Costs will come in the way of a green energy future

Hydrogen, the primary fuel of stars, could be the ultimate energy carrier for emissions-free energy.

Especially, since hydrogen already has a plethora of uses in industrial sector, and primarily used as a basic chemical in the synthesis of ammonia and other fertilizers such as urea. And for the synthesis of methanol, various polymers, and resins.

Other major consumers in today’s hydrogen industry include refineries and the metalworking industry, as well as the semiconductor, glass, and food and beverage industries. But, as a fuel, it also has the potential to facilitate the decarbonization of major greenhouse gas emitting industries such as transportation, particularly in shipping and aviation, where competing green technologies such as batteries are unsuitable.

Almost all hydrogen is currently made by reforming hydrocarbons - primarily natural gas. The production of this so-called “grey hydrogen” causes significant greenhouse gas emissions. However, the combination of rapid declines in the cost of generating green electricity, coupled to advances in electrolysis technology, which splits water molecules into hydrogen and oxygen, is changing the game.

Amid the pandemic, the global economy braces for - what some say will be - one of the worst recessions in history. However, the sharp decline in oil and gas prices, also follows a long period of volatility in the hydrocarbon markets and significant efforts by global producers to bolster prices, as well as a power struggle about who controls these markets.

The downturn, caused by the pandemic, and the turmoil in the hydrocarbon markets will continue to put oil and gas prices under pressure.

Economic theory would suggest that low hydrocarbon prices increase demand and improve the competitive advantage against greener energy sources. So, what does this all mean for green hydrogen?

Need for speed

Here are three reasons why the low oil price might pose a challenge for the energy transition but also why we cannot afford to let this slow us down:

Climate change is not tracking oil prices

Avoiding the devastating consequences of climate change is a global imperative. Large-scale application of renewable energy sources in combination with green hydrogen is our only chance to transform energy systems, including the industries that are not easy to be electrified. Investment in these technologies must proceed, despite challenging economics. In fact, investment needs to ramp up substantially to meet the targets we have already set ourselves to limit global warming.

A low oil price doesn’t mean we consume less hydrocarbons, it means we pay a lower price for what we consume. Due to the COVID-19 crisis, we are witnessing a so-called “demand shock”, leading to lower consumption despite low prices.

However, if we allow ourselves to be optimistic about overcoming the situation, then we also can’t lose sight of the decarbonization issue.

Lower-for-longer oil and gas prices mean market prices at which green fuels and green H2 derivates must meet to squeeze-out the non-green alternatives are even lower and stay low. Consequently, it might take even longer until market mechanics do the work for us.

The need for regulatory intervention will be higher, and it will require collaboration of public and private sector to kickstart the industry.

Investors do care about the climate

Norway’s Pension Fund Global, the world’s largest sovereign wealth fund - built on Norway’s legacy oil earnings - is divesting from fossil fuels. A number of pension funds, activist investors and investment firms are also shying away from fossil fuel investments or companies without clear Environmental, Social and Governance (ESG) strategies. The Investor Agenda, a collaborative initiative launched in 2018 that seeks to speed the transition to a low-carbon economy, has repeatedly urged governments to step up action to tackle climate change and achieve the Paris Agreement’s goal of limiting the average rise in global temperatures to no more than 1.5-degrees celsius. In September 2019, in a letter to the G20, 515 institutional investors, managing $35 trillion in assets, called on governments to step up action.

Corporations are increasingly decarbonizing their own operations and portfolios as a core part of their strategies, reflecting demand from investors for clear ESG guidelines and strategies. The more that do it, the greater the risk for those that don’t, to end up as a “carbon stranded asset”.

There is more to get than give

In early May, the seven founding members of The Investor Agenda called on investors, regulators and policymakers to integrate COVID-19 economic recovery efforts with enhanced policies for a net-zero emissions transition by 2050. They argue that economic stimulus spending needs to focus on supporting green industries and infrastructure, and avoid further carbon lock-in.

In June, Klaus Schwab, chairman of the World Economic Forum calls for the “Great Reset” of capitalism, expanding the discussion from COVID-19 recovery to rising inequality and creating jobs in a new economy.

Government policy can spur private investment in clean energy, green industry and other sustainable infrastructure which will lead to much needed jobs and economic growth. Green energy developments also add resilience to national energy infrastructure and to economies, by reducing reliance on one form of energy whilst also mitigating hydrocarbon price volatility.

The whole definition of resource-rich geographies might shift from availability of fossil-fuel reservoirs to green energy resources, once this green energy can be transported over long distances for at reasonable cost.

The start dilemma

In my opinion, this is to work on de-risking the initial projects that are needed to drive technology development, and scaling-up manufacturing capacity.

The value chains in the so-called power-to-X technologies are complex, since they span from renewable energy generation, water, grid integration, electrochemical and chemical process technology to downstream logistics. There is hardly any entity that masters all of this.

On the other side, we need to create the off-take markets for green H2 and H2 derivatives. That means, secured demand and committed price levels, which will make the projects bankable. It is the task of the policymakers, not only to support, but also to encourage and create this.

With the European Green Deal, the National Hydrogen Strategies that have been released in various countries like Netherlands, Austrialia, Japan, Germany, and many more under preparation. Still, those are strategies and guidelines and need to find their ways into policies and finally actionable projects.

The last few months have brought rapid changes to everybody’s private and professional life, that would have been unthinkable for most of us. And yet, here we are. Changes are made.

Is it fun? No. Does it work? Yes.

What if we use this experience to finally do what we all know is right, but never gathered the force to follow it through: Change subsidies away from fossil fuels (yes they still exist…), accept higher prices for green fuels, reduce transitional timelines to the absolute minimum, put a real price on CO2, to name but a few.

We all know what the right things are. Its about time to get them done.

Because time is running out.

- Manuel Kuehn is Senior Vice-President, Strategy and Business Development Middle East, Siemens Energy.