This is an extract from a recent report “Future of Trade: Special Energy Edition” prepared by DMCC.

Hydrogen production costs could fall sharply, but questions persist on infrastructure and demand. The hydrogen sector has garnered significant attention from various industries, but despite the enthusiasm, the production of clean hydrogen and its subsequent applications remains constrained. A number of challenges persist, including costs, infrastructure limitations, and slow demand. Numerous projects have been proposed with the aim of producing both “green” and “blue” hydrogen. However, progress further along the value chain appears less distinct and more uncertain. Projections for the use of clean hydrogen in 2050 paint a varied picture, with estimates ranging from under 45 million tonnes per year to a vastly more ambitious 450 million tonnes per year. These diverse forecasts underscore the unpredictability surrounding the pace of hydrogen’s development and integration into the global energy landscape.

Energy Intelligence takes a levelized cost of hydrogen (LCOH) approach, which shows potential production costs experiencing a significant decline by 2030. This is particularly evident in the case of green hydrogen, driven by the decreasing costs of renewable power generation and more affordable electrolyser technologies. In contrast, the costs associated with blue hydrogen production remain closely linked to fluctuations in natural gas prices, offering limited room for capex gains.

The development of the hydrogen sector looks set to unfold at a measured pace. Throughout this decade, progress is expected to be primarily concentrated on projects that offer greater certainty in terms of local demand, thus reflecting the cautious and pragmatic approach to hydrogen’s role in the energy transition.

Global hydrogen trade: Middle East poised for competitive edge, but costs are key.

The prospect of a global hydrogen trade is enticing and one that could transform the energy landscape on a global scale. There is significant economic allure to the potential of blue and green hydrogen, along with ammonia, particularly in low-cost regions such as the Middle East. A competitive edge could emerge for Gulf producers, pricing out higher cost regions and fuelling their economic incentive for international hydrogen trade based out of major trade hubs such as Dubai, laying the foundation for a truly global hydrogen exchange.

Key import markets for hydrogen would include Europe and East Asian nations like Japan. These regions are already heavily reliant on energy imports and face limitations in their domestic hydrogen production capacity. Meanwhile producers with substantial reserves of low-cost natural gas, such as the Middle East and the United States, hold the potential to emerge as competitive blue hydrogen exporters.

The stage is also set for a diverse array of regions to step into the role of green hydrogen exporters, with countries in the Middle East, Africa, Latin America, and even Australia expressing keen interest. However, it should be noted that this may take time to fully materialise. The cost considerations for trade are substantial and encompass not only production but also the intricate web of transportation and (re)conversion processes.

Energy Transition: Middle East and UAE

The Middle East’s energy transition trajectory is becoming clear with recent developments in renewable power and hydrogen projects. In the UAE, strong economic growth will foster even more demand for power, which will be met partly with significant growth in solar photovoltaic capacity. Estimates vary between 25- 50% growth in peak electricity demand in Abu Dhabi and Dubai by 2030, likely accounting for the heavy emphasis being placed on industrial decarbonisation efforts in these two emirates.

Masdar’s selection as the preferred bidder for the 1.8 GW Phase 6 development of Mohammed bin Rashid Al Maktoum Solar Park in Dubai shows that it continues to serve as the UAE’s renewable power developer and investor of choice. Its expected completion in 2026 will boost the solar park’s total installed capacity to 4.23 GW.

In Abu Dhabi, EWEC continues to advance the decarbonisation of the power sector with both renewable and nuclear power generation. The Barakah nuclear power plant started its third 1.4 GW reactor in February 2023, and its fourth and final reactor has completed operational readiness. Renewable growth in Abu Dhabi is set to continue with the 2 GW Al-Dhafra plant due online in 2024, as well as expected tendering for an additional 3 GW of solar PV to be developed by 2029.

In Saudi Arabia, new investments in natural gas and renewable power generation are now expected to reach $293 billion by 2030. Projects currently in the pipeline are expected to provide a 6 GW boost by 2025, with Saudi Aramco likely to announce additional investments that build on its target of 12 GW of net renewables capacity by 2030.

Both Saudi Arabia and the UAE are leading the region in their early-stage development of carbon markets. Policy support and clarity will be a key factor in building out these markets, and this appears to be coalescing in the UAE. Abu Dhabi Global Market launched its scheme in 2022 in partnership with the Air Carbon Exchange (ACX) of Singapore. A financial regulatory framework was launched in July 2023, with a comprehensive regulatory framework under development. Saudi Arabia has made similar moves through a partnership between the local Tadawul stock exchange and the Public Investment Fund (PIF) in order to found the Regional Voluntary Carbon Market Company (RVCMC). Its inaugural auction sold 2.2 million tonnes of credits to 15 Saudi companies.

Although there has been considerable enthusiasm for hydrogen projects during the last couple of years, bold ambitions are coalescing into realistic policy frameworks, and the UAE’s national hydrogen strategy, released earlier in 2023, sets targets of 1.4 million tonnes of clean hydrogen per year by 2031. Some 500,000 tonnes of this total have been designated for capacity to be developed outside of the UAE, while ADNOC is expected to contribute another 400,000 tonnes towards the annual target, indicating that at a minimum, these volumes are likely to be represented by blue hydrogen. Oman has also made considerable advances establishing the regulatory framework for its green hydrogen sector, which the International Energy Agency expects could make it the largest green hydrogen producer in the region and the sixth-largest worldwide by 2030.

Middle East NOCs driving large-scale renewables, CCS and hydrogen projects in the region. The Middle East’s national oil companies (NOCs) have assumed a prominent position within their peer group when it comes to low carbon investments. A significant portion of these is concentrated within CCS and carbon removal, while investments in hydrogen and other low carbon power segments have remained more constrained. While many NOCs in the region have set ambitious targets for hydrogen production and are involved in flagship blue ammonia projects, current low rates of demand will continue to place emphasis in the near term on expanding CCS infrastructure and making incremental investments in new renewable power capacity. Clean hydrogen initiatives in the Middle East will nevertheless continue to build momentum. Detailed plans are beginning to emerge, shedding light on offtake arrangements and export strategies.

Leading green hydrogen and ammonia projects in the region often involve a diverse array of partners, encompassing national utility companies, industrial and fertiliser firms, global industrial gas corporations, and trading entities. Presently, NOCs such as ADNOC and Saudi Aramco appear more inclined to prioritise blue ammonia exports over the production of green hydrogen or ammonia through renewables. However, this dynamic could evolve should these NOCs expand their role in renewable power generation. The prospects for domestic use of clean hydrogen in the region are gradually taking shape. Collaborative endeavours like the partnership between Germany’s Hydrogen Rise and a local Omani steel producer, exploring green hydrogen for “green steel” production, highlight this evolving landscape. For Western international oil companies (IOCs), the emergence of large-scale clean hydrogen projects in the MENA region represents both a potential threat and an opportunity. As rivals in this future energy market begin to take shape, some IOCs, like BP, Eni, and TotalEnergies, are actively seeking partnerships and engagements within the region to secure their position in this transformative sector.

Middle East in prime position to advance clean hydrogen production. Gas-rich regions like the Middle East are strategically positioning themselves to leverage their natural advantages by venturing into the hydrogen market, targeting markets in Europe and Asia. Recent geopolitical developments, particularly the Ukraine conflict, have also unleashed a profound impact on gas prices globally. This has elevated the opportunity cost associated with producing blue hydrogen, whose production is tethered to gas pricing, amplifying the significance of pricing dynamics in the equation.

The Middle East, a key player in the blue hydrogen landscape, stands to benefit from favourable gas prices, bolstering its competitiveness on the global stage. Forecasts for 2030, outlined in this report, paint an enticing picture, estimating the levelized cost of blue hydrogen to hover at approximately $1 per kg within the Middle East. In contrast, the journey for green hydrogen is more uncertain, marked by relatively high production costs. A silver lining emerges with the promise of falling electricity rates, more cost-effective electrolyser technologies, and supportive policy measures. These combined forces are expected to gradually narrow the cost differential between green hydrogen and its counterparts.

The cost drivers for green hydrogen predominantly revolve around two factors: the expense of electricity as a fuel source and the capex associated with electrolyser deployment. In this context, the Middle East’s green hydrogen production costs are poised to occupy the lower end of the global spectrum by 2030, primarily owing to the region’s access to cost-efficient renewable power sources.

UAE in focus

Industrial decarbonisation and building out the hydrogen sector are central to the UAE’s long term energy strategy. The UAE’s preferred approach to the transition has come under focus in 2023. Ahead of the COP28 summit in Dubai, the UAE rolled out its updated energy strategy, building on the overall transformation of its energy sector with added detail and specifics to key policies and technology.

The UAE National Energy Strategy aims to triple the contribution of renewable energy over the next seven years and invest between USD 40-54 billion during the same period. It outlines new emissions reduction goals, a significant portion of which will come from revised power mix targets, which sees an enduring role for natural gas with substantial growth in renewables by 2050. The new strategy also contains updated targets for clean energy, emissions reduction, hydrogen production, energy efficiency measures, and a greater rollout of EVs and charging infrastructure.

As part of its updated energy strategy, the UAE will look to balance economic growth in the industrial sector – its largest power consumer – with efforts to boost its decarbonisation aims and green industry economic opportunities. This will include new production of renewable forms of energy, namely nuclear and hydrogen, with supply channelled to key industrial and commercial segments to further boost their decarbonisation efforts. In 2023, the UAE unveiled its National Hydrogen Strategy 2050 which it sees as a cornerstone to its longer-term decarbonisation, transition and economic diversification goals, whilst enhancing the UAE’s position as a global producer and exporter of low-emission hydrogen within the next decade.

It also foresees the development of two hydrogen “oases” (production hubs), with a further three to be completed by 2050. Such hubs foster industrial clustering, making it easier for global companies to establish commercial networks through which wider trade and investment can be channelled.

The complete report can be accessed here