Equitable fuel of the future? Developing the hope of hydrogen

The global appetite for cost-competitive green hydrogen has seen the US, the EU, Australia and others introduce incentives to lure investment and encourage development. Japan had the first hydrogen strategy in 2017 – there are now more than 45 in development or active worldwide. In China, hydrogen is among six industries of the future.

But the fuel slated as a solution for hard to abate industries – where electrification can’t easily provide the wins seen elsewhere – holds a higher promise.

If the developed world can bring down production costs, green hydrogen could become a clean fuel for all. A more affordable green hydrogen option would make decarbonisation more accessible and achievable.

Australia, spoilt by renewables-rich conditions, has the potential to become a leading exporter of clean hydrogen (in addition to supplying the domestic market). But more than this, Australia can become a source of clean energy to its regional neighbours – especially across Southeast Asia, where the conditions aren’t as favourable for renewables.

In this insight, we look at this promising (yet relatively fledgling) fuel of the future. Can government and business efforts bring down the costs of this (currently) prohibitively expensive option as quickly as needed – and can hydrogen bring an equitable decarbonised future for all?

The world is still very much at the beginning of its hydrogen journey. Subscribe to our latest insights on future energy here.

With green hydrogen, we are igniting the clean energy revolution. We are empowering future industry leaders. We are nurturing the workforce of tomorrow. We are working towards the just transition of industry: evolution from pollution to solution. We are building a sustainable future for all powered by innovation.”
United Nations Industrial Development Organization (UNIDO), Director General, Gerd Müller

Supply side: Slashing production costs

The US is targeting an 80% cost cut to bring hydrogen down to US$1/kg by 2031, to make it competitive with fossil fuel energy. In Australia, the national science agency CSIRO has set the target to under AU$2.This is in line with the Australian government’s ambition to become a superpower in the renewable energy space. 

Despite government incentives, we’re not on track just yet. The US Department of Energy has forecasted levelized clean hydrogen costs of US$1.50-$2/kg by 2035.

To bridge the cost gap, Australia announced its Hydrogen Headstart Initiative, which will invest AU$2bn into green hydrogen (and hydrogen derivative) projects. This policy is designed to help costs fall further than that forecast, as the tide of investments and supportive policies grows.

What does it cost today? It can vary globally between US$3-7/kg for green hydrogen. Pipelines are expensive and slow to build, storage and transport await new technology to make them affordable, and it’s not a widely traded commodity – all challenges identified by the US Department of Energy in its Pathway to Commercial Liftoff report.

Key drivers expected to bring down production costs include:

• Design and technology improvements lowering the cost of electrolysers over time.
  • Fortescue Future Industries shared glimpses of a new 2GW electrolyser factory in mid-2023, revealing it is expected to produce its first electrolysers by year-end.
• The costs of wind and solar power, particularly in countries like Australia, reducing.
• As clean hydrogen production grows, economies of scale that are expected to bring down production costs – particularly using automated processes in large facilities.
• The general forces of ‘ambitious climate mitigation’ – something the International Renewable Energy Agency (IRENA) expects to drive cost reductions, sending electrolysers 40% cheaper by 2030.

“There’s now more power in the day than we know what to do with.  Rather than viewing power as a cost, we need to look at what we can do with it. This is where hydrogen comes into play. Using that excess power to produce green hydrogen, that can go on to produce green steel for example – that’s the potential when power’s cheap.” KWM Partner Rod Smythe

Demand side: Green hydrogen as a decarbonisation lever

How big a role green hydrogen will play in decarbonising economies raises legitimate questions. Australia’s prime conditions to generate renewable energy to make hydrogen does not guarantee a leading export role.

Transporting hydrogen is expensive and technology is nascent. The opportunities to create and consume hydrogen on-site, or close to the source of consumption, are compelling. The real challenge is whether it can turn into an export product, via transport and which countries it will be economic to export to.

The challenge presented by Australia’s isolated location from a transport perspective, is countered by the advantageous conditions for renewable energy. However, the balance between these competing factors is yet to be determined.

Unlike LNG export, the competitors to generate green hydrogen are not as limited. Anyone with renewable energy, water and an electrolyser can create hydrogen. But therein lies the advantage for Australia: not every country has ideal conditions for renewable energy. Different countries will face different challenges. For example, in Asia, many countries lack land mass to deploy renewables and the capital to invest in the underlying technology.

The growth of developing economies is expected to increase ammonia and methanol (both green hydrogen derivatives) demand three to four times today’s levels by 2050, according to estimates by the International Renewable Energy Agency (IRENA). 

What does this have to do with equitable futures?

Clean hydrogen is, at the moment, largely cost prohibitive, everywhere. Yet this is most acutely felt in developing nations, where the focus is on decarbonising without hurting development targets.

By investing in green hydrogen and in bringing down production costs, over time this will help other nations that can benefit from the lower-cost technology and imports.

The hydrogen export industry presents hope for an equitable future.

There is growing focus on this potential across global forums.

• IRENA has a Collaborative Framework on Green Hydrogen. Among the nine areas in its scope of work is a focus on the “applicability and relevance of hydrogen in small markets”.
• IRENA has emphasised the importance of bringing developing countries on the journey.

“Supporting the advancement of renewable energy and green hydrogen in developing countries is critical for decarbonising the energy system and can contribute to global equity and stability.” IRENA, Geopolitics of the Energy Transformation: The Hydrogen Factor

• IRENA predicts energy relations will likely become regionalised. For clean hydrogen, this means tapping into renewable resources to transport over long distances – and for Australia, it means looking to trade relationships with neighbours in the Asia Pacific, including Southeast Asia where land mass is low.
• Southeast Asia could benefit from trade flows from Australia, under IRENA’s ‘Optimistic’ technology assumptions for 2050.

• The UN Industrial Development Organisation wants to ensure a just transition to a net zero economy – including by ensuring ‘energy justice’ in the emerging green hydrogen economy.
  • A key focus is to ensure the transition is consultative, and considers energy, water and food security of local communities.
  • Cost is just one challenge.
  • Energy, water, food supply and impacts on land and biodiversity are others.
  • The shift to a green hydrogen economy “presents an opportunity to boots local energy access and security and to accelerate decarbonisation”, it notes.
• The UN Industrial Development Organisation has identified the need for a “multi-faceted industrial policy” to bridge gaps between market requirements, climate requirements and technology development. This “must promote speedy adoption” and make financing available.

What’s next?

The focus right now in Australia and other clean hydrogen-focused economies is (rightly) on production. Critically, on developing the technology and building the infrastructure needed to bring down costs and enable scale.

Yet it’s important for leading nations set to play a key knowledge-sharing and trade role. To look to standards and governance that will ensure quality and safety, while enabling fair trade and international cooperation.

Diplomacy will also play a vital role. Bilateral agreements and memorandums of understanding negotiated around cross-border hydrogen trade are emerging. Australia as a prospective exporter already has one with Germany, Japan, the Netherlands and the Republic of Korea. That is more due to the proactive approach of those prospective importing countries, particularly the Netherlands (which has a hydrogen envoy) and Germany. Chile is a standout example for would-be exporters: it has an explicit mention of “green hydrogen diplomacy” as part of its strategy and has hosted a green hydrogen summit.

There are several challenges ahead before we can say with certainty that hydrogen is the great equaliser – the hoped-for, location-agnostic clean fuel for the hard-to-abate sectors. But the emerging signs are positive. As the domestic industry grows, so does the chance of an export trade – and an equitable future.