Grey to green: Emission-free hydrogen remains elusive

Such a shift would be profound. About a quarter of the world’s carbon pollution comes not from power stations or vehicles, but out of industrial smokestacks. If one process could decarbonize all those industries, we would have discovered a technology as transformational as solar power, wind farms and electric vehicles.

It’s not going to work with hydrogen as we know it. At present, less than one tonne in every 1,000 tonnes that we use is ‘green hydrogen,’ produced by splitting water into hydrogen and oxygen with electricity. The vast majority is ‘grey hydrogen’ made from natural gas, oil or coal, pumping out huge volumes of carbon in the process. 

The optimistic view has been that the cost of water-splitting electrolyzers, and the clean energy required to power them, will decline as rapidly as we’ve seen with other green technologies. But the reverse seems to be happening—and in the absence of action, dirtier variants are gaining ground.

First, look at what’s happened with costs. The high inflation and interest rates of the past few years have been challenging for plenty of clean technologies—but wind, solar, batteries and EVs have reached a sufficient scale that they’ve been able to eke out efficiency gains and keep prices down. That’s not the case with green hydrogen.

Far from falling from levels of around $3 per kg to the US government’s target of $1 per kg—a price at which it might be able to undercut natural gas—costs in the US have increased to nearly $5 per kg, according to a study last year by the Hydrogen Council and McKinsey. Even the generous incentives in the US Inflation Reduction Act aren’t sufficient to make that competitive.

We’ve seen a similar picture in the EU. Brussels has attempted to set up a Hydrogen Bank to build a green H2 supply chain —but the first auction for the facility in April resulted in winning bids of $6.34 per kg at their lowest. 

We saw a similar result in an auction for ammonia last month by the H2 Global Foundation in Germany. The cheapest tender was more than double the price of ammonia made from fossil fuels.

Big Oil hasn’t been sitting still either. An alternative way of reducing H2’s climate footprint is to capture carbon dioxide and pump it into depleted oil wells to drive more crude to the surface. ‘Blue hydrogen’ only reduces grey H2’s emissions by 60-70%, but is still potentially attractive to consumers who want something cleaner than grey without the cost of green.

It also appeals to the oil industry, which has far more money at present to splash on R&D than cash-hungry green H2 startups. Engineering work is done and site preparation is already underway for Aramco’s first carbon-capture project, CEO Amin Nasser told an investor call last week, and the company is expecting to receive bids from Japanese and Korean buyers within months. 

BP is in the final stage of planning for a blue hydrogen hub in northeast England, while Shell has issued contracts to engineers for a project in Oman.

At present, blue H2 looks to be taking the lead. More than half of green H2 expected to be in operation by 2030 is in the earliest stage of development, according to BloombergNEF, so could easily get cancelled. About half of the blue supply has been approved to start construction, compared to 15% of the green projects.

Blue is better than grey, to be sure—but the green variety at present looks like it’s barely going to scratch the surface of existing demand, let alone fulfil its promise of decarbonizing a swathe of additional sectors.

Fixing that won’t be easy. Existing government policies have focused on subsidies for producers, rather than mandating that major consumers use it—the reverse of the demand-side support that helped kick off the renewables boom of the 2000s. 

Trade tensions may also be making project developers reluctant to buy Chinese-made electrolyzers, which can be three-quarters cheaper than locally made versions—a potentially huge cost advantage that’s being neglected. 

Interest rates need to reset at lower levels to bring finance costs down. Above all, wavering official support for clean power means investors are unlikely to make a wager on such a high-risk, early stage technology.

That’s a daunting series of chicken-egg problems, but one that we solved with solar power, wind, lithium batteries and EVs. There’s no reason the same trick can’t apply to green hydrogen. If political will is lacking, Big Oil is standing ready to move in and clean up. ©bloomberg