Why multi-million-dollar blue
hydrogen investments might fast end up as 'stranded assets'
There will be multiple downsides to
producing ‘clean H2’ from natural gas with CCS, not least because
green hydrogen is likely to soon be cheaper, says Irena report
“Blue hydrogen is sometimes portrayed as
a safe bet, because it allows producer countries to monetise natural
gas resources and pipelines that might otherwise become stranded,”
Irena says in its 118-page study, Geopolitics of the Energy
Transformation: The Hydrogen Factor.
“But the expected cost reduction in green
hydrogen, coupled with stricter climate mitigation policies, means
that investments in supply chains based on fossil fuels (blue or grey)
— especially assets expected to be in operation for many years — may
end up stranded.
“Irena expects green hydrogen to undercut
blue hydrogen on costs by 2030. It may do so even sooner in some
countries, such as China, thanks to its cheap electrolysers, and
Brazil and India, thanks to their inexpensive renewables and
relatively high gas prices.”
The report cites previous work by analyst
BloombergNEF, which wrote last year that green hydrogen would be
cheaper than blue in the key markets of China, India, Brazil, the US,
Germany, France, Canada, Australia, the UK, Spain, Italy, the
Netherlands and Canada by 2028 — and in Japan and South Korea by 2030.
And as Tom Baxter, one of the co-founders
of the Hydrogen Science Coalition think-tank, recently stated: “Once
you’ve invested in blue hydrogen, you are invested for 30 years.”
The Irena study says that blue hydrogen
would account for about a third of all H2 by 2050 in its
1.5C scenario — with two thirds being green — yet at the same time
suggests that blue H2's role would largely be in the short
to medium term.
“If blue hydrogen meets strict emissions
criteria, it could play an important role in scaling up hydrogen
volumes in the short-to-medium term and drive the development of
related infrastructure and technologies along the value chain,” it
explains. “Moreover, blue hydrogen could offer additional flexibility
in the hydrogen market. In the long run, however, green hydrogen is a
zero-carbon solution and should therefore be the endgame.”
The report adds that blue hydrogen’s use
of fossil fuels also exposes it to price fluctuations and market
volatility — citing a November 2021 article by Recharge
that showed high gas prices were already making green H2
theoretically cheaper than blue across Europe.
By contrast, the price of green hydrogen,
would largely remain stable, with the largest component of its costs
coming from renewable energy, which would likely be bought using
long-term fixed-price power-purchase agreements.
And while green hydrogen can reduce
countries’ dependency on imported fossil fuels, “blue hydrogen would
follow the patterns of gas markets, resulting in import dependencies
and market volatilities”.
“If natural gas is used as the feedstock
to produce hydrogen, it may extend or even increase imports of natural
gas,” the report says.
“Existing import dependencies could be
maintained, or increased, through continued dependence on a commodity
prone to geopolitical and market volatility.”
And it adds that blue hydrogen “does not
support the goals of climate resilience or energy security”.
And, of perhaps more importance to
would-be blue H2 developers is the geopolitical risk from
upstream or midstream leakages of methane — a very potent greenhouse
gas.
"Strong regulations around upstream
methane leakages, for instance, could become a source of friction
between blue hydrogen producers and importing regions looking for
clean hydrogen. Carbon border adjustment mechanisms, such as the one
proposed by the European Union, could cause international friction, as
they may hurt trade-exposed, carbon-intensive industries in non-EU
countries.”
Irena also points to other downsides of
blue hydrogen:
The danger that countries or gas
producers could under-report methane emissions
The high carbon capture rates promised
by blue hydrogen proponents are yet to be demonstrated at scale
The ongoing costs of CO2
transportation and storage, including monitoring of the stored CO2.
Its production is more
energy-intensive and requires more water than green H2,
adding to overall energy demand
The report adds: “Clean hydrogen can be
an important part of the deep decarbonization puzzle… but there are
risks of carbon lock-in if hydrogen strategies prolong fossil-fuel
demand and supply, and hinder energy efficiency and electrification.
“Concerning blue hydrogen, an agreed
threshold for carbon capture and methane emissions will be necessary
to ensure that blue hydrogen makes a meaningful contribution to
decarbonisation.
“Transparency in how emissions are
determined will be essential for the proper functioning of an
international hydrogen market.”
It is worth pointing out that only four
blue hydrogen projects are currently in operation worldwide, all with
very low carbon capture rates, with the highest being the 43% at
Shell’s Quest facility in Alberta, Canada, and the lowest being the
29% at ammonia producer Nutrien’s plant in the same province.
Forthcoming projects are promising
capture rates of 95% or more, including Equinor’s H2H Saltend and
Progressive Energy’s HyNet North West, but none have yet reached
financial close.
Both these UK projects are part of
regional industrial hydrogen hubs, where buyers of the hydrogen will
be lined up in advance to eliminate risks, with final investment
decisions expected next year.
