A report has warned blue hydrogen is not a low cost solution amidst the ongoing gas price crisis, with a projected cost of production 36% higher than 2021 UK government estimates.
On 24 May, the Institute for Energy Economics and Financial Analysis (IEEFA) published a report, warning that continued UK investment in blue hydrogen will risk deepening the country’s vulnerability to gas price volatility and supply uncertainty. As an extension of the gas value chain, it stressed that blue hydrogen no longer makes sense as an investment during a gas price crisis. According to the IEEFA, the UK would likely have to import 10% more natural gas to produce blue hydrogen than if the gas was used directly for heat.
This would raise demand for gas at a time when Europe is seeking to reduce its dependence on the fossil fuel. Citing findings from the BNEF, it noted that reducing demand for gas needed for grey hydrogen production could help to ease issues with gas price, security of supply and energy transition. Replacing this current demand from grey hydrogen with green hydrogen for oil refining and fertiliser production could see the EU’s gas demand fall by 12%.
The IEEFA believes that blue hydrogen projects are high risk and will likely become stranded assets. It highlighted that are 26 green hydrogen projects expected to start construction around the world this year, with no blue hydrogen projects slated. This suggests financial risks are already playing out in the global market, it said.
It went on to set out how, in future, both the EU and UK face having to reduce their gas dependency, something that can only be done by reducing defining energy security as being based on a diversity of energy sources, not as a diversity of gas supply routes and infrastructure. Hydrogen can play an important role here, though blue hydrogen project economics are tied to the volatilities of the gas market.
Unlike gas, renewables can be more regionally or locally located. They are free from annual fuel cost dependency too, meaning green hydrogen projects can capitalise on this advantage and offer an alternative route to hydrogen production that generates net zero emissions, at a cost expected to become cheaper than blue no later than 2030. It stressed that with expected blue hydrogen production costs only published a year ago now significantly higher today, continued policy support for the technology is questionable.
