Energy transition: Understanding Hydrogen

It is increasingly apparent that the world needs to rapidly decarbonise and switch towards cleaner energy generation technologies or face unfavourable climate change and lasting planetary damage. Hydrogen offers clean fuel potential to reach global net zero targets so we asked James Ayling to provide an educational hydrogen overview.  

The dream: Wind blows a turbine to make electricity, which performs electrolysis on water splitting it into hydrogen and oxygen. Hydrogen then travels through the gas grid network to my home where a combined heat and power system provides all my energy needs and, waste water from this system becomes my source of drinking water.

Currently global production of pure hydrogen is c.74m tonnes per year, against which c. 830m tonnes of CO₂ are by-produced as a pollutant. Today, hydrogen is far from green with low carbon hydrogen accounting for <5% of production of which renewable-energy-produced hydrogen is <1%. Current major uses of pure hydrogen include refining oil and creating ammonia for fertilisers (c. 90% of demand). Yet, hydrogen use could broaden significantly if costs decline over the next few decades.  

Although hydrogen is an abundant element, it’s principally found within chemical compounds such as water or methane from which it needs extracting. Hence, it’s an energy store not an energy source. And, despite hydrogen being a colourless gas, its production has become an increasingly colourful affair, reflecting varying carbon intensity production pathways.

Today, most hydrogen is produced from steam reforming fossil fuels, namely methane from natural gas. This well-established industrial process relies on extensive gas pipeline infrastructure. In this process, high temperature steam reacts with methane to produce hydrogen. This is termed ‘Grey hydrogen’ as it’s sourced from fossil fuels and emits carbon dioxide (CO₂) as a by-product pollutant.

Policymakers hope to improve Grey hydrogen, in the nearer term, by employing carbon capture technologies to extract the CO₂ before it enters the atmosphere; creating ‘Blue hydrogen’ and, a CO₂ storage problem!

Meanwhile, ‘Green hydrogen’ is seen as hydrogen nirvana – renewable electricity is used, via electrolysis, to split water into hydrogen and oxygen – a heavily decarbonised production process. Green hydrogen offers the most exciting long term potential, with a highly complementary conduit to deal with the intermittency challenge of renewables. Today alkaline electrolysers are the most mature technological approach but, a number of high-tech UK companies are delivering innovations in newer electrolysis methods, such as proton exchange and solid oxide. Yet cost, reliability and durability present meaningful commercialisation headwinds for green hydrogen ahead.  

Another colour, ‘Turquoise hydrogen’ is gaining increased literature reference as an interim step toward Green hydrogen. Preferably using renewable energy as the process’ energy source, it is produced from methane pyrolysis, which splits methane into hydrogen and solid carbon. Hence, no CO₂ is produced negating carbon capture and storage needs.  

Further colourful variants of hydrogen exist with more emerging from various R&D stage technologies globally. However, the direction of travel from policymakers grows clearer; decarbonised methods are preferred, so scale-up investment is needed to bring down greener production costs.

Given the vast size of the global energy system, large volumes of hydrogen would need to be produced, stored and distributed across geographies and, despite hydrogen’s high energy density by weight, it suffers low energy density by volume which makes moving and storing hydrogen more challenging.

Hydrogen can be produced and used on-site which works well for industrial settings but this isn’t sufficient for widespread use particularly as renewable based source energy is, to a fair degree, a geographical game; the UK benefits from a competitive advantage in wind so our hydrogen production is likely to be concentrated around coastal areas.   

If, then, hydrogen needs to be produced at sites far from use, as investors, we need to consider the transport and storage costs akin to traditional fuels – the fundamental economics aren’t really different. Local distribution could be covered by pipeline infrastructure, for which countries already have knowledge and experience from working with natural gas, albeit leakage problems, for hydrogen, would be worse! Transnational distribution is more troublesome. Shipping is more likely but here hydrogen’s volume weakness means either converting into denser compounds such as Ammonia or liquefying, which requires -253 degrees Celsius; both processes will consume additional energy inputs and hence costs.

Similarly low volume density implies higher storage costs. Small storage can be achieved through pressurised storage vessels but for large scale storage, there are two more likely stores; salt caverns and, disused oil and gas fields. Here hydrogen will have to compete with CO₂ based storage needs; planetary decarbonisation necessity may rank atop hydrogen.

Traditional demand for hydrogen is focused around industrial processes; oil refining, fertiliser and methanol production. These are critical modern-day processes that impact our daily lives. But future opportunities across heat, power and transport may dwarf current demand volumes.

In heat, hydrogen could be used either directly or indirectly through boilers or combined heat systems to provide commercial or residential heat. Furthermore, hydrogen use in industrial heating could be expanded to high temperature applications such as making steel – to heavily decarbonise production.

In power, hydrogen could be input into fuel cells to produce electricity with water produced as waste. Useful applications alongside generalised commercial and residential building power include back-up decentralised power generation for key infrastructure assets such as data centres and hospitals. 

In transport, hydrogen refuelling could be as quick as petrol or diesel refuelling; outperforming battery charge times. I expect applicability to centre on heavy transport where batteries are likely to be less capable and depot based infrastructure is more acceptable e.g. shipping, aerospace, trucking and, plant machinery.

Long term prospects for hydrogen appear bright. Hydrogen offers wide applicability across heat, power and transport end markets but hydrogen is not a complete energy panacea. Current technology risks are aplenty and ahead meaningful cost reductions are needed to unlock hydrogen’s fuller potential. Government subsidies or improved carbon pricing mechanisms could help accelerate hydrogen adoption. Nevertheless, investors may be wise to look across supply, distribution and demand verticals when seeking hydrogen exposure.

James Ayling CFA, Research Analyst