Last week, and in our dedicated ESG and climate report this week, we talked about the challenges of shipping hydrogen, and the linked bp project for Western Australia will have the same problem to solve – choosing ammonia according to the announcement over the very inefficient toluene/cyclohexane option we discussed last week. The appeal of Western Australia is the unpopulated available land that has little alternative use and sees abundant sunshine. The bp project assumes that the facility can buy attractively priced renewable power from third parties, but the company must have a specific power project in mind for the bulk of the electricity needed. The stumbling block here will likely be when the power project(s) bid out the solar module contract, find out that the suppliers are sold out and are asking higher prices to cover reinvestment and higher material prices, and then have to go back to bp with a much higher than expected cost of power. The advantage of solar and wind projects is that inflation only impacts upfront capital costs, which can be amortized over the life of the project – feedstocks are free! That said, most of the announced projects have declining capital costs per megawatt in their planning assumptions today.
Hydrogen also features in the first chart below, which gives a good summary of the costs from the various alternative routes today and highlights the step changes in costs that are required to make hydrogen from solar power, as proposed by bp and discussed above. While some of this cost reduction could come from lower cost electrolysis (mostly from equipment cost reductions), the bulk would need to come from lower power generation costs and this is the bridge that we believe will be difficult to cross, especially if we get widespread acceptance for methane-based production with CCS. We would make one adjustment, or notation, to the chart to make it clear that, while biomass gasification has an attractive cost, you must deal with the CO2 produced, which is significant in proportion to the hydrogen – less so if you can use the carbon monoxide or carbon dioxide to make ammonia, methanol or other syngas based chemicals – but in that case, you would not get the hydrogen for fuel.
Source: Oilprice.com, Hydrogen Strategy: Enabling A Low Carbon Economy; DOE, Link, September 2021
