Usefulness of the article: This article describes the role that « green » hydrogen could play in the energy transition, as well as the challenges it faces. Traditional public policies would be beneficial, but the use of new tools to promote its use must be a priority.
Summary:
- Although hydrogen can be produced in different ways, 95% of global production currently comes from fossil fuels.
- In France, in the context of the energy transition, carbon-free hydrogen production is a priority for the sovereignty of the industrial and energy sectors.
- Green hydrogen faces a number of challenges: high costs, difficulties in tracing its origin, inefficient or developing technologies, and the need for suitable infrastructure.
- Public authorities can support the deployment of these technologies through traditional tools such as subsidies and labels.
- New tools are also available: carbon-related contracts for difference, new market organizations, and « hydrogen valleys. »
Dihydrogen H2 (hydrogen) is the most abundant element in the universe. However, hydrogen is not an energy source[i] as such, but an energy carrier, produced by a chemical reaction from a primary resource.
Hydrogen is therefore mainly used today in the industrial sector, for example in the production of ammonia and methanol, as well as in the refining of petroleum products, fuels, and biofuels.
Hydrogen does not emit carbon dioxide (CO₂) when burned, but it can be produced in various ways that may generate greenhouse gas emissions. Historically, its production has been based on steam reforming[ii] of fossil fuels such as oil, gas, or coal (« gray » or fossil hydrogen). In short, this involves obtaining hydrogen and CO2 from methane and water. According to IRENA (2018), 95% of global production currently comes from fossil fuels[iii], see Figure 1.
Figure 1: Global hydrogen production
Source: IRENA (2018)
However, this gas can also be produced in a carbon-free way thanks to advances in water electrolysis technology, if and only if the electricity used for its production is itself carbon-free. An electrolyzer uses an electric current to separate water molecules into oxygen and hydrogen. In this case, we refer to « green » or « renewable » hydrogen. Electrolysis production capacity currently remains very limited: 25.4 MW per year (IEA, 2020).
Another alternative is to supplement steam reforming production with carbon capture and storage technologies (« blue« or « low-carbon » hydrogen). It is also possible to use biomethane (methane produced from the fermentation of biomass) as a substitute for fossil fuels. In France, there is another form of low-carbon hydrogen: produced by electrolysis, but with electricity coming mainly from nuclear energy (« yellow » hydrogen).
It should be noted that « green » hydrogen may be classified as « renewable »; « gray » hydrogen as « fossil, » and « blue » and « yellow » hydrogen may be grouped under the term « low-carbon. »
1. « Green » hydrogen: a tool for energy transition
Public authorities are interested in « green » hydrogen because it could facilitate the transition to a carbon-free economy, either through direct combustion of the gas or through electricity[vi].
Source: IDDRI (2022)
In France, carbon-free hydrogen production is a priority for the sovereignty of the industrial and energy sectors: the government estimates that production needs amount to nearly 900,000 tons per year. The 2020 post-Covid recovery plan provides for nearly €2 billion to be made available to support this sector[vii] and – in total (through additional programs) – nearly €7 billion by 2030[viii].
The decarbonization of many sectors, such as transportation( fuel cell vehicles, aircraft, trains, ships, etc. ) and heating (heat pumps, industrial heat), relies on their massive electrification (as shown in recent scenarios published by AD EME and RTE). This initial strategy assumes that this electricity will come from renewable sources and requires, as a first step, an increase in their share of the energy mix. The deployment of renewable energies, whose production depends on climatic (e.g., hydroelectric power plants) and meteorological (e.g., wind and solar farms) variables, also requires a grid that is capable of constantly adapting and coping with peaks in production and consumption while avoiding power cuts (i.e., intermittency). To cope with this intermittency, the deployment of flexibility solutions is necessary. Hydrogen as an energy carrier can thus help balance supply and demand by absorbing surplus renewable and nuclear energy and serving as a fuel during consumption peaks or when renewable production is low (Bossmann et al., 2018; Energy Transitions Commission, 2021; RTE, 2021). This gas has significant advantages over other carriers, as hydrogen has an energy density of 33 kWh per kilogram, meaning it contains three times more energy per unit of mass than diesel and 2.5 times more than natural gas (ADEME, 2013).
Thus, the role of this vector in the energy transition is not only to contribute to the decarbonization of end-use sectors, but also to contribute to greater resilience (balancing and security) of energy systems, see Figure 2.
Figure 2: The seven roles of hydrogen in the energy transition
Source: Afhypac (2018)
However, although the development of this sector is receiving public support, « green » hydrogen is likely to face many challenges in the early stages.
Firstly, « green » hydrogen will provide solutions for the energy transition if it becomes more competitive than hydrogen produced by steam reforming of fossil fuels. According to the IEA (2019), renewable hydrogen is currently three times more expensive (€5.5/kgH2) than hydrogen produced from fossil fuels (€1.5/kgH2). The main determinants of the cost of « green » hydrogen are those related to the deployment of electrolysers and electricity. The IEA (2019) forecasts a significant reduction in the former thanks to technological innovations (e.g. the development of less expensive materials) and economies of scale linked to the mass deployment of electrolysers. The longer an electrolyzer is used, the lower the share of investment costs in favor of electricity in hydrogen production.
If we consider an electrolyzer connected to the grid, then access to low-cost electricity for long periods of time is essential to ensure low-cost green hydrogen production (IEA, 2019). Otherwise, it would be more advantageous to deploy renewable capacity exclusively for its production. It should be noted that these costs are compounded by those of storage and transport, which are particularly high due to the compression of hydrogen. Hydrogen has a low density, and densifying it allows it to be operated at lower pressures but requires more energy, making it more expensive (IPFEN, 2022).
Secondly, even though « green » hydrogen is presented as a lower-emission alternative, it remains difficult for consumers to trace the origin of hydrogen (HyLaw, 2019). Technologies using hydrogen can contribute to a reduction in greenhouse gas emissions if, and only if, this gas is produced from renewable energies. Otherwise, they will only contribute to increasing emissions. If consumers want to switch to lower-emission technologies, it is currently difficult to observe the hydrogen production process. This could encourage consumers to stick with technologies where this uncertainty is not – or less – present (e.g., biofuels).
Thirdly, many of the hydrogen-based technologies for the energy transition are not yet commercially available or require significant technical improvements. Air transport technologies, for example, may not be available until 2040-2050 (Napp et al, 2019; Verstraete, 2013). Similarly, for the resilience of the electricity system, large-scale storage, given the new technologies in the electricity sector, requires a fairly high round-trip efficiency[xiii] (Bravo-Melgarejo and Haritchabalet, 2022), whereas today it is around 65% (IEA, 2019). This low energy efficiency of hydrogen compared to other energy carriers indicates that, at present, it is not intended to replace gas in the energy system, but rather to decarbonize certain uses.
2. Public policies for the deployment of « green » hydrogen
To address the limitations mentioned in the previous section, there are a few avenues that public authorities could explore in terms of strategies to support the deployment of hydrogen technologies for the energy transition.
Firstly, the main challenge facing « green » hydrogen is its uncompetitive production cost, particularly compared to that of hydrogen produced by steam reforming of fossil fuels.
By 2030, this cost should fall to €3/kgH2 (CEA and DGSE, 2017), provided that an appropriate policy framework is put in place. To make it competitive, traditional tools such as subsidies for operating costs and/or investments would be beneficial. Similarly, in order to shift demand from « gray » to « green » hydrogen, a sufficiently high carbon price[xiv] is necessary. Chaton and Metta-Versmessen (2021) propose the additional use of carbon contracts for difference (CCfD)[xv].
This tool, introduced by Helm and Hepburn (2005), is a contract in which the public authorities set a carbon price for an investor and undertake to reimburse them for the difference between the fixed price and the market price if the latter is lower. If the market price is higher than the carbon price, then the investor will have to reimburse the public authorities. This type of contract offers major advantages for industries where cost reduction through research and development (R&D) is necessary.
Richstein (2017) argues that CCfDs reduce the uncertainty associated with a project’s future revenues and therefore require less subsidies. In the case of « green » hydrogen, Chaton and Metta-Versmessen (2021) demonstrate that a CCfD must take into account future natural gas prices, state aid from the EU Emissions Trading System (ETS), and the electricity generation capacity of each region. It should be noted that steam reforming production is currently eligible for free emission allowances. RTE (2020) recommends eliminating these free allowances to promote electrolysis production. Furthermore, electrolysis benefits from state aid linked to the ETS to limit the risk of carbon leakage, i.e., the relocation of industrial activities outside the European Union. This aid takes the form of a unit compensation of up to 75% of the indirect costs of its emissions. Within the European Union, for geographical and historical reasons, each country has its own unique energy mix. For example, in France in 2020, nuclear power accounted for 67.21% of total energy production, followed by hydroelectricity (11.74%), wind power (7.42%), and gas (6.48%). In Germany, there is significant wind power production (23.71%), which is supplemented by coal (23.66%). Poland relies mainly on coal (69.84%). Thus, the implementation of a single CCfD is not possible within the European Union: each member country would have to define its own CCfD if it wishes to develop this sector.
Secondly, to facilitate the tracing of hydrogen’s origin, the European Commission (2020) is working on a definition of decarbonized hydrogen, based on the « Certifhy » system proposed by Hylaw (2019).
This free and voluntary label is inspired by the Guarantees of Origin (GO)[xvii] used in the electricity market. The same principle is applied in the Certifhy system, which distinguishes between two possible labels: low-carbon hydrogen and « green » hydrogen. The first certifies that the hydrogen is produced using a process with 60% fewer emissions than steam reforming, while the second guarantees that it is produced from renewable sources.
The advantage of such a system at the European level lies in the decoupling of production and consumption: however, it is questionable whether a free label will be sufficiently credible for consumers (Bonroy & Constantos, 2014). Indeed, this tracking along the value chain is not without cost, and its production is exposed to the risk of carbon leakage. In sectors with complex supply chains, such as transport, a market organization with vertical relationships would also enable effective, and even less costly, tracking if this label were to become fee-based (Bravo-Melgarejo & Haritchabalet, 2021). However, this label is compatible with product differentiation and the transport of hydrogen from different production processes through a network of pipelines (as with natural gas). This is particularly true because, according to FSR (2020), pipeline networks offer a clear cost advantage over other means of transport.
Thirdly, in order to benefit from synergies, cooperation between the various players in the value chain could be envisaged in the form of » hydrogen valleys. »
Established players and start-ups would join forces to combine production, infrastructure, and use in a single region. For example, in the Auvergne-Rhône-Alpes region, the « Zero Emission Valley » project (a cluster of captive fleets) brings together 80% of French players in the hydrogen sector. These « hydrogen valleys » could accelerate the deployment of new technologies by sharing expertise, reducing costs, and facilitating access to government aid. However, these clusters could continue to hold too much market power once the market is sufficiently developed. At this stage, ex ante regulation could introduce uncertainty about future revenues and therefore hinder the development of these new technologies.
While these « hydrogen valleys » limit the need to deploy large transport infrastructure, in the long term the question of connecting these « clusters » arises (IDDRI, 2022). In addition, the conversion of part of the existing natural gas infrastructure could be considered, or the deployment of specialized gas pipelines. In the context of the deployment of these networks, public authorities are considering the regulations that will be necessary given their essential infrastructure status (FSR, 2020). In the case of electricity and natural gas networks, the conditions of use[xx] by third parties (e.g., use of the electricity network by non-incumbent suppliers) were introduced ex-post, whereas in the case of hydrogen, uncertainty about possible future regulation could hamper investment at this early stage (FSR, 2020).
Conclusion
In France, carbon-free hydrogen production is a priority for accelerating the decarbonization of many end-use sectors and increasing the resilience of the electricity grid.
The high price of « green » hydrogen compared to that produced from fossil fuels, as well as compared to other energy carriers based on emitting energy sources (e.g., fuels), remains a major obstacle. Subsidies accompanied by a sufficiently high carbon price can help reduce this price difference. New tools, such as carbon-linked contracts for difference, can complement these traditional policies, but depend on the willingness of each EU Member State to develop a « green » hydrogen sector.
In addition, the development of this sector requires the implementation of new infrastructure and organizations, such as essential infrastructure or the concentration of players in « hydrogen valleys » (where ex ante regulation could hinder its development). Thus, it remains difficult today to identify and correct any market failures that may emerge. The large-scale deployment of green hydrogen therefore depends on key economic and institutional conditions that will need to be closely monitored in the coming months and years.
References
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Bossmann, T., Barberi, P., & Fournié, L. (2018). Effect of high shares of renewables on power systems.
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[i] Natural hydrogen deposits (« white » hydrogen) have been identified in Mali, Russia, Brazil, and the United States; however, current technologies do not allow this resource to be exploited.
[ii] Steam reforming is based on the following process: at a temperature between 700 and 1,100°C, water vapor reacts with methane to produce carbon monoxide and hydrogen. Since hydrogen is easier to purify under high pressure, reforming is carried out at a pressure of twenty atmospheres. The hydrogen/carbon monoxide mixture is commonly referred to as synthesis gas. If the reaction is carried out in the presence of excess water vapor, the carbon monoxide is oxidized to a higher oxidation level, producing carbon dioxide, which increases hydrogen production. In this process, for every kg of H2 produced, 10kg of CO2 is released.
[iii] This fossil hydrogen is mainly produced in industrial sites as a co-product (IDDRI, 2022).
[iv] The cost of producing hydrogen by electrolysis has been divided by four since 2010 for Proton Exchange Membrane (PEM) technology, according to the CEA and DGCE (2017).
[v] This fossil hydrogen is mainly produced in industrial sites as a by-product (IDDRI, 2022).
[vi] This is thanks to a fuel cell that converts hydrogen into electrical energy using the reverse principle of electrolysis.
[vii] Presentation of the national strategy for the development of carbon-free hydrogen in France | economie.gouv.fr
[ix] Although less polluting alternatives such as electric cars exist in certain markets, fuel cell cars may be more suitable for certain uses due to their greater range (see Hydrogen applications | Air Liquide Energies). Furthermore, hydrogen is proving to be the only alternative for markets that are difficult to decarbonize, such as air transport (e.g., Airbus has presented three hydrogen aircraft concepts for 2035).
[xi] Energy futures 2050: production mix scenarios under study to achieve carbon neutrality by 2050 | RTE (rte-france.com)
[xii] Demand response and storage.
[xiii] Round-trip efficiency is the rate of usable energy acquired from an energy vector, i.e., the proportion of stored energy that can be recovered. By way of comparison, theround-trip energy efficiency of a lithium-ion battery is 92%.
[xiv] This is also true in order for hydrogen to be more competitive than other fuels, such as kerosene or diesel.
[xv]IDDRI, Decarbonizing basic materials in Europe: how carbon contracts-for-difference could help bring breakthrough technologies to market, No. 6, October 2019. How Carbon Contracts-for-Difference could help kick-start commercial-scale carbon-neutral basic materials projects in EU Member States (iddri.org)
[xvi] Due to a lower level of uncertainty regarding carbon price fluctuations and government strategies.
[xvii] According to Article R314-53 of the Energy Code: « A guarantee of origin […] proves […] that a specified amount of energy has been produced from renewable sources or by cogeneration. »
[xix] A captive fleet is a group of vehicles that make regular trips with predictable patterns, so a limited number of stations can provide recharging.
[xx] For example, the introduction of a network access tariff, accompanied by operational tools to ensure non-discriminatory treatment.
