By Denmon Sigler – Chair North American Energy Transaction Practice, Baker McKenzie & Andrew Ketner – Senior Associate, Baker McKenzie
Global demand for pure hydrogen is approximately 70Mt per year; largely for use in oil refining and chemical production, and continues to rise. Hydrogen can be made from fossil fuels or biomass, or by electrolysis (passing electricity through water). Currently, most hydrogen comes from natural gas or other fossil fuels such as coal; besides, the associated carbon emissions are significant.
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Global Demand for Hydrogen
As the world continues to grapple with the threats posed by climate change, global decarbonization efforts have taken center stage. Countries are actively seeking ways to reduce or eliminate carbon from their economies. Therefore, many observers see green hydrogen—hydrogen produced from renewable energy sources—as playing a vital role in achieving a decarbonized global economy.
Unlike so-called “grey” hydrogen, which is produced from natural gas or other fossil fuels, green hydrogen is produced using clean electricity. Furthermore, it does not result in carbon emissions. The majority of industrial hydrogen in the U.S. is grey hydrogen produced from natural gas.
While grey hydrogen is relatively cheap to produce due to the low cost of natural gas in the country; the process releases vast quantities of carbon dioxide into the atmosphere.
Other parts of the world, the European Union, China, and Japan, have made significant strides in developing long-term hydrogen strategies. Accordingly, those economies spurred in last few years massive investments in research and infrastructure. While it may lag behind these countries in terms of investment, the U.S. can become a major player in green hydrogen.
The factors discussed below will affect how quickly the U.S. becomes a leader in the green hydrogen industry.
Cost of Electrolyzer Infrastructure – for Green Hydrogen
The key ingredient for green hydrogen is cheap, low-carbon electricity. Through a process called electrolysis, the electricity is run through water to produce hydrogen with zero or low carbon emissions; depending on the source of electricity used.
The cost to produce renewable energy in the U.S. declined dramatically in recent years, which bodes well for green hydrogen production. However, the cost of electrolyzers—the machines used to split water into hydrogen and oxygen—remains prohibitively high.
President Biden through the announcement of his clean energy plan has promised that the U.S. will have access to green hydrogen at the same cost as grey hydrogen by 2031. For this to be the case, the U.S. must develop more innovative and cost-effective electrolyzer technology.
Enhancements in Carbon Capture and Storage
Another form of low-carbon hydrogen, “blue” hydrogen, is produced from fossil fuels but uses carbon capture and storage (CCS) to offset emissions. While some countries have not embraced blue hydrogen (Germany declared in its national hydrogen strategy that, “only hydrogen that has been produced using renewable energy is sustainable in the long term”), it could serve as an intermediate solution in the U.S., particularly given the increased use of CCS technology in renewable energy production. If CCS technology—which currently captures about 90% of carbon emissions—is improved to allow for close to 100% capture, CCS could also serve as a long-term solution.
Moreover, big oil is poised to lead the way in development of blue hydrogen. Therefore, there are a number of companies, including Equinor, BP PLC, Repsol SA, Royal Dutch Shell Plc and PetroChina Co. announcing investments in blue hydrogen.
Deployment in Industrial Sectors
Given the potential wave of government policy that would penalize companies for carbon emissions, there is a growing demand for hydrogen in heavy industrial sectors where decarbonization is more difficult, such as aviation, steel, shipping and power.
Moreover, these industries, which rely predominately on fossil fuels for power, could meet emissions-reduction targets by incorporating blue hydrogen or green hydrogen into their processes. Likewise, industries that use grey hydrogen as a chemical feedstock, such as refining and ammonia, could dramatically reduce carbon emissions by transitioning to lower-carbon hydrogen.
Simultaneously, demand for low-carbon hydrogen could increase exponentially in the next 20 years; thus, creating the need for considerable infrastructure to handle production and delivery. Therefore, for hydrogen to make a significant contribution to the country’s clean energy transition, the U.S. must be able to deploy low-carbon hydrogen technologies in these sectors.
Government Support for Green Hydrogen
As part of its overall commitment to combat climate change, the Biden administration pledged to make historic investments in clean energy and innovation. Therefore, it aims to accelerate the deployment of clean technology throughout the U.S. economy.
As a result, building foundational hydrogen infrastructure will require a significant amount of capital. In order to attract this capital, the U.S. federal government should establish a supportive regulatory framework with meaningful government incentives.
For instance, federal tax credits spurred private-sector investment in wind and solar projects; moreover, federal incentives for low-carbon hydrogen; would give a huge boost to investors who are eager to advance U.S. hydrogen production. Therefore, look for low-carbon hydrogen to be a focal point of the administration in the near term.
Finally, given the growing emphasis on sustainability and decarbonization; investors will continue to focus on companies and technologies that advance these goals. Furthermore, smart policies that support the growth of blue hydrogen and green hydrogen would give developers and investors certainty; besides, it would foster public-private collaboration Moreover, they could continue expanding the country’s clean energy infrastructure.