This is the third bulletin in Fasken’s Energy in Transition Series. You may also be interested in reading Energy in Transition: Renewable Natural Gas has a Role to Play and Change is the Only Constant: Navigating the Energy Transition and Commitments to “Build Back”.
Promoted by many as one of the key pillars in the energy transition, hydrogen as an alternative to fossil fuels is not a new topic. After all, Canada’s Stuart Oxygen Company was manufacturing and selling commercial electrolyzers to produce hydrogen for industrial purposes as early as the 1920s. Hydrogen was successfully used to fuel airplanes and automobiles in the 1920s and 1930s - albeit on an experimental basis. Both NASA and the United States Air Force began using liquid hydrogen as a propulsion fuel in the 1950s. Since those early days, there have been recurrent waves of interest in using hydrogen to power more of the world’s industrial, transportation and energy systems: peaking in the 1970s in response to the oil crisis that witnessed the tripling of the price of foreign oil, and again in the late 1990s and early 2000s in response to efforts to combat climate change.
But to date, the “hydrogen economy” has yet to take off. Although it is the most abundant chemical element in the universe, hydrogen does not exist in a natural form on Earth that may be converted for commercial uses. Rather, hydrogen must be produced from other raw materials like water or natural gas employing costly and technically complex processes that require large amounts of energy. Hydrogen is also a highly reactive element, making it difficult to store and transport. And so while hydrogen is being promoted as a climate friendly alternative energy source, the commercial production and use of hydrogen could be limited in the near term until a robust market for hydrogen develops worldwide and substantial investments are made in hydrogen production, storage, transportation and export infrastructure.
These factors have led some to question whether the recent surge in interest for hydrogen is only temporary, and whether the prospect of hydrogen as a leading pillar in the global transition away from fossil fuels will again recede from public attention.
For the reasons that we outline in this bulletin, we believe that hydrogen’s time has come, and that hydrogen’s story has reached a true inflection point. The use of hydrogen as a source of fuel, heat or feedstock will allow crucial industries to decarbonize which, in turn, will result in significant reductions in greenhouse gas (GHG) emissions. With the maturation of hydrogen technology, the development by governments of new regulatory frameworks and the creation of financial incentives designed to spur the development of hydrogen economies worldwide, we believe that hydrogen is poised to play an increasingly important role in the global energy transition.
In other words, this time it really is different.
Difficult-to-Decarbonize Sector Use Cases
To date, most climate change policy initiatives cluster around changing consumer behavior by discouraging the use of fossil fuels, promoting the use renewable energy sources such as wind or solar, or selling more electric vehicles. Those changes are important, but much more will need to be done to achieve global emissions reductions targets. Difficult-to-decarbonize industries – such as heavy industry, heavy transportation and commercial and residential heating – will need to transition away from the use of fossil fuels if emissions reduction targets are to be achieved. In our view, hydrogen has a critical role to play in reducing GHG emissions from these difficult-to-decarbonize sectors.
The steel industry alone is a significant carbon producer, with 1.83 tonnes of carbon dioxide emitted for every tonne of steel produced in 2017. Manufacturing steel requires extremely high temperature sources of heat that are difficult to achieve using anything other than fossil fuels. Hydrogen, however, can be used for that purpose (and in similar industries requiring high temperature heat sources). A pilot steel manufacturing project in Sweden has replaced natural gas with hydrogen for high-temperature heat. The steel produced was of the same quality, but released no carbon emissions. ArcelorMittal is also running decarbonization trials at a Hamburg facility that produces iron. The company’s stated goal is to manufacture and use Direct Reduced Iron made with 100% hydrogen as the reductant.
Transportation is another difficult-to-decarbonize sector that contributes 24% of global GHG emissions through diesel and gasoline combustion processes. While battery powered electric vehicles may transform sectors such as passenger vehicles and light-duty trucks, batteries don't currently have the energy density required to power some of the heavy vehicles and vessels used in the commercial transportation sectors. Hydrogen can provide a low carbon solution to displace fossil fuels used in long-haul trucks, locomotives, container ships and aircraft. These sectors are well suited to use hydrogen as a fuel source because they have energy-intensive duty cycles and they haul over long distances and fixed routes.
Case Study: Loop Energy Inc.
Loop Energy is a leading designer, manufacturer and global supplier of hydrogen fuel cell systems, primarily targeted for the electrification of commercial vehicles. From transit buses to medium and heavy-duty trucks, Loop Energy works with OEMs and vehicle sub-system suppliers to advance the production and adoption of fuel cell electric vehicles. Loop Energy’s fuel cell products feature the Company’s proprietary eFlow™ technology in the fuel cell stack’s bipolar plates, a patented design that excels in both performance maximization and cost minimization by improved fuel efficiency, peak power and power density uniformity.
Loop Energy completed its initial public offering of $100 Million in Q1 2021 (TSX: LPEN), evidence the market sees opportunities in the sector. Fasken advised Loop on its IPO.
For more information about how Loop Energy is driving towards a zero-emissions future, visit www.loopenergy.com.
New Regulatory Frameworks and Global Opportunities
As a signatory to the Paris Agreement, Canada is committed to reducing GHG emissions, recently announcing an intention to slash emissions by 40-45% below 2005 levels by 2030. These ambitious targets are driving federal and provincial governments to promote hydrogen through a combination of new regulatory schemes and financial incentives that are larger in scale and wider in scope than any that we have seen before.
Canada's 2020 Hydrogen Strategy for Canada: Seizing the Opportunities for Hydrogen sets out important goals aimed at helping Canada reach its net-zero emissions targets. Canada has identified hydrogen as a key part of its plan, and has designed a strategy to scale up hydrogen production for export and domestic use, and to encourage the financing, development and commercialization of innovative technologies in the hydrogen space. Among the strategy's goals:
- Create domestic regional hubs for clean hydrogen production, utilization and export;
- Have hydrogen make up approximately 30% of domestic energy consumption by 2030;
- Enable Canada to be a top three producer of clean hydrogen worldwide by 2030; and
- Have Canada be the leading exporter of clean hydrogen worldwide by 2050.
Canada's federal government has recently announced a $1.5 billion Low-Carbon and Zero-emissions Fuels Fund to accelerate the transition to low carbon intensity fuels, including hydrogen.
Provincial governments and businesses across the country have also been active, including:
- British Columbia - In 2018, British Columbia released its CleanBC plan, which promoted the development of clean hydrogen, among other things. A year later, British Columbia released a hydrogen study, which emphasized low-carbon emission transportation fuels, fuel cells and zero-emissions vehicles. In 2020, British Columbia allocated $10 million to the construction and operation of 10 hydrogen fuelling stations in the province, as well as support for Hydrogen BC, a new provincial partnership to promote hydrogen technologies in the province.
- Alberta - Alberta is rich in natural gas and its associated transportation and processing infrastructure and expertise. Already a leading producer of “grey” hydrogen from natural gas, Alberta has emerged as a leader in the development and implementation of carbon capture and storage (CCS) technology and processes. When CCS is employed in the production of hydrogen, much of the carbon by-product is separated and stored underground instead of being emitted into the atmosphere, resulting in the much cleaner form of “blue” hydrogen. In May, Suncor and ATCO announced a partnership on a potential 300,000 tonnes/year blue hydrogen production project, which would see approximately 85% of the output being used to supply existing energy demand (including at Suncor’s Edmonton refinery, reducing emissions there by 60%), and the balance available for blending in ATCO’s natural gas distribution system. On Wednesday, June 9th, Air Products announced a $1.3 billion investment in the first phase of a blue hydrogen project in Edmonton that is expected to capture 95% of its GHG emissions.
- Ontario - In November 2020, Ontario published its Ontario Low-Carbon Hydrogen Strategy—Discussion Paper, in which the province declared its intention to be a leading clean hydrogen hub in North America. Enbridge and Cummins have announced plans for a blending project in Markham, Ontario, where hydrogen will be introduced into Enbridge’s existing natural gas network, reducing GHG emissions.
- Quebec - With its abundance of hydroelectricity, Quebec is focused on producing “green” hydrogen, which means hydrogen that is produced from water using electricity from zero-carbon energy sources. No GHGs are emitted during production or use of green hydrogen. The Government of Quebec announced it would provide $15 million to support green hydrogen projects, particularly those in the industrial and heavy transport sectors. Hydro-Quebec announced its intention in 2020 to build and operate an electrolysis plant in Varennes. In February 2021, Evolugen and Gazifère announced a collaboration on a green hydrogen project using a 20-MW electrolysis plant in Gatineau. The parties plan to inject the hydrogen produced into Gazifère's natural gas network, which is expected to reduce GHG emissions by around 15,000 metric tonnes per year.
Governments around the world are charting a similar path.
- United Kingdom - Hydrogen came in at number 2 in Boris Johnson’s “10 Point Plan for a Green Industrial Revolution”. The UK is aiming for 1GW of low carbon hydrogen production capacity by 2025 and 5GW by 2030, with renewable energy, carbon capture, utilization and storage (CCUS) and hydrogen forming a triumvirate of low carbon technologies driving the government’s aspiration for new industrial “SuperPlaces”.
This ambitious role for hydrogen will be supported by a range of measures, including a £240 million Net Zero Hydrogen Fund, new hydrogen business models and a revenue mechanism to incentivize private sector investment, to be unveiled in the government’s eagerly-awaited Hydrogen Strategy and consultation later this year.
Early indications from Whitehall are that the Hydrogen Strategy will take an “all of the above” approach, encompassing both green and blue hydrogen production. Although the “10 Point Plan” showcased Sheffield-based ITM Power’s PEM (proton exchange membrane) electrolyzers and Gigastack project, exploring the potential to scale up electrolyzer size and integrate those units with offshore wind facilities, steam methane reformation projects such as Equinor (formerly Statoil)’s H2H Saltend project in the Humber region also form a key part of the government’s drive to establish decarbonized industrial clusters.
Less glamorous but potentially far-reaching on the distribution side, Cadent Gas’ HyDeploy project has injected up to 20% (by volume) of hydrogen into Keele University’s private natural gas grid, feeding 100 homes and 30 faculty buildings. The 20% hydrogen blend is the highest in Europe, and could help pave the way for methane grid operators to decarbonize their networks by introducing hydrogen into the natural gas-dominated UK domestic heating sector.
- Germany - The German government has predicted a hydrogen demand of about 90 to 110 TWh by 2030. Efforts are underway to build electrolyzers with a total capacity of up to 5 GW by 2030, together with the offshore and onshore energy production required for providing electricity for the electrolyzers. The National Hydrogen Strategy of Germany focuses on the development of a domestic market for hydrogen technology as its first step, recognizing that most of the hydrogen needed will have to be imported.
- EU - The “Hydrogen Strategy for a Climate Neutral Europe” calls for the installation of at least 6 GW of renewable hydrogen electrolyzers in the EU by 2024 and the production of 10 million tonnes of renewable hydrogen in the EU between 2025 and 2030.
- Chile - Chile is also undergoing an energy transition, announcing its Green Hydrogen National Strategy in November 2020, which focuses on the production of green hydrogen to replace fossil fuels. The strategy includes several targets including the pursuit of 5GW capacity of constructed electrolysis, becoming the most competitive producer of green hydrogen in the world by 2030 and being one of three major exporters of green hydrogen by the year 2040.
- UAE - The United Arab Emirates and Germany are actively collaborating in pursuit of opportunities presented by the energy transition, leveraging their green energy partnership forged in January 2017. In May of this year, the UAE announced the commission of its first green hydrogen plant in collaboration with Siemens Energy. In the same month, Oman announced plans to build one of the world’s largest green hydrogen plants. State oil firm OQ SAOC, InterContinental Energy Ltd. and Kuwait’s EnerTech have partnered on the 25 GW project.
One Proton, One Electron, So Many Possibilities
Hydrogen’s versatility is part of its appeal. It can be adopted for use in many applications and across many sectors, and because its combustion products are not GHGs, it can be blended with, or entirely replace, natural gas and other fossil fuels as a means of reducing or eliminating GHG emissions.
As a heat source, hydrogen can be used as a replacement for natural gas in industrial, commercial and residential settings. As noted above, projects are currently underway to adopt hydrogen as a replacement source of heat in heavy industries like steel production. In cold weather countries like Canada that use natural gas and other fossil fuels as a source of heat, hydrogen is touted as a potential replacement source of heat, although challenges associated with the adaptability of existing natural gas transportation and distribution infrastructure, among others, will have to be overcome.
As an energy source, hydrogen has many potential uses, including as a carbon free fuel for both consumer and commercial transportation as noted above. Other uses, such as a replacement fuel source in the generation of power, are also possible. In addition, hydrogen may be employed in fuel cells which work like batteries in that they produce an electric current without combustion or GHG emissions. The hydrogen in the fuel cell is split into proton and electron molecules, with the electrons creating a flow of electricity. When used as a fuel source in vehicles, fuel cells can reduce emissions considerably, particularly if green hydrogen is used.
As a feedstock, grey hydrogen is already commonly used in both petroleum refining processes and in the production of fertilizer. Cleaner forms of green and blue hydrogen could supplant grey hydrogen as a cleaner feedstock in petroleum upgrading and refining applications as well as in the production of fertilizer. Other potential uses of hydrogen as a feedstock include the production of methanol.
Another emerging use is as a medium of energy storage in the generation of renewable power from sources such as wind and solar. One of the main challenges associated with the broader adoption of wind and solar energy is the intermittency of supply and the challenges that presents with imbalances in the market’s demand for power. During productive periods, but when demand is low — wind and solar generators often create a surplus of power that can't be used. Conversely, during periods of low productivity, but when demand is high — wind and solar generators cannot produce enough power to meet demand. Hydrogen, as an energy storage medium, can be used to even out these imbalances, with excess power used to produce green hydrogen which, in turn, may be stored, and then used to generate power during periods of higher demand. This will bring stability to power grids and make renewable sources of power generation like wind and solar more viable.
Hydrogen’s versatility and reactivity may also facilitate solutions to some of its challenges, including those related to its storage and transportation. One possibility is Ammonia, composed of one nitrogen atom and three hydrogen atoms. While toxic, its energy density is nearly double that of liquid hydrogen and it is easier to transport and distribute. Significant attention (notably in Australia) is focused on the use of ammonia as an alternative means of storing and transporting hydrogen, using ammonia electrolysis to create hydrogen closer to where it will be used.
Bridges to the Future
Looking to the future, there is still much to be done to fully develop a global hydrogen economy. The cost competitiveness of producing hydrogen, in relation to conventional fuels, is a significant challenge. In addition, technological and infrastructure challenges and gaps exist that will have to be overcome. Significant technological advances will be required in order to make the commercial production, transportation, storage, export and use of hydrogen not only cost competitive but, in some cases, feasible. Even with the required advances in technology, massive investment and collaboration is required to develop, implement and build the technology and infrastructure necessary to deploy hydrogen as a broadly used alternative to fossil fuels. Successfully developing a hydrogen economy will therefore require active participation and investment by all stakeholders, including strategic partnerships and cooperation among governments, industries, technology developers and community stakeholders.
Progress is already being made. There is already evidence that hydrogen may experience the kind of rapid cost improvements seen in the solar, wind and battery industries. For example, the cost of electrolyzers manufactured in Europe and North America fell by 40% between 2014 and 2019. But the premium for low-carbon hydrogen remains stubbornly high, and is expected to remain so until hydrogen infrastructure attains the requisite scale. The capital investment required to enable the transition to a hydrogen economy is immense – measured in the trillions by some estimates.
It is unlikely that the levels of capital investment needed can be sustained without direct government support. While moving in the right direction, the scale of announced government funding still falls well short of what will be required. Greater levels of government support will be necessary, but politically-plausible levels of public spending on hydrogen is not likely to be sufficient to drive down the cost of low-carbon hydrogen to the point where it is competitive.
Fortunately, indirect incentives are ramping up in parallel with direct government support to fill that gap. Cap-and-trade, carbon taxes and other carbon pricing regimes are taking hold across Canada and internationally. The increasing price of carbon, combined with strategic public investments to promote investment in key aspects of the hydrogen supply chain, will be needed to impel heavy emitters in hard-to-decarbonize sectors to make the switch to hydrogen. Maintaining the stability of broader carbon-pricing policy regimes is therefore as important as targeted funding initiatives in order to make the hydrogen economy a reality.
Environmental, Social and Governance (ESG) investors will also play a key role. Increased focus by investors on the climate change policies of public companies is driving more and more heavy emitters to adopt “net-zero by 2050” targets. For important segments of the industrial economy, hydrogen is the only clear pathway for heavy emitters to achieve substantial reductions in their own GHG emissions. While direct government support and robust carbon pricing regimes will be needed to incentivize the transition to a hydrogen economy, the need to demonstrate to ESG investors that companies are making concrete progress toward voluntary “net-zero” targets will prompt early adoption of key hydrogen technologies by some companies – even before low-carbon hydrogen is fully cost competitive. Even if the number of firms that experiment with hydrogen-based solutions in response to ESG investor pressure is low, this type of early adoption can have an outsized effect by attracting capital to the sector and facilitating innovation.
The next phase of the hydrogen economy story will be marked by technological change and rapid market evolution. Successful firms will need to act fast to take advantage of emerging market opportunities and to secure the financing and partnerships needed to scale up projects rapidly. It is likely that companies will want to reduce risk by maintaining exposure to multiple points along the hydrogen supply chain and to test different business models for generating value in the emerging hydrogen economy. Whether through acquisitions or by entering strategic alliances, companies will need to remain nimble and responsive as they experiment and learn which of today’s promising technologies and business models will prove out in the long term. We therefore expect robust networks, commercial innovation and deal-making to be as important as technological know-how in determining the winners in the hydrogen economy.
The emergence of a fully formed hydrogen economy is more feasible now than at any time in the past. Hydrogen’s growth, and its role in the energy transition, is being made possible by a unique mix of supportive government policies and incentives, innovative private sector companies willing to invest in pioneering projects and the growth of the ESG-oriented investment sector, as well as broader societal concerns over climate change that is driving companies toward the adoption of “net zero” GHG emissions targets. And in a post-pandemic world, where governments and industry are looking for ways to bounce back economically, a global hydrogen economy means global opportunities, not just for hydrogen itself as an export, but also for the technologies and service sector know-how required to support the industry. Early movers and countries with robust industrial sectors with transferable technology and skills, conventional oil & gas being one, have opportunities to build up hydrogen businesses that extend well beyond their own borders.
While it is true that enthusiasm for hydrogen as an alternative to fossil fuels has waxed and waned in the past, we have never before seen so many positive developments occurring at the same time. Hydrogen’s time has come.
For more information about hydrogen or the energy transition, please contact one of the authors of this bulletin or a member of Fasken’s Hydrogen Energy Advisory Team.