In economics, the laws of supply and demand are two factors that drive price fluctuations and govern market dynamics in any economy around the world, big or small. Scarcity drives prices up while an increase in supply forces prices down. Such is the case with any traditional hydrocarbon fuel that is produced through natural processes. Though fossil fuels have proven to be an excellent and reliable source of energy, supplies are limited and therefore prices are subject to the amount available in a specific asset. Nothing could have demonstrated this more than the outbreak of conflict between Ukraine and Russia which sent global oil and gas prices through the roof.
Researchers have unveiled that hydrogen has remedied the issue of scarcity by finding ways to produce energy from the most abundant element in the universe. Widely accepted as an economically viable alternative to power the world economy into the future, hydrogen is the next step in the energy sector’s evolution and an essential ingredient to combat global inflation. But is it really that clear-cut? It turns out that hydrogen production can put the brakes on skyrocketing prices around the world, but not on its own.
Though hydrogen is an environmentally responsible alternative, the process of producing hydrogen for energy can be expensive, and the only way to reduce output costs is to increase the amount of fossil fuels used in the process. A study titled “Outlook for Green and Blue Hydrogen Market” by GEP’s Anshuman Saini estimated that the cost of hydrogen production currently stands at $3 to $6 per kilogram. Other major factors that determine the cost of hydrogen production include expenditures related to electrolyzers and necessary equipment, which typically drive up costs. Though climate activists insist that hydrogen production should be fueled exclusively with renewable resources, fossil fuels are shown to be a cheaper alternative that can drive production costs down and hence limit inflation to a certain degree. This further reinforces the idea that hydrogen can only be a viable solution for inflation as part of a diverse energy mix, which includes fossil fuels.
Some may argue that this is only the situation today, but let’s take a trip to the future. Instead, the reality is that even by 2050, hydrogen production will prove to be costly. A study titled “Energy from Green Hydrogen Will Be Expensive in 2050” written by Liz Wan and Paul Butterworth from CRU found that though hydrogen is a critical tool for decarbonization, especially in emissions-intensive industries, it points out that hydrogen production will cost “~$0.5 /kg – a cost level that is infeasible in our view – we don’t believe it will be available for <$3 /kg (real 2022) at the point of use, even in 2050. $3 /kg is equivalent to ~$80 /MWh, higher than natural gas prices today and six times higher than pre-energy crisis, steady-state thermal coal prices.”
Nonetheless, there is still consensus among many economic experts that the move towards hydrogen will be better for addressing inflation as an economic reality in the long term. Lauren Melodia and Kristina Karlsson from the popular US-based think tank The Roosevelt Institute argue, “Once capital is invested in the infrastructure to [produce] renewable energy and convert it to electricity or heat, there are no fuel costs—that is, no specific volume of gasoline manufactured elsewhere that must be input into the system in order to generate power.”
“Renewable energy will bring the majority of our energy consumption into the electricity sector, a highly regulated sector that has historically produced stable energy prices,” Melodia and Karlsson further argue. “A transition to renewable energy can improve existing inequities in energy burdens among renters, and among low-income [communities].”
A study titled “Can renewable power help to tackle the UK’s inflation problem?” by the Green Alliance UK’s Senior Policy Analyst Heather Plumpton concluded that “effects of the invasion of Ukraine on UK inflation would have been at least 11% lower over the past year. Because [traditional energy price fluctuations] also indirectly increase inflation, this is likely to be an underestimate. It would have kept inflation lower than inflation in Italy and Germany in the second half of 2022.”
Hence, though hydrogen can remedy the crisis of inflation by dodging the issue of scarcity, science has yet to improve the hydrogen production process such that it is less costly. It is only then that it can be the ideal fuel that can push the costs of essential commodities down. Until then, economic experts and energy sector officials around the world need to have a flexible mindset in realizing that hydrogen production cannot exist in a vacuum as the only energy source to power an economy and prevent inflation as these expectations are unrealistic. Rather than hydrogen needs to coexist with other elements of a diverse energy mix that can sustain the economy and provide energy stability while keeping consumers immune from extreme price fluctuations.
