Could DoE Ambitious Hydrogen Plans Have Unintended Consequences?

We will cover the very comprehensive DoE hydrogen work in more detail in the ESG report next week, but a couple of the charts from that work are worth mentioning today. The first picture below accurately depicts all of the potential uses of hydrogen and shows that over time it could solve a lot of “hard to solve” CO2 emission problems, especially where electricity cannot do the job efficiently. The reason why so many countries and companies are so interested in hydrogen is because of its potential versatility and because of its minimal carbon footprint (there is some carbon leakage in the full lifecycle of the production coming from construction around the plants themselves and infrastructure to use the hydrogen).

Source: US DOE, June 2021

The point of debate and the huge leap of faith that the DoE is taking is the ability to lower costs quickly. We see the targets in the second picture as very much stretch goals and challenges set out by the DoE to encourage R&D in the hope of meaningful innovation. There are two significant goals – production cost reductions and capital cost reductions.

Source: US DOE, June 2021

• On the production costs, much of the “hope” is in lower renewable power costs, and this is where we think that the timeline is most unrealistic. If you read our ESG and Climate report from this week, there is a chart that shows how much fossil fuel-based power capacity in the US will retire over the next 20 years – all of this will likely need to be replaced with renewable-based power unless there is a change of heart concerning new natural gas-based power plants with CCS or nuclear. At the same time, the wave of EVs expected in the next 10 years will add to power demand. Each analysis, that talks about net-zero progress, seems to ignore the idea that there are other needs for renewable power and consequently the deflationary expectations are likely unrealistic, especially if we continue to see materials inflation, as we are seeing this year and have commented on regularly.
• The other production breakthrough hope is around process. It takes a set amount of energy (electrical) to break the water bond and the only way that could be reduced would be some sort of catalyst breakthrough or through an as yet unknown route perhaps using bacteria or other biobased feeds. The chlorine industry has spent decades trying to lower the cost of breaking up a salt molecule, and there have been some technology breakthroughs (membrane technology being the most significant), but the scale has been the most important operating cost factor, and it will likely be the most important for hydrogen also.
• The capital cost reductions will likely come from scale and the modularization of the process – looking at what Praxair did with modular air separation design might be a good illustration of what is possible. There is a lot of money to be saved by using a standard design – two of them if you want twice the size – versus designing from scratch each time. Not what the engineering companies want to hear, but the right moves for the industry.

We applaud the DoE ambition, and the R&D initiatives and targets will likely net some real gains. We doubt if the costs can be achieved on the timeline suggested and think that this is more realistically a 2045-2050 target, primarily because of the power demand/cost/availability issues. The negative of the DoE goal is that it might discourage blue hydrogen and ammonia in the near term. Anyone looking at the 2030 green hydrogen cost goal would struggle to justify the investment in blue hydrogen if they thought $1/KG was possible for green hydrogen within 10 years.   This could be a very good example of one of the pitfalls we have identified in government initiatives to push net-zero targets – so much emphasis on hoped-for technologies, that near-term solutions get overlooked or underfunded. The study talks about the need for blue hydrogen and ammonia in the near term, but it is unclear how that gets funded, given that 45Q does not cover the costs and it remains unclear whether customers would pay more.   If we do not encourage blue hydrogen today, and then do not get the technology or power breakthroughs assumed in the picture above, we might have made no progress at all by 2030.