bn green hydrogen plant near the planned city of Neom on the Red Sea and is reportedly aiming to produce 4 mt per year company-wide by 2035, including through fossil fuels.
Local governments are also backing proposals for green hydrogen hubs in Namibia and Mauritania. A consortium of investors, including the government of Oman, is planning a hydrogen mega-project in that country powered by wind and solar.
Söderbaum nominates Norway and Iceland, for their wind and geothermal power capacity respectively, as potential hotspots for hydrogen production closer to major European markets. He tells GTR: “I think once the market starts to emerge then people will think, ‘can we get in on the act?’”
Who’s going to buy it?
To identify which economies are likely to emerge as top hydrogen consumers, Söderbaum suggests looking to countries that currently import a lot of liquefied natural gas (LNG) and who will be looking to replace some of that with hydrogen as the energy transition evolves.
Germany, which launched a national hydrogen strategy in mid-2020, has signed a hydrogen alliance agreement with Australia. Söderbaum says Germany’s interest in hydrogen is partly driven by its desire to unshackle itself from reliance on LNG imports from Russia, a long-running strategic headache for Berlin.
The German hydrogen strategy notes: “International trade in hydrogen and synthetic downstream products will not only create new trade relations for Germany and the EU, but also facilitate a further diversification of energy sources and transport routes, and will thus improve the security of supply.”
With its strategy gunning for the “swiftest possible establishment of a global hydrogen market”, the German authorities in October last year committed €350mn in grants for companies working on hydrogen projects overseas.
Most green hydrogen projects in Australia will rely on state funding and government-backed guarantees for at least “a couple of years”, Deutsche Bank’s head of corporate banking in Australia, Peter Connor, tells GTR.
The bank’s head of trade finance and lending in Australia, Gemma Blake, says conversations are already underway between export credit agencies in Germany and Australia over how to support hydrogen-related deals. German companies are keen to position themselves as providers of technology and expertise in hydrogen and renewable energy.
Deutsche Bank is hoping to position itself at a green hydrogen trade and export finance nexus in which German companies export technology and infrastructure to Australian projects, which in turn export energy to markets such as Japan and South Korea.
“For Deutsche’s corporate bank, that’s a perfect scenario,” says Connor. “With our global network we can bring all the participants in the industry together.”
But in terms of financing, the industry is still between four to five years out from exports “of any reasonable size” and “a number of years away” from being able to cut commercial deals without government involvement, reckons Connor.
“To go from very little green hydrogen to all of a sudden a green hydrogen industry overnight… is completely aspirational,” he says. “It will take time for the industry to build out the demand side, the underlying infrastructure that drives investment in the supply side.”
The EU is also eager for hydrogen to help slash greenhouse gas emissions to meet a bloc-wide target of net zero greenhouse gas emissions by 2050. Its strategy, released in mid-2020, foresees deploying green hydrogen “at a fast pace” to cut emissions in half by 2030.
In China, a total of 53 hydrogen projects have been announced spanning both production and usage, according to a July 2021 report published by the Hydrogen Council, a global CEO-led initiative, and consultants McKinsey.
China, the report notes, is likely to try to meet demand with domestic production. The report adds that even with production costs slumping, it is unlikely locally produced hydrogen will be competitive for export, and that little hydrogen is expected to be imported until shipping costs are slashed.
Other Asian economies, such as Singapore and South Korea, are eyeing green hydrogen with enthusiasm. But Japan is the country with the most detailed vision for the role of hydrogen in its economy, and the furthest down the road. It already boasts the world’s largest number of hydrogen refuelling stations for cars and is aiming for wide adoption across transport, power generation, large vehicles and shipping.
It is producing a small amount of green hydrogen from a solar plant built on farmland destroyed by the 2011 tsunami and is looking at investments in production capacity around the globe. Since 2017, the Japanese government has trumpeted a “hydrogen society” that would be a model for the world.
How will it get there?
It is also in Japan that efforts to construct ships capable of carrying hydrogen on long sea journeys are most advanced.
Sometime before March, the Suiso Frontier, a ship built by a consortium led by Kawasaki, will complete the journey from Kobe in Japan to the Port of Hastings in the southern Australian state of Victoria. The vessel’s return journey will be the first commercial voyage of a custom-built liquefied hydrogen carrier.
Designing ships capable of safely transporting liquid hydrogen is a minefield. If transported as a liquid, it has to be cooled to -253°C (compared to -160°C for LNG), and can easily cause corrosion, potentially endangering a vessel’s safety over time. Once at its destination, it is turned back into gas.
The Suiso Frontier will carry 1,250 cubic metres of liquid hydrogen on the 9,000km trip, but Kawasaki is planning to build a fleet of vessels that can each carry up to 40,000 cubic metres.
Some trade corridors, such as North Africa to Europe for example, may use pipelines.
But depending on the take-up of hydrogen, there could eventually be demand for thousands of hydrogen vessels, according to Martin Carolan, chief executive of Global Energy Ventures (GEV), one of the companies in the race to build such fleets.
Each export project will require between four and eight ships, he tells GTR, depending on production volume and the distance of the export market. GEV is so far focusing on the expected trade corridors between Australia and North Asia and is aiming to have a first vessel out of the shipyard in 2026.
Carolan says shipping is likely to be a “material portion” of overall hydrogen costs but says that “as multiple ships are built, over time, capital costs will come down and there’ll be improvements in material costs”.
Hydrogen can also be shipped as ammonia, which needs to be cooled to just -37°C, or compressed gas. Rystad’s Bhaskar says he expects most hydrogen to be shipped as ammonia, with that version of the gas being traded on global markets.
The cost of imported green hydrogen from low-cost exporters such as Australia is still likely to be higher than locally produced sources by 2030, according to investment advisory Edison, but domestic supply constraints mean strong demand for imports is still likely.
Green hydrogen faces competition in the automotive sector from electric vehicles and battery power, particularly as that technology becomes more powerful and can be used in ever-larger transportation methods.
Costs of producing green hydrogen may remain above those of hydrogen made with coal or gas until around 2040, according to the Hydrogen Council and McKinsey, although buyers scrambling to hit emissions reduction targets are likely to be willing to fork out a premium.
Bhaskar at Rystad cautions that there are costs for adoption of hydrogen, not just those incurred in production. Vehicles, for example, need to be custom-built or significantly adjusted to run on hydrogen.
In other use cases, such as steelmaking, green hydrogen could become competitive more quickly as coal and other fossil fuels are driven higher by carbon pricing and taxes.
Hydrogen has enjoyed previous moments in the sun, but has never received so much investment and policy backing. As the European Commission’s hydrogen strategy notes, “the rapid cost decline of renewable energy, technological developments and the urgency to drastically reduce greenhouse emissions, are opening up new possibilities”.