The pandemic’s impact on government budgets, and therefore on green energy subsidies, may endanger the emergence of green hydrogen at commercial scale, analysts have warned.

Green hydrogen is widely expected to be called upon to decarbonise the final 20pc of global energy consumption, especially for hard-to-abate sectors. But its ability to fulfil this role depends on production becoming cost-competitive with more conventional fuels.

The cost of green hydrogen is falling and is expected to continue to do so, but production will not reach self-sufficiency unless governments first support adoption through investments and policies.

“A government that wants to ‘go for green’ might decide that they will do it anyway—but I do not think we can take it as a given” Margaret Crow, Edison

 

The cost of fossil-based hydrogen is €1.5/kg ($1.8/kg), according to the EU Hydrogen Roadmap. This is substantially cheaper than green hydrogen, which costs €2.5–5.5/kg.

According to research organisation BloombergNEF, even if production costs of green hydrogen fall to $1/kg, a carbon tax equivalent to $50/tCO₂ would be needed to make hydrogen cost-competitive with conventional fuels in steelmaking, for example.

To make the energy source cost-competitive, governments will have to back net-zero carbon ambitions with prolonged, significant investments in hydrogen, according to a report by UK-based investment research company Edison Group titled The Hydrogen Economy - Decarbonising the Final 20pc.

20pc – Global energy to be decarbonised using green H2

 

“This will require policies, subsidies and some kind of coordination at a governmental level, and perhaps at the local regional level,” says Dan Gardiner, director for energy and resources at Edison Group. “Failure to do so could hamper growth in the renewable hydrogen market, and some companies may fail to live up to expectations.”

He believes the most important government policy will be levelling or tilting the cost of hydrogen by “squeezing” the carbon tax pricing higher, because it will have “the greatest impact on encouraging investment in hydrogen”.

Covid-19 uncertainty

The problem facing governments backing green hydrogen is the Covid-19 lockdowns and resulting recessions have put most of them in challenging fiscal positions. So, while some have issued ambitious plans to grow the green hydrogen market, their attention remains focused on emergency support for their economies.

Anne Margaret Crow, an industrials analyst at Edison Group, says: “If a government has much less tax coming in, it has less available to pay out in subsidies to projects involving fuel cells and putting hydrogen networks in place.

“A government that wants to ‘go for green’ might decide that they will do it anyway—but I do not think we can take it as a given.”

Companies that are heavily dependent on government cash face the greatest challenges. For example, US-based Bloom Energy is very dependent on subsidies in California, and is particularly dependent on the way those are calculated—which makes it a “much riskier proposition”, Crow says. California has experienced 30,000 Covid-19 related deaths and is enduring an unemployment and homelessness crisis.

Similarly, some of the smaller European hydrogen companies receive a high proportion of their revenues in grants from EU programmes, such as one to provide fuel cell stacks for a relatively small number of buses or trams.

Crow says she “feels more worried” about the prospects for these companies because it is not certain that subsidies will remain available at a level these firms would like.

“That would be perhaps less desirable than being in a position like Ballard Power Systems, which has [received] a huge investment from a big Chinese bus company,” she says.

“Companies such as ITM Power, Plug Power, NEL Hydrogen, Ceres Power and Ballard Power Systems all have well-established routes to market through partners that they are working with, and in many cases those partners have invested in them as well.”

However, Covid-19 lockdowns could also slow down the pace of private sector partnerships and acquisitions during 2021. Most of the deals announced last year would likely have been in play before the Covid-19 pandemic started.

Even though hydrogen companies seem relatively unaffected and have continued to operate through Covid-19 lockdowns, they may increasingly run into issues. There is a limit to what firms can do in terms of getting out onto customer sites when travel is not an option, says Crow.

“For example, if you cannot actually get engineers to go out and talk to each other and help to get projects moving, this will hold things back. You can do a lot of work remotely, but I cannot imagine anybody actually making an acquisition unless they have physically travelled to meet the people.”

While interest is undimmed, how rapidly companies can act on it will depend on the ability of their workers to travel and whether Covid-19 vaccines work sufficiently to pull countries out of lockdowns.

 

 

---

Author: Stephanie Baxter