Timera Energy has explored factors likely to drive hydrogen investment, supply chain value and impact on existing energy portfolios.
On 1 February, it set out how after hydrogen gathered momentum in 2020, defining policy support and business models that drive rapid investment in hydrogen supply chains is the key challenge in 2021. Although headline policy announcements have so far targeted green hydrogen, Timera warned targeting electrolysers alone will result in a slower pace and scale of hydrogen deployment. Incremental demand drive by the EU and UK electrolyser targets announced to date, which is around 45GW, will see European power demand increased by 5% by 2030 though the volume of green hydrogen produced will still be “well short” of what is needed to progress decarbonisation of the hardest to electrify areas.
It acknowledged a broader focus is emerging, with both the EU and UK recognising a need for blue hydrogen, indicating leaders are pragmatic about scaling hydrogen at speed, before exploring the potential factors that could shape how this would happen in practice.
Cost is a factor, with hydrogen expensive whether produced from electricity or natural gas. These high production costs mean initial deployment will likely focus on high value end users in industrial clusters. Supply chain costs, meanwhile, are likely to shape competitiveness with blue and green hydrogen having very different supply chain structures. Long-term, from 2040 and beyond, incremental investment in hydrogen production capacity will likely be dominated by green hydrogen but across the next 20 years, with limits to how fast electrolysers can be scaled, there is a way for green and blue hydrogen to both compete and co-exist.
Hydrogen could evolve into a more liquid market over time, the next 10 years at least will see end user requirements play a key role in shaping hydrogen deployment and supply chains. Local hydrogen markets will likely develop faster than cross border markets.
Elsewhere, hydrogen being cheaper to store than power could be an important factor in shaping supply chains and utilisation. Electrolysers are also capable of providing key flexibility services to power networks to compliment electricity storage. The subsequent revenue from these services will form an important part of the investment case for green hydrogen projects. The final factor is policy, which should focus on scaling, rather than picking winners. Policy makers currently focused on defining hydrogen support mechanisms to incentivise competition and drive down costs; support rapid scaling; allow access to low cost financing; facilitate a level playing field; and do not impose an unreasonable cost burden on consumers.
It further noted that the EU and national governments have learnt key lessons from renewables deployment that will shape their approach to hydrogen and likely support a much faster evolution of support mechanisms. The details of national support mechanisms expected to emerge over 2021 to 2022 will prove a key catalyst for scaling investment in hydrogen infrastructure.