Industrial decarbonization: Green hydrogen’s potential as a green Swiss Army knife

Energy transition solutions can often be broken down into two categories: those that harness the power of the electron and those that store energy in molecules. Much of the discussion in our Energy Transition series  focuses on the electron and the use of renewable energy as a direct source of power for electrifying the economy. But “clean molecules” also have a role to play in reaching global net-zero greenhouse gas (GHG) emissions, perhaps none more so than hydrogen.

Though hydrogen is the most abundant element in the universe, it is rarely found on its own and typically must be extracted from other substances. As shown in the table below, industry participants use colors to distinguish among the various extraction methods.

Today, the vast majority of industrial hydrogen is “grey” and extracted from natural gas or coal through processes that generate GHG emissions. Hydrogen’s climate benefits will not be realized unless the industry can transition to the production of "green” hydrogen. Green hydrogen is produced through electrolysis—the process of using electrical current to split water into hydrogen and oxygen—and does not contribute to GHG emissions when powered with renewable energy sources.

Green hydrogen is known as the “Swiss Army Knife” of climate solutions due to its many potential applications for replacing fossil fuels. Hydrogen can act as both a portable fuel source and an input in chemical reactions, two properties that we believe make it particularly promising for the decarbonization of heavy industry. For example, green hydrogen can replace coal-based coke as an input in the steel-making process; has the potential to decarbonize cement-making; and can serve as a feedstock in the production of ammonia, a key component of fertilizer. Longer term, green hydrogen may have broader applications in the transportation and energy storage markets. Hydrogen fuel cells, which produce energy by reversing the process of electrolysis, have the potential to power buses, trains, heavy-duty trucks, ships, and planes, all of which are substantial sources of GHG emissions.^1,2

Medium-Term Opportunities in Ammonia and Steel Production with Policy Advantages

By 2050, the Hydrogen Council, an industry group, estimates the global green hydrogen market could reach $2.5 trillion, supply 18% of the world’s energy needs, and reduce CO2 emissions by 6 gigatons per year from today’s levels. But the development of green hydrogen is still in its early stages and additional investment will be needed to overcome a number of obstacles to the market’s growth, including the high cost of production and a lack of storage and distribution infrastructure.

End-Market Opportunities

In the near-term, the most viable end-use applications for green hydrogen are in the production of ammonia and steel. These industries currently have few means of mitigating their GHG emissions and hydrogen can be integrated into their production processes at minimal cost. Accounting for the green premium, the cost competitiveness of these applications could be influenced by carbon pricing. In Europe, green ammonia may be cost competitive by 2030 at a price of under $50 per ton of CO2-equivalent, while green steel could cost as low as $515 per ton of crude steel, which is a premium of $45 per ton of CO2-equivalent by 2030.³

1. Ammonia production: The production of ammonia is the second largest consumer of hydrogen after petroleum refining. In 2022, the ammonia market had a total value of $78 billion on a global scale. This market is projected to expand and reach a value of approximately $130 billion by 2030. Nearly all the hydrogen used in ammonia production today is grey hydrogen, but if green hydrogen can compete on cost, it will potentially have an established source of demand and may help reduce GHG emissions from the ammonia industry.⁴

2. Steel production: The steel industry accounts for 7 to 9% of the world's CO2 emissions and currently has limited alternatives for GHG abatement. Green hydrogen has the potential to serve as a source of high-temperature heat and a substitute for coal during steel production. The global green steel market was worth approximately $83 million in 2021 and is expected to grow to $386 million by 2031. According to McKinsey, steel companies risk losing up to 14% of their potential value if they fail to reduce their environmental impact.^5,6

But realizing hydrogen’s near- and long-term potential will require innovation and substantial amounts of capital to overcome several key obstacles to its adoption. Cost is perhaps the most significant. According to the International Renewable Energy Agency, the levelized cost of green hydrogen was around $3 to $7 per kilogram in 2020, while the cost of grey hydrogen was around $1 to $2 per kilogram. However, in coming decades, technological improvements and economies of scale have the potential to drive costs down. The International Renewable Energy Agency estimates that the cost of electrolyzers—the machines that conduct electrolysis—will fall 40% by 2030 as manufacturing capacity increases. As long as renewable energy costs remain low and electrolyzer utilization rates remain high, grey and green hydrogen are expected to reach cost parity by 2030.^7,8

Transportation and storage are among the other key obstacles to the development of the hydrogen economy. Though hydrogen can be held in gas or liquid form, it is not compatible with much of the fossil-fuel industry’s existing pipeline infrastructure. Impurities in hydrogen can corrode natural gas pipelines, reduce their lifespan, and increase the risk of leaks. Converting pipelines for use in transporting hydrogen requires costly and time-consuming modifications. Hydrogen also has a relatively low volumetric energy density, so a larger volume of the gas must be stored, transported, and consumed to achieve the same energy output as fossil fuels.

Hydrogen’s chemical properties also make it a challenge to store. The steel tanks used to store natural gas, oil, and its derivatives are vulnerable to embrittlement when they hold hydrogen. Expensive and complex tanks are needed instead to maintain safety, reduce energy losses during storage and release, and reduce the risk of leakage and contamination. Both government organizations and the private sector are exploring new and economical techniques for storing hydrogen, which has led to a blend of patient and market-rate capital investments. Underground caverns, salt domes, and depleted oil and gas reservoirs hold the most promise for hydrogen storage because they are cost effective, have large capacities, and are tied to existing infrastructure. But hydrogen’s propensity to dissipate makes leak prevention difficult. Other approaches include compressed gas storage, liquid hydrogen storage, and various types of chemical storage in which hydrogen is bound or absorbed into other compounds. However, none of these technologies are currently cost competitive.

Climate Policy Support

We have little doubt that industry innovators will overcome these cost, transportation, and storage challenges, but policy support will also be needed if hydrogen is to make a meaningful contribution to the world’s net-zero-by-2050 ambitions. In the U.S., the climate-focused Inflation Reduction Act added $369 billion in production subsidies and tax incentives for clean energy technologies, including a Production Tax Credit of $3 per kilogram, per year for qualified clean hydrogen production facilities.⁹ Morgan Stanley estimates that the Production Tax Credit could bring green hydrogen costs down to less than $1/kg. The Inflation Reduction Act also broadens the existing investment tax credit to include hydrogen projects and storage technology. Additionally, it complements existing Department of Energy programs that direct a total of $9.5 billion towards regional clean hydrogen hubs, advanced hydrogen manufacturing capabilities, and hydrogen storage projects, among other initiatives.^10,11,12

The EU’s Green Deal, a policy initiative designed to make the EU carbon neutral by 2050, includes several initiatives that support the development of the green hydrogen market in Europe. It sets aside $436 million for electrolyzers, renewables and infrastructure for hydrogen distribution. The strategy seeks to expand the EU’s current electrolyzer base from 0.1 GW to 40 GW by 2030, with a working estimate of 500 GW by 2050. The strategy also includes the establishment of a European Clean Hydrogen Alliance, which brings together industry, governments, and other stakeholders to promote the development of the green hydrogen market in Europe.¹³

Finally, the Australian government has made a significant push to become a leader in the green hydrogen market, with policies designed to support both a domestic and export-driven hydrogen industry. Australia’s Asian Renewable Energy Hub, one of the largest hydrogen projects in the country, aims to produce hydrogen and ammonia for export to Asia, as well as supply electricity to the local grid. The project is expected to have a capacity of up to 26 GW of wind and solar power, with hydrogen production of up to 3.5 million tons per year.

Fostering the widespread use of hydrogen across various sectors requires a cohesive policy approach. This goal is being pursued by governments worldwide, which are implementing hydrogen hubs and strategies to develop the market and achieve economies of scale in their respective regions.

Investments Focus on Infrastructure Projects and New Technologies

Investment activity in the hydrogen sector is bifurcated between early-stage investors, which are playing an important role in funding the development of new hydrogen technologies, and large corporations and governments, which are funding large hydrogen production and infrastructure projects. Governments around the world have dedicated over $70 billion of public funding towards the development of hydrogen, while the private sector has announced investments totaling approximately $300 billion.¹⁴ Nevertheless, this amounts to a fraction of the total investment required by 2030 across the hydrogen value chain, which falls between $700 billion to $1.2 trillion based on various estimates.^15,16

The HYBRIT project in Sweden, for example, is a joint venture between three companies in the steel, mining, and energy industries. It leverages iron ore extracted from a mine alongside wind and hydroelectric power to generate hydrogen at a pilot plant located nearby. Following production, the hydrogen is transported to a steel plant where it is utilized in the creation of fossil fuel-free steel. The waste heat produced during the steel-making process also generates electricity, reducing the power needs for hydrogen production and creating a self-sustaining system. The HYBRIT project is expected to have a considerable impact on the green hydrogen market, as it demonstrates the potential of using green hydrogen in large-scale industrial processes.¹⁷

The main recipients of venture capital and private equity investments are electrolyzers and fuel cells, with hydrogen storage and transportation close behind. In 2022, private equity firms invested $3.1 billion in 37 hydrogen-related deals, while venture firms invested $2.6 billion in 192 startups.¹⁸ Investments in specialized and supportive applications of green hydrogen are the most feasible, in our opinion, and could potentially have a more significant role in the long-term energy transition.

Green Hydrogen: Versatility That Needs to Overcome Practical Impediments to Adoption

Green hydrogen offers the potential to decarbonize heavy industries that can’t be electrified. The cost of green hydrogen is still prohibitive, however, while transportation and storage solutions are works-in-progress, so capital and technological development will be needed to ensure associated solutions reach commercial viability.

 

This article is part of the Plugging into the Energy Transition series. Click here to download the complete report.

 

 

1 IEA, “The Future of Hydrogen: Seizing today’s opportunities,” June 2019, https://iea.blob.core.windows.net/assets/9e3a3493-b9a6-4b7d-b499-7ca48e357561/The_Future_of_ Hydrogen.pdf

2 The Hydrogen Council, “Hydrogen Insights 2022: An updated perspective on hydrogen market developments and actions required to unlock hydrogen at scale,” McKinsey & Company, September 2022, https://hydrogencouncil.com/wp-content/uploads/2022/09/Hydrogen-Insights-2022-2.pdf

3 The Hydrogen Council, “Hydrogen Insights 2021: A perspective on hydrogen investment, market development and cost competitiveness,” McKinsey & Company, February 2021, https://hydrogencouncil.com/wp-content/uploads/2021/02/Hydrogen-Insights-2021.pdf

4 Precedence Research, “Ammonia Market Size to Surpass USD 129.63 Bn By 2023,” November 2022, https://www.precedenceresearch.com/ammonia-market

5 Digvijay P et al., “Green steel Market by Energy Source, by Type, by End User: Global Opportunity Analysis and Industry Forecast, 2021-2031, October 2022, https://www.alliedmarket-research.com/green-steel-market-A31690

6 Christian Hoffmann et al., “Decarbonization challenge for steel,” McKinsey & Company, June 2022, https://www.mckinsey.com/industries/metals-and-mining/our-insights/decarbonization-challenge-for-steel

7 Emanuele Taibi et al., “Green Hydrogen Cost Reduction: Scaling up Electrolyers to Meet the 1.5 degrees Celsius Climate Goal,” IRENA, 2020, https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Dec/IRENA_Green_hydrogen_cost_2020.pdf

8 World Energy Council, “Working Paper | Hydrogen on the Horizon: National Hydrogen Strategies,” September 2021, https://www.worldenergy.org/assets/downloads/Working_Paper_-_National_Hydrogen_Strategies_-_September_2021.pdf?v=1646390984

9 Fuel Cell & Hydrogen Energy Association (FCHEA), “Inflation Reduction Act of 2022: Hydrogen & Fuel Cell Incentives,” accessed May 2023, https://static1.squarespace.com/static/53ab-1feee4b0bef0179a1563/t/62fd3b3b64d1955b55ed9a2b/1660762940190/Inflation+Reduction+Act+H2++FC+Factsheet.pdf

10 US Department of Energy, “H2@Scale: Enabling Affordable, reliable, clean and secure energy across sectors,” accessed May 2023, https://www.energy.gov/eere/fuelcells/articles/h2scale-handout

11 US Department of Energy, “Hydrogen Strategy: Enabling A Low-Carbon Economy,” July 2020, https://www.energy.gov/sites/prod/files/2020/07/f76/USDOE_FE_Hydrogen_Strategy_July2020.pdf

12 Garrett T. Galvin et al., “Energy & Sustainability Legal Feature – Recently Announced Clean Hydrogen Hub Program Funding,” Mintz, October 2022, https://www.mintz.com/insights-center/viewpoints/2151/2022-10-13-energy-sustainability-legal-feature-recently-announced

13 European Commission, “The Green Deal Industrial Plan: putting Europe’s net-zero industry in the lead,” February 2023, https://ec.europa.eu/commission/presscorner/detail/en/ip_23_510

14 Green Hydrogen Organization, “Development finance for the green hydrogen economy: Priority actions for development finance institutions,” November 2022, https://gh2.org/sites/default/files/2022-11/Development%20finance%20-%20green%20hydrogen%20priority%20actions%20-%20Nov%202022.pdf

15 McKinsey & Company, “Five charts on hydrogen’s role in a net-zero future,” October 2022, https://www.mckinsey.com/capabilities/sustainability/our-insights/five-charts-on-hydrogens-role-in-a-net-zero-future

16 Green Hydrogen Organization, “Development finance for the green hydrogen economy: Priority actions for development finance institutions,” November 2022, https://gh2.org/sites/default/files/2022-11/Development%20finance%20-%20green%20hydrogen%20priority%20actions%20-%20Nov%202022.pdf

17 IRENA Coalition for Action, “Decarbonising End-Use Sectors: Practical Insights on Green Hydrogen,” 2021, https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2021/May/IRENA_Coalition_Green_Hydrogen_2021.pdf?rev=ffd96aeed97c4d029b01aa3a93131e8b

18 Emily Burleson, “Private investment in hydrogen breaks record,” Pitchbook, December 2022, https://pitchbook.com/news/articles/hydrogen-energy-transition-deals-record-pe-vc-2022