Logo - S&P Global ratings

Despite its potential role in energy transition and economic recovery, hydrogen is several years from achieving its potential, S&P Global Rating’s Infrastructure and Utilities conference learned. 

The virtual conference heard that despite country-level commitments to ramp up production - market uncertainty, high production costs and the need for new infrastructure are holding back progress. Experts predict hydrogen is unlikely to play a significant role in the low-carbon energy mix until production of renewable energy has been significantly increased, in a ‘second phase’ of low carbon policy.

S&P identified three types of hydrogen. ‘Grey’ hydrogen is made from hydrocarbons and produces CO2 emissions. Future clean sources will be ‘blue’ hydrogen, extracted from natural gas, accompanied by carbon capture and ‘green‘ hydrogen, obtained from water through electrolysis, using electricity from renewable sources. 

All methods of production are currently expensive.

Mass-produced hydrogen could be used to reformulate gas grids, to reduce greenhouse gas emissions from heating and cooking, in industrial applications such as steel making and to power vehicles, using fuel cells – particularly for heavy fleet vehicles and trains.

The EU has put hydrogen at the heart of its green recovery, as our October insight briefing identified. It announced in July a target of 40GW of electrolyser capacity to be installed by 2030. France has earmarked €7bn this decade to support development and Germany €9bn. The Netherlands, Spain and Portugal are also making significant investments. Outside Europe, Japan and Australia see the fuel as important to their future energy mix.

In the UK, prime minister Boris Johnson this month promised £500m – half for trialling homes using hydrogen for heating and cooking and the remainder for new hydrogen production facilities. This is somewhat shy of France’s €7bn and Germany’s €9bn.

Business secretary, Alok Sharma, told parliament in September that his department will be publishing a strategy next year, setting out a pathway for the UK to be a ‘world leader’ in clean fuel. Hydrogen will be included in the forthcoming energy white paper, which has been delayed by COVID-19.

Upgrading infrastructure in all countries will require massive investment. Other factors holding back production on a larger scale is its lack of cost competitiveness, immature technology, insufficient regulatory support and uncertainty about future demand. One expert, mayor of the UK’s hydrogen capital – the Tees Valley Combined Authority – Ben Houchen believes that without a subsidy system akin to contracts for difference (CfD) used for wind and solar energy, hydrogen technologies are unlikely to take off in the UK.

Market uncertainty

Pierre Georges, senior director of S&P Global Rating said: "We do not expect new hydrogen technology to disrupt European utilities' business models over the next five years. Most players, facing business risk, are testing the waters. To share the cost burden of clean hydrogen development, we believe industry will allocate funds for pilot projects led by consoria, including utilities."

Projects to be developed over the coming three to five years are likely to remain small-scale, with capacity in the range of 10MW to 100MW. Most are unlikely to be operational before 2023.

Industry experts estimate that about half the cost of green hydrogen stems from the cost of electricity. As a result, to reach a degree of parity with grey hydrogen by 2030, the cost of renewables would need to drop significantly, by half or even two-thirds.

Karl Nietvelt, SPGR managing director for global infrastructure told Environment Analyst: "I think that, in the UK, the political priority for achieving net zero carbon will be developing renewable energy." 

However, he said that, beyond 2030, blue and green hydrogen would play an increasing role: "Remember, once you have hydrogen you can do a lot with it. You can store and transport it much more efficiently than electricity and you can balance the grid to cover the intermittency of renewables. Gas is also much better for meeting the swings in the need for primary energy than electricity is."

He said that, in terms of automotive transport, technology and investment meant that the electric car powered by lithium ion batteries, had "won the race". However, for freight transport and buses and trains, the prohibitive weight of batteries would make hydrogen fuel cells a viable power source. 

In this technology, in a reverse of electrolysis, compressed hydrogen comes into contact with oxygen in a fuel cell, producing water and electricity to power a motor. A network of hydrogen filling stations will be needed.

UK’s hydrogen pioneers

In February, the UK’s Department for Business, Energy and Industrial Strategy awarded £28m to pathfinding hydrogen production schemes. The funding was part of a wider £90m funding pot for research and projects examining how to reduce carbon emissions from industry and homes.

HyNet is designed to create blue hydrogen from natural gas. Located on Merseyside in the north-west, the £0.9bn project will include up to three hydrogen production plants and carbon capture in depleted oil and gas reservoirs in Liverpool Bay. It is set to be operational by the mid-2020s. HyNet involves Progressive Energy, Cadent Essar, Johnson Matthey and SNC Lavalin. Consultants WSP will advise on planning, stakeholder engagement and environmental impact assessment.

Acorn is another blue hydrogen scheme. Located at Peterhead, north of Aberdeen, it will use North Sea natural gas. This project is being developed by Pale Blue Dot Energy, with technical consultancy support from Costain. It is set to include hydrogen production at St Fergus, a deep-water port at Peterhead, which can also receive CO2 imports, an onshore pipeline and an international CO2 storage hub in the North Sea. 

Gigastack, a demonstration project on the Humber in North Lincolnshire, claims to be the UK’s most advanced green hydrogen scheme. It is being developed by a consortium led by Sheffield electrolyser manufacturer, ITM Power. The other partners are wind power producer Orsted, Texas-based oil refining company Phillips 66 and low-carbon energy consultant Element Energy. 

The project is located at Phillips 66's Humber refinery. The power will be sourced from Orsted’s 1.4GW Hornsea Two, which is set to be the world’s largest offshore wind farm. Phase two, which received £7.5m funding in February, will involve the production of the UK’s first industrial-scale, 100MW electrolyzers, using polymer electrolyte membrane (PEM) technology. It is hoped that Gigastack will provide a blueprint for green hydrogen production, particularly where connection to large renewable assets is possible.