Guest view: Understanding hydrogen and unlocking its net-zero potential

Last month, the UK Government shortlisted 17 projects to receive financial support from the Net Zero Hydrogen Fund. This is part of the country’s wider ambition to deploy up to 10GW of low-carbon hydrogen production capacity by 2030.

Achieving these ambitious targets, estimates suggest, could require the mobilisation of over £11bn (€12.6bn) of private investment and could support 12,000 jobs by 2030. This represents a tremendous opportunity for investors, particularly those seeking local impact and to contribute to net zero, provided there are adequate supports from government to minimise risk.

While hydrogen’s potential as a fuel source has been well known since the 1800s, it is once again at the forefront of the conversation around fossil-fuel alternatives due to its diverse potential applications and the slow rate of decarbonisation across the economy. The UK’s transition to renewable energy has significantly reduced power-grid carbon-dioxide emissions, and this clean power will decarbonise heating and passenger cars through heat pumps and electric vehicles, but emissions from aviation, shipping and industrial processes such as steelmaking and cement remain high. For some, hydrogen is seen as the ‘Swiss army knife’ of the energy transition – a potential solution for these hard-to-abate sectors – but unlocking this potential requires government support and investor incentives.

Despite its many promises, hydrogen is not a one-size-fits-all energy source – and not all hydrogen is created equally. The way it is produced and its environmental impact vary significantly depending on the method employed. The different types of hydrogen are ’colour coded’ – chiefly into grey, brown, blue and green.

Today, much of the hydrogen used in the economy falls under the grey category, originating from steam methane reforming. Brown hydrogen, meanwhile, is derived from the gasification of coal. Both methods have detrimental environmental implications. Blue hydrogen also uses fossil gas as input material, but the carbon emissions are captured and stored, thereby reducing its environmental footprint. This approach is particularly prominent in the UK.

At the forefront of the hydrogen revolution is green hydrogen, produced through the electrolysis of water using renewable energy sources, such as wind and solar power. This environmentally friendly approach, which splits water into hydrogen and oxygen using electricity, is an obvious solution for achieving carbon neutrality.

Despite the prevalence of grey and blue hydrogen, the competitive and environmental edge of green hydrogen as the frontrunner in the race toward sustainability is clear.

Hydrogen’s role in achieving net zero

While hydrogen is not the best solution for things like vehicular travel and home heating, it stands out in sectors which have proven difficult to electrify. This includes the petrochemical industry, which already uses brown and grey hydrogen at scale, as well as carbon intensive processes, such as the production of steel and cement – which account for over 15% of global emissions. Realising a way to reduce the carbon footprint of these sectors will have a huge impact on national and international net-zero targets.

Other potential uses include aviation and shipping – which account for almost 5% of global greenhouse gas emissions – where hydrogen, or products made using hydrogen such as ammonia, methanol or other electrofuels, can replace fossil fuels.

In consumer-facing industries, paper companies and some food and drink manufacturers are embracing hydrogen as an alternative energy source. This is likely to continue across industrial sectors as government subsidy schemes solidify and hydrogen use at scale is increasingly de-risked.

Understanding hydrogen economics

For green hydrogen to become truly viable as a means of decarbonising the economy, the cost of its production needs to be dramatically reduced. Today, it is considerably more expensive than grey hydrogen per-kilogramme. However, as technology advances and electrolysis projects scale up, experts anticipate a significant cost reduction. The economic viability of hydrogen projects hinges on various factors, including offtake agreements, long-term stability in pricing and power prices.

Offtake agreements, which govern the purchase and sale of hydrogen, play a pivotal role in shaping project economics. Establishing long-term agreements with credible counterparties is essential for stability and profitability. Price stability over an extended period is crucial for investors. Government subsidies and price certainty mechanisms, similar to those that fuelled the early development of renewables, are needed to provide that certainty.

The final key consideration in the economics of the hydrogen economy is production cost. The main factor here is the price of electricity, which accounts for the majority of cost after construction when it comes to hydrogen production. Ensuring you optimise energy costs is crucial, either through contracted power supplies with generators or locating hydrogen production facilities with generation assets.

There is a huge opportunity to reduce the cost of hydrogen production by leveraging continued renewable infrastructure buildout. Balancing the grid by funnelling excess energy into hydrogen production and storage, rather than disconnecting wind turbines and solar panels from the grid at times of excess generation, is likely to be the main way of providing long-duration storage of energy and facilitating less expensive hydrogen production.

Funding growth in green hydrogen

To produce green hydrogen at scale and achieve net-zero emissions by 2050, the industry needs to go through a substantial scale-up over the next 10 to 15 years. It is expected that there will need to be up to £8trn in renewable energy investment and £4trn to £6trn in hydrogen investment alongside to achieve these goals.

To ensure there are adequate incentives for investors to support hydrogen development, clear government support will play a pivotal role in supporting development of and investment in hydrogen infrastructure. The UK government’s hydrogen allocation round process has so far been effective in stimulating development and is a pioneer scheme which other countries are examining closely. However, the total budgets allocated to hydrogen development currently appear smaller than those proposed in the US and EU through the Inflation Reduction Act and RepowerEU programmes.

As the hydrogen revolution gains momentum, Britain stands at the forefront of innovation and investment, alongside European counterparts such as Spain, Portugal, the Nordics and Germany. As production methods evolve, and with ongoing government support to attract investment to the sector, the future of hydrogen will remain bright.

As technology advances and investment pours into the hydrogen sector, we can expect a transformative shift – particularly in previously hard-to-abate industries – towards more sustainable outcomes. There is no doubt that hydrogen projects will play a central role in reshaping the energy landscape and accelerating the transition to a net-zero economy, so long as it is given the appropriate support.