Clean hydrogen the chicken or egg conundrum

The discussions and blueprints for a new low-carbon energy mix that are being designed by governments, regulators and industry around the world inevitably feature low-carbon and renewable hydrogen. It is envisaged that low-carbon (blue) hydrogen, produced from natural gas but with the carbon dioxide abated, and renewable (green) hydrogen produced using electrolysis powered by renewable electricity, can play an important part in replacing fossil fuels.

But there is a clear challenge to overcome: while conventional hydrogen has established uses in various industrial applications, it is, to a large degree, not yet completely clear in which sectors, and to what extent, clean hydrogen can play a role. And so while energy companies are poised to make investments in clean hydrogen production, it can be challenging in certain circumstances for those investments to be made in the absence of clarity on both the market for their product and the regulatory framework which will apply. The uncertainty about the availability and price of large volumes of clean hydrogen can, in turn, make it difficult for policy makers and offtakers to make decisions about the viability of low-carbon and renewable hydrogen. At the same time, the fact that we are starting with an almost clean slate in developing the market for clean hydrogen and its supporting infrastructure is also an exciting opportunity and a number of front-runner companies are already making investment decisions in relation to large-scale clean hydrogen projects, on the basis that there are potential offtakers in a number of different sectors.

One area which illustrates this challenge and opportunity is the space heating sector in the UK, where clean hydrogen could potentially displace fossil fuels. In the UK, 85% of households use natural gas for heating (or oil, which is the dominant heating fuel in Northern Ireland), which is responsible for around 15% of all greenhouse gas emissions in the UK. In the vast majority of cases in the UK, households that are able to be connected to the gas distribution system choose natural gas as their fuel for heating because it is the cheapest option. The position is similar in other countries that have extensive gas transmission and distribution systems. The UK Government has recently announced that by 2035 no new conventional gas boilers will be available for sale – it is envisaged that all new heating appliances will either be electric heat pumps or hydrogen boilers. As such, space heating could potentially be a huge market for clean hydrogen.

There are trials taking place to determine the safety and efficacy of blending up to 20% of hydrogen with natural gas, to use in existing pipelines and appliances. A full conversion to hydrogen for heating, on the other hand, would require adaptations to the existing natural gas distribution and transmission networks and appliances. While such conversion is generally considered to be technically possible, it is still subject to further trials. A smaller-scale "neighbourhood trial" is scheduled to start by 2023 in the UK, followed by a larger-scale "village trial" by 2025. These trials are expected to inform the UK Government's decision on hydrogen heating, which the Government has committed to make by 2026.

In the meantime, the UK public is being encouraged to install air source and ground source heat pumps, although currently the high cost of heat pumps, combined with questions about the suitability of heat pumps for some older housing stock in the UK, mean that their take up may not be as rapid as contemplated by the Government. Therefore, in the UK the role of clean hydrogen in heating is subject to further trials, but even if these trials are successful, it seems likely that the current position – where the majority of consumers rely on natural gas – will not be replicated, with clean hydrogen being one of a number of different technologies providing low-carbon heating. In this scenario, hydrogen producers, as well as the owners and operators of the adapted transmission and distribution networks, may face some uncertainty about the level of product offtakers and system users. Therefore government policy will need to play a key role in providing a market structure for clean hydrogen producers.

The potential use of clean hydrogen in other sectors, such as transport, raises similar issues. While the transport industry itself will play a role in determining which decarbonisation technologies are best suited for different types of transport, it is clear that here too government policy will be key, given that any incentive mechanisms will drive choices about which alternative fuels are adopted, at least in the short to medium-term.

Nonetheless, while both potential clean hydrogen producers and potential offtakers grapple with some short-term interrelated questions relating to government policy, technical challenges, public perception and costs, it is clear that clean hydrogen is an essential part of our future energy mix. In the UK context, the recently published hydrogen strategy provides a road map for the integration of clean hydrogen in the UK's energy mix. While the regulatory framework and busines models are still being developed, and some policy decisions on issues such as heating are still to come, as discussed above, there is a plan in place. Other countries have also developed national hydrogen strategies and the new agreement at COP26 to target emissions from power, transport, steel, hydrogen and agriculture (the "Glasgow Breakthrough") will further boost the development of clean hydrogen.

This article was first published by Transition Economist.

Authors: Justyna Bremen and Julia Derrick