By Fatma Ahmed, Amina Hussein

In light of the necessary need for the energy transition, hydrogen becomes the current mainstream of interest all over the world, having the ability to play a key role in the future of energy. This pushed governments and investors to think about the economy of hydrogen. According to an article published by “The Guardian”, hydrogen economy refers to the approach of using hydrogen as a low-carbon source of energy instead of the existing ones. The International Energy Agency’s (IEA) “Future of Hydrogen” report stated that hydrogen can help in implementing the global goal of reducing emissions.

“Hydrogen can be used in a wide range of new applications as an alternative to current fuels and inputs, or as a complement to the greater use of electricity in these applications, for example in transport, heating, steel production and electricity – hydrogen can be used in its pure form, or converted to hydrogen-based fuels, including synthetic methane, synthetic liquid fuels, ammonia and methanol”, the report explained. Furthermore, it can help in the rapid growth of using renewable electricity. This drives us to identify the market dynamics of hydrogen.

Hydrogen’s Market Dynamics

Global Demand for Hydrogen

The demand for hydrogen in different industries has consistently increased from 2000 to 2020. The global demand in 2000 recorded around 60 million tons (mmt), while in 2020 the global demand reached 90 mmt, which represents a 50% increase, according to the EIA’s “Global Hydrogen Review 2021” report.

The data represented in the report further show that the demand for hydrogen is dominated mainly by chemical and refining industries. Refineries consumed around 40 mmt of hydrogen either as a feedstock or as a source of energy. On the other hand, chemical industry consumed around 45 mmt of hydrogen in 2020, of which 75% were directed to ammonia production while 25% were mainly for methanol production.

Sources of Production

The global hydrogen demand was met by either fossil fuel-based hydrogen or by byproduct hydrogen. The fossil fuel-based hydrogen is generated from dedicated hydrogen production plants and represented 72% of supply in 2020, while the remaining 21% was generated in facilities designed primarily for other products, mainly refineries in which the reformation of naphtha into gasoline results in hydrogen, according to EIA’s report. Natural gas is the main fuel for hydrogen production. In 2020, 6% of the global natural gas production, around 240 billion cubic meters (bcm), was dedicated to producing 60% of the global hydrogen in the same year.

Hydrogen Production Cost

Fossil fuels are the cheapest source available around the world to produce hydrogen, as the levelized cost of hydrogen produced from natural gas is in the range of $0.5-1.7/kg. On the contrary, producing hydrogen from renewable energy sources is much higher where it ranges from $3-8/kg. As for coal, the cost is considered average with a range of $1.2-2.2/kg. This led us to important questions about how to invest in hydrogen, whereas the governments can support the hydrogen economy and how they can do this.

Areas of Investments

Investing in hydrogen can be carried out in different ways: either the infrastructure or research, development, demonstration and deployment, according to an article published by Columbia SIPA. Regarding infrastructure, many countries are investing in hydrogen production to reduce infrastructure costs. Moreover, research, development and deploying innovative technologies are needed to accelerate cost reduction, performance improvement, and adoption.

During the COVID-19 pandemic, hydrogen was remarkably resilient to the global economic slowdown. Over the period from January 2019 to mid-2021, companies for producing, distributing and using hydrogen were able to raise around $11 billion. Most new funding for hydrogen in 2020 and 2021 was raised by companies already listed on a stock exchange.

For example, Plug Power an American company that makes electrolyzers, fuel cells and refueling equipment had the largest share in raised funds with $4.8 billion. Even the investment in the risky early-stage start-up witnessed a boom, as the investments in these ventures totaled $1.24 billion over 2019-2020, according to the World Energy Investment 2021 report.

Governments’ Crucial Role

Dr. Romanas Savickas, an expert in hydrogen and energy efficiency, told Egypt oil and gas (EOG) that “the governments have to support the hydrogen investments, develop long-term roadmaps, and put the hydrogen besides other new technologies as renewables.”

IEA’s “Global Hydrogen Review 2021” report recommended five key areas of policy frameworks that governments adopt for developing hydrogen investments. The first is to establish long-term targets and determine the most efficient way to use hydrogen. The second is to create demand for low-carbon hydrogen and pull investments to fund these projects. The third is to implement measures to reduce investments risks. The fourth is to develop policies that motivate private sectors to innovate and use new technologies.

The last one is to set standards followed while hydrogen deployment. For example, in 2019, Australia developed strategies to produce coal with carbon capture, utilization and storage (CCUS), electrolysis and natural gas with CCUS with investments $0.9 billion. Also, Canada developed a strategy in 2020 to produce biomass, oil and gas with CCUS and electrolysis with investments of $19 million. This is in addition to other countries like Chile, Russia, Japan, Korea and etc.

Moreover, international cooperation between countries’ governments plays a significant role in this regard, which can motivate knowledge sharing and connect a wider group of investors on the best practices. Examples of such agreements include an agreement between Germany and Australia to develop technologies for the hydrogen industry; Morocco and Portugal cooperated on how to develop hydrogen from renewable sources; Singapore and New Zealand collaborated on establishing supply chains for low-carbon hydrogen.

Hydrogen Transition Setbacks

Despite the enormous benefits of the hydrogen economy transition, it still suffers from several obstacles. Krzysztof Łokaj, sustainability and circular economy expert commented, “since hydrogen is fairly new as a fuel or energy storage, therefore, it comes with issues typical for a new product (lack of infrastructure, high production costs or underdeveloped market)”. According to the IEA report, one of these challenges is the uncertainty of the low-carbon transition speed adopted by the government in different countries. Also, there is a lack of financial commitments to hydrogen technologies and infrastructure.

In addition, it is still unclear to determine the cost of hydrogen in different regions. Moreover, the regulations for hydrogen utilization are still not clear as well and don’t allow exploitation of the full benefits hydrogen can provide. Our experts provided some recommendations in this regard. “The financial institutions, in this case, play a significant role by providing subsidies/grants for the research and innovation projects as well as technical-economical feasibility studies and also by providing support in the form of low-interest rate loans,” Savickas said.

Łokaj affirmed the need for long-term impact of the hydrogen projects adding “obstacles of legislative nature caused by law not being able to keep up with new technologies may lead to serious delays or even decisions not to invest due to uncertain legislative environment.”

For his part, Thomas Gael, energy economist, explained that “by 2030, some $300bn is to be invested in the entire sector, not just to deploy what remains an embryonic value chain, but also to achieve economies of scale to bring down costs right across this chain, from hydrogen’s production to its various end-uses. Only part of the $300bn will be financed by the public sector, with $70bn committed by national governments to date, which underscores the extent of the challenge facing the sector and private finance.”

In the same context, Samuel Ikemba, energy economist, said “role of financial institutions is to provide flexible repayment plan, help in conducting market research and guide investors through evidence-based decision making”. Ikemba emphasized that policy support and cost are the main factors that affect hydrogen investment. He called on governments to review the existing inter-governmental resolutions such as the Paris Agreement and COP26 Summit at Glasgow.