The International Renewable Energy Agency (IRENA) has released a report titled, “Geopolitics of the Energy Transformation: The Hydrogen Factor”. IRENA has carried out an in-depth analysis of the geopolitics of hydrogen as part of the work of the Collaborative Framework on the Geopolitics of Energy Transformation. This report considers whether and how hydrogen may disrupt future energy systems. REGlobal provides an extract of the report covering a summary for policymakers…
The ongoing energy transition is unprecedented due to its scale and the profound impact on the established socio-economic, technological, and geopolitical trends around the world. Renewables, in combination with energy efficiency, now form the leading edge of a far-reaching global energy transition. This transition is not a fuel replacement; it is a shift to a different system with commensurate political, technical, environmental, and economic disruptions. The central question this report addresses is whether and to what extent hydrogen exacerbates or mitigates these disruptions and in what ways.
Hydrogen, until now the missing piece of the clean energy puzzle, is likely to further disrupt energy value chains in coming years. The climate change imperative has been the main driver of the renewed policy focus on hydrogen. IRENA’s 1.5°C scenario envisages that clean hydrogen (mix of green and blue hydrogen) could meet up to 12% of final energy consumption by 2050. Majority of this would be produced using renewables, with the rest from gas and carbon capture and storage.
Hydrogen is likely to influence the geography of energy trade, further regionalising energy relations. With the costs of renewable energy falling, but those of transporting hydrogen high, the emerging geopolitical map is likely to show growing regionalisation in energy relations. Renewables can be deployed in every country, and renewable electricity can be exported to neighbouring countries via transmission cables. In addition, hydrogen can facilitate transport of the energy renewables produce over longer distances via pipelines and shipping, thus unlocking untapped renewable resources in remote locations. Some existing natural gas pipelines, with technical modification, could be repurposed to carry hydrogen.
Countries with an abundance of low-cost renewable power could become producers of green hydrogen, with commensurate geoeconomic and geopolitical consequences. Green hydrogen could be most economical in locations that have the optimal combination of abundant renewable resources, space for solar or wind farms, and access to water, along with the capability to export to large demand centres. New power nodes could arise in places that exploit these factors to become centres of hydrogen production and use.
The hydrogen business will be more competitive and less lucrative than oil and gas. Clean hydrogen will not generate returns comparable to those of oil and gas today. Hydrogen is a conversion, not an extraction business, and has the potential to be produced competitively in many places. This will limit the possibilities of capturing economic rents akin to those generated by fossil fuels, which today account for some 2% of global GDP. Moreover, as the costs of green hydrogen fall, new and diverse participants will enter the market, making hydrogen even more competitive.
Hydrogen trade and investment flows will spawn new patterns of interdependence and bring shifts in bilateral relations. A fast-growing array of bilateral deals indicates that these will be different from the hydrocarbon-based energy relationships of the 20th century. More than 30 countries and regions have hydrogen strategies that include import or export plans, indicating that cross-border hydrogen trade is set to grow considerably. Countries that have not traditionally traded energy are establishing bilateral relations centering on hydrogen-related technologies and molecules. As economic ties between countries change, so might their political dynamics.
Hydrogen diplomacy is becoming a standard fixture of economic diplomacy in several countries. Access to hydrogen is often seen as an element of energy security, and overall national resilience, particularly for industries where other solutions are not feasible or uneconomical. Some countries that expect to be importers are already engaged in dedicated hydrogen diplomacy. Germany and Japan have been trailblazers, but other countries are following close behind them. Potential exporters are deploying similar strategies, with many including hydrogen – green hydrogen in particular – at the highest levels of their diplomacy.
Fossil-fuel exporters consider clean hydrogen an attractive way to diversify their economies. Many current exporters are pivoting to clean hydrogen to develop new export industries. They can leverage established energy infrastructure, a skilled workforce and existing energy trade relations. While blue hydrogen seems like a natural fit, many fossil-fuel producing countries have ample renewable potential to shift directly to the green variety as well. United Arab Emirates’ Hydrogen Leadership Roadmap is explicitly taking such dual approach, and several others are exploring this path including Australia, Oman and Saudi Arabia. Nevertheless, fossil-fuel producers should continue to develop broad-based economic transition strategies, given that hydrogen will not compensate for loss in revenues.
The technical potential to produce green electricity – and, in turn, large amounts of green hydrogen – exceeds estimated global demand by several orders of magnitude. Many countries have declared their ambition to become exporters of hydrogen, limiting the likelihood of export concentration. Judging by their strategies and growing bilateral deals, even net energy importers such as Chile, Morocco and Namibia seem poised to become green hydrogen exporters. However, the supply of hydrogen will be constrained by the pace of deployment of capital and cost of production, particularly where long-term markets are not assured.
Africa, the Americas, the Middle East and Oceania have the highest technical potential for green hydrogen production. The ability to produce large volumes of low-cost green hydrogen, however, varies widely. Countries will have to set their strategies in light of broader social and economic priorities, including the ability to decarbonise their energy systems or tackle energy access and poverty, currently prevailing in over 80 countries worldwide. Having access to abundant renewables is an asset in the clean hydrogen race, but it might not be enough. Many other factors come into play, including existing infrastructure and the current energy mix, along with the cost of capital and access to necessary technologies. Whether the technical potential can be realised will also depend on soft factors like government support, the investment climate and political stability.
Higher project finance costs do not necessarily impede investment in countries with higher risk profiles. The upstream oil and gas sectors show that where revenue potential is sufficient, investment will flow in despite country risk. The same should apply to countries showing a low-cost potential for green hydrogen. There are limits, of course. Countries in turmoil, some of which have great potential, are unlikely to be able to realise investment opportunities owing to the immense risks of doing business in such locations.
The 2020s could become the era of a big race for technology leadership, as costs are likely to fall sharply with learning and scaling-up of needed infrastructure. The geopolitics of clean hydrogen is likely to play out in several stages. Green hydrogen is projected to start competing with blue on cost by the end of this decade. This seems likely to occur sooner in countries such as China (thanks to its low-cost electrolysers), or Brazil and India (with cheap renewables and relatively high gas prices). Green hydrogen was already more affordable than grey across Europe during the 2021 spike in natural gas prices. But the uptake will greatly depend on predictable demand, especially in harder to abate sectors where no alternatives exist.
Cross-border trading of hydrogen will increase in the 2030s, at pace with the cost-competitiveness of green hydrogen. Across many decarbonisation scenarios, demand starts to take off from 2035. IRENA envisages that two-thirds of green hydrogen production in 2050 would be used locally, and one-third traded across borders. Pipelines, including adapted natural gas pipelines, are likely to facilitate half of this trade. The other half would be loaded on ships in the form of hydrogen derivatives, notably ammonia.
In the short to medium term, countries and regions can assert technology leadership and shape the rules of the growing market. Having a stake in the hydrogen value chain can boost economic competitiveness. The direct economic stakes are high, and the market potential is considerable. In the long run, countries with ample renewable potential could become sites of green industrialisation, using their potential to attract energy-intensive industries.
Equipment manufacturing offers an opportunity to capture value in the coming years and decades. The hydrogen value chain is extensive, and the bulk of investment will be needed for renewable power. Along this value chain, estimates point to a USD 50-60 billion market potential for electrolysers and a USD 21-25 billion market for fuel cells by the middle of the century. China, Europe and Japan have developed a strong head start in producing and selling electrolysers, but the market is still nascent and relatively small. Innovation and emerging technologies can change the current manufacturing landscape.
Any form of hydrogen may strengthen energy independence and resilience, but most of the benefits stand to come from green hydrogen. Today, there are three main ways in which hydrogen can bolster energy security: 1) by reducing import dependence, 2) by mitigating price volatility and 3) by boosting the flexibility and resilience of the energy system, through diversification. Most of these benefits are associated with green hydrogen. Conversely, blue hydrogen would follow the patterns of gas markets, resulting in import dependencies and market volatilities. Moreover, the expected cost reduction in green hydrogen means that investments in supply chains based on fossil fuels – especially assets planned to stay in operation for many years – may end up stranded.
The raw materials needed for hydrogen and renewable energy technologies are likely to draw more attention to material security. While geological supplies for most minerals and metals are presently sufficient, markets could become very tight owing to rapidly rising demand, and the long lead times of mining and refining projects. A relatively small shift in supply or demand can cause significant price fluctuations. Such fluctuations could reverberate through hydrogen supply chains and affect the overall cost of equipment, along with the revenues of miners and exporters of raw materials. Supply chain problems caused by COVID-19 are also instructive when considering possible risks beyond those already well-known.
Hydrogen trade flows are unlikely to become weaponised or cartelised. This is because hydrogen can be produced from many primary energy sources and in a wide variety of places worldwide. Indeed, it is a manufactured product rather than a raw material or energy source. Therefore, green energy trade flows are unlikely to lend themselves as easily to geopolitical influence as oil and gas. That said, supply shortages could arise, particularly in the early years of hydrogen trade, when the number of suppliers is limited and most trade is still governed by bilateral arrangements.
Shaping the rules, standards and governance for hydrogen trade will have a significant impact in determining which technologies dominate future markets. The success of clean hydrogen markets hinges upon the ability to set coherent and transparent rules, standards and norms to facilitate its deployment across countries, regions and sectors. Standards are designed to improve the quality, safety, and interoperability of various goods and services. At the same time, divergent standards could slow down progress and lead to market fragmentation, stir regulatory competition, and erect trade barriers. Setting standards could be an arena for geopolitical competition or international co-operation. Ultimately, all players can gain from a coherent and transparent global system.
Certificates of origin rooted in a transparent and credible international system will be needed to monitor and manage hydrogen’s contribution to climate change efforts. Transparency in how emissions are measured will be essential. There are well-known risks of carbon lock-in if hydrogen strategies prolong fossil fuel use and hinder energy efficiency and electrification. Robust and well-thought-out policy frameworks can help ensure that hydrogen effectively contributes to reducing greenhouse gas emissions.
Price transparency early on would support the rapid evolution of the global market in hydrogen. The currencies and pricing mechanisms that take hold in the emerging market are likely to have considerable geopolitical effects. The currency chosen will be positioned to become a global benchmark as the market expands. Those associated with that currency will to some degree be sheltered from exposure due to fluctuating import costs. For instance, the European Union, likely to become one of the key import markets, seeks to denominate its future hydrogen imports in euros. Moreover, putting a price on carbon might be helpful, or even necessary, to make green hydrogen competitive with the grey variant and, ultimately, with fossil fuels. In that sense, hydrogen may become embroiled in a broader set of carbon trade wars.
Investment decisions are long-lived and the risks of stranded assets high, so fixed infrastructure should be assessed with a long-term logic. Every investment and planning decision around energy infrastructure today should consider that the geography of a decarbonised economy is likely to be very different from what currently makes sense. Significant electrification of end uses will reshape demand. On the supply side, renewable hydrogen production will likely occur in locations other than today’s oil and gas fields. While some of the existing infrastructure could be repurposed, the technical challenges and economic costs of such repurposing should be accounted for from the outset.
Helping developing countries deploy hydrogen technologies early on could improve energy security for all, while preventing the global decarbonisation divide from widening. A diverse hydrogen market would reduce supply chain risks and improve energy security for all. Access to technology, training, capacity building and affordable finance will be key to realising the full potential of hydrogen to decarbonise the global energy system and contribute to global stability and equity. Establishing hydrogen trade relations could open new possibilities to set up local hydrogen value chains, stimulate green industries and create jobs in countries rich in renewables.
Global efforts should focus on the applications that provide the most immediate advantages and enable economies of scale, particularly in the coming years. Prioritising high-demand applications for which hydrogen is the best — and perhaps the only — alternative is more likely to be cost-effective and less susceptible to the risks of nascent markets. One example could be supporting and then accelerating a shift to green hydrogen in industrial applications where hydrogen is already used, such as refining and the production of ammonia and methanol.
Depending on how it is developed, hydrogen could have both positive and negative effects on sustainable development. The concept of “human security” is often used to describe the root causes of geopolitical instability to account for threats such as climate change, poverty and disease, which can undermine peace and stability within and between countries. Going forward, it will be important to gain greater understanding of the multidimensional nature of global threats and vulnerabilities to foresee and defuse certain risks that may come with the deployment of hydrogen on a major scale.
The full report can be read here
