Europe could mainstream green hydrogen faster than traditional assessments suggest by creating joint investment projects along the value chain, which would allow the initial green premium, or extra cost, of green hydrogen to be measured against the sustainability value-add of a final product, and not only against the cost of competing fossil fuels. Presented below are select extracts and highlights from the white paper titled, “Mainstreaming Green Hydrogen in Europe“. The white paper summarises an independent research project conducted by Material Economics and commissioned by Breakthrough Energy, exploring what Europe can do to accelerate the growth of hydrogen, and in particular renewable energy-based (or so-called green) hydrogen.
Green hydrogen is all the rage these days, and for good reasons: By 2050, it might provide both enormous global economic value – €2.5 trillion in annual sales of hydrogen and equipment, by an estimate from the Hydrogen Council – and environmental benefits. The carbon emission reductions might be as high as 6 Gt CO2e annually (similar to current GHG emissions in the U.S.), and largely in sectors that have few other technological options to cut emissions. Hydrogen could also create millions of employment opportunities and in fact become a cornerstone of a future clean economy. The projections above are broadly comparable to the size of the current global oil industry, and hydrogen is equally versatile as both feedstock and energy carrier.
There is already plenty of green hydrogen momentum in Europe (and other regions). About 100 MW of capacity has already been built, with a full 20 GW announced– for instance, in green steel, fertilisers, petrochemicals, and transport fuels. The European Union released its hydrogen strategy in July 2020 and has committed to “installing at least 6 GW of renewable hydrogen electrolysers in the EU by 2024 and 40 GW of renewable hydrogen electrolysers by 2030” European industry has a plan to reach an additional 40 GW in Europe’s neighbourhood (e.g. North Africa). Germany, France, Spain, the Netherlands, and others have all released national hydrogen strategies, and hydrogen is a part of the energy strategies of many more Member States. In the startup world, a recent venture capital scan showed 50–60% of all hydrogen startups1 globally are located in Europe.
Green hydrogen can also play an important role in Europe’s post-COVID recovery. It has several characteristics that are positive from a stimulus perspective: Developing it mainly involves major infrastructure investment projects; major parts of the supply chain could be located in Europe; it makes use of economic resources that might otherwise be underutilised in a post-COVID recession; and it is highly relevant for several Member States that have been hit hard by COVID. It also meets the criteria of “build back better”; Europe was already pursuing a green hydrogen transition before COVID, and allocating recovery funds could accelerate it.
Still, for all its promise, the early European momentum is still embryonic compared with the size of the opportunity. This white paper explores two questions: How can Europe accelerate the growth of clean (or carbon-free) hydrogen, and in particular green hydrogen? And how can Europe capture a major share of the industrial value associated with green hydrogen and ensure strategic autonomy?
The analysis focuses on green hydrogen, as we see that as the most promising and sustainable long-term solution. However, we acknowledge that blue hydrogen could also play an important role in a first phase of the hydrogen transition where demand for green hydrogen2 might outweigh supply (due to e.g. limited renewables capacity or transport infrastructure).
540 TWh of green hydrogen demand available near-term?
Our analysis suggests Europe could build up the green hydrogen industry faster than many current strategies suggest. The key insight is that many traditional cost competitiveness analyses disregard important aspects of how “sustainability” – broadly defined – is now unfolding in some of the major energy- and material-using value chains, and the strategies leading companies are pursuing. Traditional analyses look at the cost-competitiveness of green hydrogen relative to incumbent, fossil-based commodities. The conclusion is typically that green hydrogen solutions are (far) out of the money today, and that years of learning effects will be needed before costs will come down to competitive levels and green hydrogen can scale in earnest. For example, green hydrogen today costs approximately €4–5 per kg, while grey hydrogen costs €1–2 per kg (a hydrogen green premium of 3-4 € per kg). Current CO2 prices, at approximately €25 per tonne CO2, only reduce the gap by about €0.3vi per kg H2, or 10% of the difference.
Of course, such calculations are a crucial starting point when discussing the economic viability of green hydrogen. However, another crucial point is often missed: Such initial cost increases are often very small as a share of the total end-product cost, and in many of the relevant value chains, there are now end-product manufacturers who have set net zero climate targets, who see green hydrogen as an important part of reaching those targets, and who are willing to engage far back in their value chains.
Several large green car niches are also likely to emerge over the coming years: cars purchased through or influenced by public tenders, corporate cars at environmentally conscious companies, cars for environmentally conscious private consumers. Competing in these market segments will be much easier with green steel. There is also a real probability of future regulation of the CO2 content of the car’s materials in addition to the tailpipe emission regulation already in place, so manufacturers that decarbonise early will have a better regulatory risk profile. All in all, the case for switching to green steel looks much more persuasive in this holistic context than if just comparing to the cost of fossil steel.
A full 540 TWh of green hydrogen demand in the EU already meets all four criteria. Key sources of such potential demand include green fertiliser, green shipping fuels, green steel for vehicles and some buildings/infrastructure (public tenders), some industrial heating (for e.g. glass production), and parts of fuel cell mobility. Of the total, 220 TWh involves a shift of existing grey hydrogen demand over to green hydrogen.
In many of these sectors, green hydrogen investments have already been announced, giving further support to the assessment that green hydrogen solutions can already be economically viable if the holistic end-product perspective described above is applied. Key examples include Yara and Ørsted planning a green hydrogen plant in the Netherlands for fertiliser production, Fertiberia and Iberdrola doing the same in Spain, Shell developing a green hydrogen project for use in its refinery near Rotterdam to decarbonise fuel production , HYBRIT going into hydrogen-reduced steel-making in Sweden, and Maersk, Ørsted, SAS and others collaborating to produce green hydrogen-based transport fuels in Denmark.
One important barrier that companies even in these sectors will have to overcome is that purchasing department priorities and approaches are often set up to achieve very different objectives: Purchasers typically have targets for year-on-year cost reductions, and work with competitive cost-based tenders to achieve those targets. The type of long-term value-chain partnerships discussed here, which only pays off with a holistic business case including sales, marketing, and regulatory benefits, runs counter to these traditional purchasing methods and is a big shift for many organisations.
Going forward, this potential demand could grow further: Green hydrogen costs will come down due to scale and learning effects, more companies are likely to adopt strict climate targets, and green hydrogen policies are likely to fall into place. These changes will allow additional demand to be created. If hydrogen costs come down to €1,7-2 per kg companies continue to set ambitious climate targets at the same pace as over the last five years, and contract-for-difference support schemes of 50-60 Euro per ton CO2 are put in place, the potential demand that meets the four criteria above grows from 540 TWh to 1200–1400 TWh.
Accelerating buildout: Removing barriers
Renewable energy buildout, and the associated grid expansion, stand out as the largest bottleneck by far to substantial green hydrogen growth. To cover a potential demand of 540 TWh green hydrogen, approximately 120 GW of additional renewable energy sources will be needed in Europe, assuming 70% of the electricity is produced within the EU. To put these volumes in context, they are approximately equivalent to the total installed wind capacity in Europe today. To cover 1200 TWh of green hydrogen demand, a full 280 GW of electricity supply would be needed.
Such a build-out, just to deliver renewable energy to the first 540 TWh, will present massive challenges, especially when considering that several other sectors also see major increases in electricity demand: passenger transportation, industrial heating, and residential heating (through heat pumps), to name a few. This puts pressure on both electricity generation and grid expansion. One way to reduce the pressure is of course that more hydrogen production gets located outside Europe, for instance in sunny locations in North Africa or Australia. That is likely a good solution for parts of the hydrogen supply.
But there are also major opportunities for Europe to accelerate renewable energy build-out within its borders: Permitting for new renewable energy supply, for instance, should take 2–3 years, as stipulated in the 2018 Renewable Energy Directive, but today’s average is closer to 5 years. And in many cases, the outcome of permitting processes is very difficult to predict, as rules and practices vary from place to place. Such protracted permitting processes and unpredictable outcomes are arguably the single largest barrier to mainstreaming green hydrogen, and we will come back to it below as one of the major improvement areas for Europe.
On the contrary, electrolyser supply might prove less of an issue: The independent expert interviews conducted as part of the research for this white paper all indicated that the big electrolyser manufacturers (e.g. Nel, Siemens) are well-prepared to ramp up production quickly. Finally, there are many issues regarding regulation, standards and permitting hindering the buildout of green hydrogen. For example, the lack of a system for guarantees of origin make it difficult to prove that hydrogen is green, and there is no fair access regulation for existing hydrogen pipelines. Also, for the transport sectors, there is a need to agree on standards for green hydrogen fuelling infrastructure.
Getting green hydrogen to cost competitiveness
Mainstreaming green hydrogen in Europe will mean a major industrial transformation. Delivering 1200 TWh of green hydrogen, as an example, would require total investments in the range of €545–690 billion: €90–105 billion in electrolysers, €250–300 billion in renewable energy capacity14, €30–60 billion in transport infrastructure and €175– 225 billion in the end-use sectors. In parallel, the cost of green hydrogen needs to be reduced from €4-5 per kg, to a level of €1.5–2 per kg, for it to be fully cost-competitive with grey hydrogen. This cost gap might look daunting, but breaking it down into its components and comparing to learning rates of other similar technologies reveal it to be a feasible prospect in a 5-10 year time horizon
Another key question for green hydrogen is where and how the production should occur to realise cost decreases. We believe we will see a dual pattern: On the one hand, renewable electricity makes up for more than half the green hydrogen production cost. Renewable electricity is typically cheapest at the circumference of Europe: wind in the Nordics and on the Atlantic coast, and solar power in Southern Europe. On the other hand, the cost of transporting hydrogen is nontrivial (at €0.15– 0.25 per kg per 1000 km), favouring local production where possible. Localization decisions taking advantage of both these factors are already emerging, creating hydrogen hotspots
This is good news for Europe, as it means green hydrogen opportunities are accessible for many Member States and regions. Ensuring sufficient pipeline (and needed storage) capacity to transport H2 to central European demand clusters where local production is not sufficient will be a key priority for an efficient hydrogen economy. For hydrogen, pipelines are typically a more cost-efficient mode of transport than electric transmission16. Where transport and storage are needed, repurposing existing underutilised gas pipelines is often attractive, or else building “hydrogen highways” with high-capacity pipelines, potentially combined with strategically utilised salt cavern storage (for buffering). This is not to say that strengthening European electric transmission lines is not important, however – in fact, this is also a crucial part of wider decarbonisation strategy for Europe. In the end, exactly where electrolysers and resulting transport needs will become an economic optimisation problem where there may well also be some use cases (e.g. production of sustainable aviation fuels) where it makes sense to produce and import the end product from outside Europe in locations with very low renewables costs and few land constraints (e.g. North Africa, the Middle East, and Australia).
Winning the global race
The industrial transformation inherent in a green hydrogen economy is precisely the type of positive change that Europe wants to see: It will contribute to lower greenhouse gas emissions, strategic autonomy, broad innovation, new investments, economic growth, and ample employment opportunities. It is a prize worth fighting for. A fast transition is also likely to increase the competitiveness of European products abroad. At the same time, international competition in green hydrogen is fierce. Just the production of electrolysers looks to be an industry with global revenues in the tens of billions of euros by 2030, and the first companies able to develop fuel cell-powered trucks, hydrogen-derived fuels, green fertilisers and alternative fuels will increase their global competitiveness. Europe is a leader when it comes to existing demand and policy, innovation, and high-quality electrolyser production. However, it faces strong competition from China on electrolyser costs, from Australia and the Middle East on renewable energy, and from Korea and Japan when it comes to fuel cell-technology. The global race for market shares and industrial value creation in different parts of the green hydrogen value chain has only just begun.
Action areas for Europe
We believe this white paper has shown that green hydrogen is a very attractive opportunity for Europe and that it is possible to see a much faster acceleration than what current strategies indicate. Major demand can be unlocked in the near term in Europe and timelines are largely set by how fast Europe’s public and private sectors can mobilise. If Europe wants to be a future global leader on green hydrogen, which is possible, it should accelerate efforts now. Four action areas stand out to achieve the acceleration: establish lead markets, mobilise massive investments, accelerate innovation, and establish enabling standards and policies.
Green hydrogen is a massive opportunity for Europe, industrially as well as environmentally. Mainstreaming green hydrogen will mean a major industrial transformation, with huge investment and innovation potential. This is precisely the type of clean technology journey that Europe says it wants, and it can help Europe achieve its core goals of building back better and securing strategic, open autonomy. This is a prize worth fighting for, and Europe should do its very best to capture this opportunity.
The full report can be accessed by clicking here