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Why has hydrogen become our best hope of driving the world’s decarbonisation imperative and reaching net zero by 2050?
Executive summary
- What are the cost implications of the so-called hydrogen economy?
- What are our considerations for the challenge of energy storage?
- How does hydrogen practically help to solve some of our sustainability challenges?
We’ve been talking for decades about using earth’s most abundant chemical element as a clean energy source. Now, hydrogen isn’t just getting some attention: it’s become our best hope of driving the world’s decarbonisation imperative and reaching net zero by 2050 – and increasingly, reducing our dependency on imports of fossil fuels from volatile regions.
But why hydrogen, and why now? The biggest driver of the hydrogen agenda is low-carbon hydrogen’s huge potential to help advance decarbonisation, especially in so-called ‘hard-to-abate’ sectors, like transportation, mining and heavy industry. The current spike in oil prices has only strengthened the case for an accelerated transition to hydrogen.
It’s important to note that there are many ways of producing hydrogen, and they’re not all equal. So-called grey and blue hydrogen are produced using fossil fuels. In fact, almost all the hydrogen produced today is grey hydrogen, which is mostly used to produce ammonia and fertiliser, and to refine oil. Green hydrogen, on the other hand, is produced from renewable energy sources – and that’s where the opportunity lies. The challenge is to find a replacement for fossil fuel as energy-dense store of energy. Our global energy system is currently largely focused on the extraction, processing, storage, transportation and use of fossil fuels. There’s no doubt that this needs to change, and that renewables will ultimately be the next main source of energy.
How this energy is stored for later use is the subject of much debate. There are currently two schools of thought: either lithium-ion batteries, or green hydrogen or ammonia.
Our view is that both of these will coexist as complementary technologies in a post-fossil fuel world. We see large utility scale (>1000MW) integrated wind and solar farms feeding electricity into electrolyser ‘giga factories’ that turn sea water into hydrogen and oxygen, This will feed a pipeline and export system, and some of this hydrogen will be converted into ammonia, which is easier to transport.
Countries like South Africa and Namibia have fantastic natural endowments - large open tracts of land, high wind and solar potential, and ready access to sea – which makes them ideally placed to play a leading role in the global hydrogen economy. To take advantage of this, it’s important that governments put in place a more incentives to allow the private sector to invest.
Although the hydrogen transition will require significant investment in new and repurposed infrastructure, the scale of green hydrogen production is set to ramp up dramatically this decade. Green hydrogen production projects are booming worldwide, with hydrogen demand expected to increase significantly by 2030, to then boom in the 30s and 40s, driven by new demand centres.
The biggest challenge with green hydrogen is that it’s currently significantly more expensive to produce than its grey and blue cousins. But that’s changing too. There are three main factors driving lower production costs and the viability of green hydrogen: decreasing renewable costs, with solar and wind power costs expected to drop by between 15-40% in the next three years; the same significant drop in costs for the electrolyser capex; and the increasing cost of CO2 taxes making the alternatives more expensive.
Great. But what do ordinary businesses do with it?
Hydrogen is already in broad use in industrial applications, either as-is or through conversion into ammonia. In other words, there’s already a value chain in place. Going forward, though, we see five major uses for hydrogen across a range of industries.
- Power generation: As a long-lasting and reliable source of energy, hydrogen offers a new solution to our need to store power, as an alternative to lithium-Ion batteries. It also offers a way to stabilise shifts in energy production, which is one of the big challenges of current renewable energy generation methods. The dispatchable nature of this power source (that is, the power output supplied to the grid can be adjusted on demand) is a holy grail in power grids of the future.
- Transportation fuel: Hydrogen can be used as energy storage to power cars and other vehicles. We’re already seeing a major mining company using hydrogen to power their massive tipper trucks, and leading automotive manufacturers already have hydrogen powered fuel cell vehicles on sale today. Although aimed at early adopters, both have proved the viability of hydrogen in real-world transport applications.
- Feedstock for industrial processes: Hydrogen is used in several industries for as a feedstock. Refining and steel production are among the best-known sectors that are already using it in their process flow.
- Energy source for industries: Hydrogen can be burned to produce heat as a substitute to natural gas. Used for this purpose, hydrogen has the potential to significantly reduce greenhouse gas emissions.
- Energy source for heating buildings: Gas hydrogen can be used to heat buildings, including residential houses, schools, hospitals and commercial buildings in regions where central heating is required.
How EY can help
Despite the higher cost and the steep levels of investment needed, demand is already growing for green hydrogen. Our modelling indicates that demand for green hydrogen will grow to over 500 million tonnes per year by 2050.
As a result, a rising number of businesses are considering their hydrogen options. By being pioneers, they see real opportunities to create value and seize a competitive advantage. This includes a smoother and longer learning curve; securing key aspects like locations, assets and suppliers early; and establishing the company’s brand in the new market.
Ultimately, though, decarbonisation is a sector disrupter and, as such, needs to be treated like any other strategic risk. It must be addressed at board and executive level, and managed as part of the overarching business strategy, and not left to a separate climate strategy team.
At EY, we’ve been aboard the train for some time now. We were the financial advisor on a several recent M&A transactions on hydrogen, and have a deep knowledge of the sector, local market dynamics and key value drivers that can be pivotal if you decide to move forward with a target opportunity. We also offer a ‘one-stop-shop’ approach with a comprehensive transaction services offering under one roof. If you’d like to know more, please reach out.
Summary
The bottom line? Even organisations that have no hydrogen agenda, but that want to reduce their carbon footprint, can be thinking about green hydrogen now. There’s never been a better time to climb aboard the green hydrogen train.
