Why green hydrogen might require government support for the next ten years or more — and why that would be okay
Renewable H2 will not become cheaper than grey until about 2040, so subsidies and other policies will be required for some time, experts tell conference
Green hydrogen may be key to decarbonising many parts of the global economy, but it will remain more expensive than grey H2 made from unabated fossil fuels until around 2040.
This means that government subsidies and supporting policies will be needed in the medium term, experts told the Asia Pacific Hydrogen Summit in Sydney, an event co-organised by the Australian Hydrogen Council (AHC) and the Sustainable Energy Council.
“We think green hydrogen can become cheaper than grey hydrogen in the long term, in the year 2040 or so, but it requires subsidy in order to get down the cost curve and get to that level,” Kobad Bhavnagri, global head of strategy at research house BloombergNEF told the final session on the future of H2, which was moderated by Hydrogen Insight.
“Hydrogen is a premium product and a high-value product… at the moment, it is structurally more expensive and if government did not support it, it would not happen,” he said, later adding that all hydrogen used in 2050 would be grey without such backing.
But Bhavnagri also pointed out that government support for renewable energy and electric vehicles — first introduced in 1991 (in Germany) and 1996 (in Japan), respectively — has clearly managed to significantly bring down their costs.
AHC CEO Fiona Simon added that if the world relied purely on economics to drive the energy transition, “we would never get off fossil fuels”.
“Of course, prices are going to go up. That’s the energy transition… and that’s the difficult political question, the societal question for all of us. How much do we really care about climate change? How much are we really prepared to pay?”
Fellow panellist Rupert Maloney, executive director for alternative fuels at the Australian government’s green bank, the Clean Energy Finance Corporation, added that higher costs were a decarbonisation challenge generally, rather than just a problem for hydrogen.
“Politically it's very easy to say clean energy costs are cheaper and costs will go down but we've been seeing it over the last few years is that costs are very cheap in energy because we’ve had a fossil fuel boom over the last 50 years.
“The fossil fuel costs are very, very cheap and so to replace them with lower carbon alternatives are by definition going to be more expensive and that’s a difficult pathway in a high inflation environment.”
Maloney said that both government incentives and mandates would be needed to support and encourage the use of green hydrogen.
But when asked what the impact of the EU’s new mandate for 42% of the hydrogen used in European industry to be green by 2035, he immediately responded that prices would rise — something that could in itself drive up inflation.
“We’re going to get higher food costs, higher fertiliser costs, higher petrochem [costs]. I think we have to accept this.”
Discussing similar plans in Australia, he explained: “Unless you couple it with something like a carbon border adjustment mechanism [like there will be in Europe], you then penalise an ammonia fertiliser producer in Australia where their customer can import very cheap alternatives from other markets that don't have those same costs and carbon.
“I don’t think government’s in the job of making businesses go bankrupt, and so we need to be careful.”
Bhavnagri pointed out that the need to reduce greenhouse gas emissions means “there has to be an equalisation of the cost of something that has an environmental and a greater economic benefit against something which has a detriment. So is that regulation, is it carbon pricing, is it subsidy? Whatever it is, that’s the game to equalise [costs] that has to be played.”
This all means that countries without the necessary government support to bring down costs and make clean hydrogen cost-competitive with grey hydrogen will lose out to those that do.
In a separate interview with Hydrogen Insight, Simon said: “We’re not in a position yet where hydrogen is in any position to compete meaningfully with fossil fuels, particularly in the Australian context, because we don’t yet have any meaningful carbon pricing-type arrangements.
Without carbon pricing raising the cost of fossil fuels, “it’s very difficult for a new technology that’s going to cost a lot relative to fossil fuels to get up [to speed]”, she added.
So how long will government support be needed?
Simon told the conference: “[That’s] a bit of a how-long-is-a-piece-of-string question. You get whacked no matter what [you say], because on the one hand, we don’t want to say ‘in 10 years or 20 years’, but we don’t know what that future looks like, the policy isn’t in place to have us even value [clean hydrogen] properly in the first place.”
Despite the requirement for government support and/or the need to accept higher costs in the short to medium term, Bhavnagri points out that “taking action on climate change is actually the economically rational thing to do” over the long term, as shown by several governmental studies, such as the famous Stern Review from 2006, due to future environmental damage and lost productivity.
“The problem is that when you narrow down on a particular product and you say, ‘aha, that’s going to be more expensive, isn’t it’, you forget that we’re solving a broader societal problem [ie, climate change].”
How will the cost of green hydrogen fall in the coming years?
There was no doubt among the panellists that the cost of green hydrogen will fall in the coming years. But how will that happen in practice?
“It’s really all about learning and manufacturing economies of scale,” said Bhavnagri. So we should see the cost of elefctrolysers fall as manufacturing scales up and we should also continue to see the cost of renewable power fall as deployments increase.
“And so the bulk of the cost reduction is happening on the electrolyser side, but the power cost should continue to fall too.”
Maloney disagreed. “I don’t think learning curves will get you there on current technologies. I think you need step changes in technology and I think it will come because I think we have to remember where we are. This, only a number of years ago, was a cottage industry. Alkaline technology is very old technology and the supply chain is very old technology and there's been very little R&D focus on this sector really until probably the last two to three years and look what happened in other sectors of clean energy.
“Look what happened in the renewable energy sector and so I see that's what's going to drive it is step changes in technology costs along the supply chain to make it more viable and that's going to come with great R&D minds around the world to make those breakthroughs.”
Bhavnagri responded by saying he didn’t think step changes will bring the required cost reductions.
“It’s lots of little things that add up. How solar went from being a satellite technology to the cheapest form of energy is people figuring out how to slice a wafer of silicon one millimetre thin.
“I think it's just a ramp up in scale that sees a lot of incremental improvements that ride things down the cost curve.
I think by the year 2030 we're going to see gigawatts deployed. We should see two gigawatts this year. I think we'll see four the next year, we'll probably see doubling. Costs will come down and the main thing is I think people will get much smarter.”
An audience member asked if there was still room for the cost of wind and solar power to come down, and whether the growing demand for critical materials from a range of clean technologies might actually increase clean hydrogen costs over the coming decade.
“I think it is a very brave and perhaps a foolish person that would bet against cost curves. They are a very ironclad law really of manufacturing,” said Bhavnagri.
“The more you produce of something the cheaper it gets. They are exponential by nature because the costs fall every time you double and the bigger you are the harder doubling is.
“Doubling gets harder to do but solar still has a good distance to fall, wind still has a good distance to fall. We think that the cost of clean power is going to go to about an average of about US$30/MWh by 2030, down to US$10-20/MWh by the year 2050 because the equipment will just keep getting cheaper. And the same I think is true of electrolysers.
“Little perturbations in the cost of materials, those things get ironed out. The commodity markets go up and down and when a particular mineral is very expensive the industry evolves around it and finds substitutes. We see that in batteries as well. So I wouldn't be distracted too much by the noise about commodity market fluctuations. The overall direction of travel is if we scale these industries up these things will get cheaper.”