Hydrogen economy: CO2-neutral?

How can governments and enterprises jointly find a realistic - and economically successful - path towards a CO2-neutral hydrogen economy? goetzpartners and the "Future Cleantech Architects" think tank have sought answers to this question in close dialog and agreed on five theses. One thing is clear for both: There is neither a social nor a technical-economic "silver bullet". The starting point must be transparency, openness and realism for different assumptions and models.

1. The path towards a competitive green hydrogen economy is longer and more complex than often suggest.

While publications and funding programs repeatedly assume competitive production of the so-named 'green' hydrogen (i.e., hydrogen produced from renewable energy resources by means of electrolysis), we look on a totally different reality today. More than 95% of the worldwide used hydrogen comes from the category 'gray' – and is produced from natural gas by steam reforming. The resulting climate effect is correspondingly high. However, in terms of competitiveness, the production of the climate-friendly green hydrogen variant is still far behind: on average, green hydrogen costs more than three times as much as fossil-based, gray hydrogen.

Although promising potentials along the value chain of green hydrogen can be identified, it is currently not yet possible to achieve economic viability or sufficient market maturity, especially when it comes to the production and distribution. Hence, a steep learning curve of various components of electrolysis systems coupled with continuously falling electricity costs is required to achieve cost-competitiveness with existing, gray hydrogen applications.

2. Economic battles that hydrogen cannot foreseeably win, must be lost early enough.

There are several application areas within both the mobility and the building sector, where hydrogen will foreseeably be without real economic opportunities. Other sustainable processes, especially direct electrification, often have an unbeatable advantage. At the same time however, there are many initiatives and government-funded projects that are still calling for hydrogen solutions to be developed in the areas of car mobility or decentralized heat generation. In such fields, fewer resources should be invested in publicly funded R&D, which in fact do have no economic prospects.

Hence, the government should not present a list of wishes, but rather use economic incentives to deploy funding more efficiently as well as in a more targeted manner. A good indicator for any potential project is whether it succeeds in attracting significant private funding to co-finance public seed funding for any technology.

3. The carbon footprint of hydrogen needs to be considered more realistically and be portrayed more transparently.

Media too often portray H2 – in all its colorful schemes – in a clearly climate-neutral light. This is not the case. Especially the production of hydrogen via conventional processes from natural gas entails a high climate impact along the value chain. This does not only apply to the production via steam reforming but also to the transport of the natural gas with its high leakage rate of the greenhouse gas intensive methane, which is difficult to monitor. It will therefore be important on the one hand to immediately reduce methane and carbon dioxide emissions generated via gray processes, and on the other hand to achieve a more accurate 'footprint' along the value chain of the greenhouse gas emissions of hydrogen.

Efforts to achieve mutual agreements and standards at the European level are extremely important. However, given the economic consequences this might have on entire industries, actors on the European level are also correspondingly affected by lobbying activities.

4. Even in the long run, Germany will hardly be able to cover its own demand for green hydrogen from domestically produced renewable energy resources.

Following the shutdown of German nuclear power and coal, Germany faces a major challenge in providing sufficient renewable electricity. The tightened climate protection targets together with the plan to supply reasonable processes with green hydrogen in the future will make Germany more dependent on imports from sun-rich countries of southern Europe and the MENA region. At the same time, the production of hydrogen in these regions faces major challenges concerning the transportation logistics. According to the current state of development, long-distance transport of hydrogen will be too expensive for large parts of the planned applications.

The conversion of gray hydrogen, which today is being used in many areas – from fertilizer production to the refinement of specialty chemicals – must be pursued as a top priority given the high climate effect of its processes. However, these processes cannot simply be converted to green hydrogen due to missing electrolysis capacities and high costs. Thus, a pragmatic solution for decarbonizing gray hydrogen must be found quickly. In a transitional period, it will not be possible to refrain from the production of hydrogen from natural gas in a more climate friendly way (e.g., blue hydrogen).

5. Market participants that will not be able to compete within the international hydrogen market due to their lack of size, risk-taking propensity or technology expertise should avoid the field.

Subsidies from both Germany and the EU suggest companies of all sizes low-risk investments into a growing market. Looking at the international competition, this is not the case. In the mid-term, those companies and technologies will be successful which – driven by international competition of state subsidies – receive the largest and most targeted seed financing and offer an internationally competitive product within an economically sensible hydrogen application field. These companies will also receive the highest amount of venture capital.

Consequently, the perspective in Germany must be much more directed towards the creation of a global hydrogen market. Moreover, to compete on an international level and be able to offer a competitive portfolio, a critical size, a strategic approach and staying power are required. Market participants that do not have these qualities take very high, possibly existential risks when pursuing platform or infrastructure projects. They should therefore involve shareholders already at an early stage of their business development.



Dr. Klaus Grellmann, Managing Director, Co-Head Energy, goetzpartners

Dr. Peter Schniering, Chief Executive, Future Cleantech Architects