HARNESSING HYDROGEN

How businesses can best get ahead in a world with volatile natural gas costs

By Trevor Hutchings, Sustainability, Partner at BIP.

European energy prices have dropped sharply since the extreme levels seen in 2022 – when title transfer facility (TTF) gas prices peaked at over €300/MWh, up sixfold from €50 in August 2021 – but they still remain subject to volatility . In fact, UK energy prices have risen 8.1% in the year to May and significant price swings are expected in the coming winters after Russia drastically cut gas supplies to most EU nations.

Despite impressive energy-saving measures seen in the winter of 2022/23, demand for gas remains high, with over 40% of UK electricity generated by fossil fuels in 2022, mostly gas . To meet our net zero goals, we need clean alternatives and, for many, this will include hydrogen .

At first glance, extreme volatility in energy markets does not bode well for the cost competitiveness of hydrogen, particularly blue hydrogen which is produced by natural gas using carbon capture and storage (CCS) technologies.

However, the fundamental nature of energy supply is shifting. Net zero is high on the political agenda. The deadline set by the Paris Agreement for a 45% reduction in carbon emissions by 2030 is fast approaching. A recent report by the Intergovernmental Panel on Climate Change (IPCC) stated that global warming is set to break 1.5c of average global temperate rise within the next few years, which is also putting nations under pressure to act .

With this in mind, how can businesses effectively scale up their hydrogen use and stop relying on an increasingly volatile natural gas supply?

A PROMISING SHIFT: HYDROGEN AND A CHANGING ENERGY MARKET

It is very doubtful that the 2050 net zero target can be achieved without a massive scale-up of hydrogen to decarbonise sectors where electrification falls short, and in some ways replace our reliance on natural gas. This is especially true for energy - and emissionsintensive industries such as steel production, the refining of iron, and fuel for heavy goods vehicles, maritime, and aviation - all difficult areas to electrify.

Moreover, hydrogen is a storable fuel, making it an ideal replacement for natural gas, not least because existing gas infrastructure can sometimes be repurposed for hydrogen transport and storage. This is particularly useful when we look at the knotty problem of industries that are more difficult to electrify, or to meet short term peak power demand where hydrogen could play an important role in electricity generation.

To this end, businesses have a vital role to make the hydrogen economy a reality by drawing on innovative technologies and changing their outlook to reflect the new state of the energy market.

It’s true that unabated oil and gas are expected to remain an important but reducing part of the energy mix in most parts of the world until 2050. However, data from BIP revealed that the total investment by the oil and gas sector in renewables rose to $17 billion in 2022, almost six times the rate of 2019 - representing a 5.2% investment of capital expenditure compared to 2019’s 0.7%. This is welcome recognition of the vital role these companies must play if we are to reach net zero, but the sector faces sharp criticism for not moving quickly enough, as do governments for not regulating this industry to move faster. Nevertheless, with their expertise and experience, they should be well-placed to lead the development of a new hydrogen economy.

A blend of energy solutions – including abated hydrocarbons, renewables, nuclear and hydrogen technologies – is likely to play a key role in the future energy mix. In fact, the International Renewable Energy Agency (IRENA) expects hydrogen to meet 12-13% of global energy demand by 2050.

Scaling up hydrogen solutions will not be possible without government support, at least not during the embryonic stage. There are, however, signs that government aid packages for businesses are on the rise. For example, the UK has announced an £80 million investment package for low-carbon energy innovation, which has helped fund food manufacturing company Kellogg’s switch to alternative fuels.

THE TRILEMMA: CHALLENGES BLOCKING A HYDROGEN TRANSITION

There is still a huge funding gap to bridge though. And although steps are being taken to develop a hydrogen economy, the challenges ahead are illustrated by the so-called ‘energy trilemma’ – affordability, security, and sustainability.

The capital requirements linked to green hydrogen production from renewable electricity are significant, and businesses are facing substantial costs around integrating hydrogen solutions to their energy supply.

Businesses must be flexible – they need to remove their reliance on vulnerable sources of supply and diversify energy supply chains to source carbon-free and low-carbon energy. Hydrogen valleys are a central part of the solution here. They are geographic areas that allow for a localised integrated hydrogen supply chain from production to distribution to utilisation. These valleys can be diverse and fit various models.

Hydrogen valleys can use different production technologies like electrolysis or CCS, various molecules such as gas or liquids, as well as diverse infrastructures and target different end-users such as industry or transport. This has the potential to foster the decarbonisation of a wide range of industries and facilitate cooperation between transmission system operators (TSOs), distribution system operators (DSOs), industrial players, and government and private investors.

Ensure A Business Energy Transition Strategy

Above all, businesses must be proactive to drive the energy transition forward. No one solution fits all: to achieve a net zero energy scenario, significant transformations are required in terms of generation sources, transport, and energy management infrastructures. Centralised planning and modelling are also key, such as economic assessments of hydrogen valleys and technical sizing. Businesses must have a dedicated transition strategy and implementation plan with company-wide recognition of its commitment to lower emissions. They must collect, measure, and analyse data on hydrogen and energy as well as conduct climate reporting – this will help to set realistic short-term goals and to develop a long-term roadmap.

For instance, BIP provides hydrogen data to aid companies forecast likely hydrogen demand, allowing for strategic planning ahead. Forecasting and modelling data of this type is essential to plot a route to sustainable, affordable hydrogen and overcome the aforementioned ‘trilemma’.

There are undoubtedly huge challenges to overcome in the initial phases of a hydrogen transition – costs, energy sourcing, uncertainties over end-user demand, planning and the overall complexity of the hydrogen value chain, to mention a few. Yet, investments and planning will ultimately pay off as the world moves closer towards the net zero target.