Industrial

Will green hydrogen's high cost prevent it from being used where it will reduce the most emissions?

Developers and investors are split on whether steel will represent a significant offtaker, given scale of subsidies needed to cover the green premium

Margaux Moore, head of the energy transition group at Trafigura, speaking during World Hydrogen Week in Rotterdam.
Margaux Moore, head of the energy transition group at Trafigura, speaking during World Hydrogen Week in Rotterdam.Photo: World Hydrogen Leaders

With limited electrolyser capacity scheduled to come on line in the short term, green hydrogen is set to be in short supply over the coming years and at a much higher cost than fossil fuels.

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This raises the pertinent question of how best to use it. How can limited renewable H2 supply best reduce emissions? And which industries will be the first to pay extra for a green product — and who should foot the bill?

“The way we see it, price will follow the emissions,” said Pierre-Germain Marlier, investment director at hydrogen-focused fund Hy24, at a panel at a World Hydrogen Week side event on global hydrogen projects.

This is because the EU’s Emissions Trading Scheme reduces its cap on allowed greenhouse gas emissions every year — making it more costly for industries to emit CO2 over time.
“We will go first after the low-hanging fruit, where we abate the most CO2 with each kilogram of green hydrogen, and then we will tackle sectors one after the other,” he added.
Marlier noted that the first wave of European hydrogen projects set to receive public and private finance are in heavy industries such as steel, where direct iron reduction with clean H2 could replace carbon-intensive blast furnaces.

Hy24 has already invested in Swedish startup H2 Green Steel, which is close to taking the final investment decision (FID) on its flagship project in Boden at the end of this year.

This perspective was echoed by investor and analyst Michael Liebreich in a speech later in the week, which cited green steel as the only use case for hydrogen that would reduce sufficient emissions to justify drawing limited renewable electricity away from direct use in power or transport.

But this characterisation of the highest emitters as the most obvious offtakers was disputed by Marlier’s fellow panelist Margaux Moore, head of the energy transition group at commodities trader Trafigura.

“We look at what is the current consumption of these industries at what price, and what is going to be the gap that is going to be bridged with the low-carbon offtake agreement — we need to talk about the green premium,” she said, adding that “not all industry has the same willingness to pay”.

“Oftentimes, people focus on displacing natural gas with hydrogen, which in value is probably the most expensive green premium,” she added.

Moore noted that while some heavy industries, such as chemicals, are “a fantastic end-user” for hydrogen, “steel has extremely tight margins today using coal [and] gas, and hydrogen displacement requires upgrading of capex on top of upgrading of opex”.

“And these industries, no surprise, are also extremely supported by local governments and at the EU level. So, I think one of the reasons why H2 Green Steel-type projects are getting a lot of attention is also because they’re getting a ton of subsidies,” she added.

While she agreed that the emissions reduction benefit “is clearly there” for hard-to-abate sectors, “these are also going to be really, really expensive industries to decarbonise”.

“If you look at the profits of steel companies, they're very thin, they can’t just say they'll do the right thing,” Liebreich told Hydrogen Insight.

“Every so often, you'll get Tata Steel or Reliance who make a lot of money, but mostly, it's not that high margin, they can't just suck up the difference, and the differences are colossal. We’re talking about, for the European steel industry, that'll be billions [of euros] per year,” he added.

And Liebreich noted that to make the switch away from blast furnaces at all, support to cover the green premium of renewable hydrogen would need to be guaranteed for more than a decade.

“In steel, the equipment might have a 40-year life, the payback might be 15 or 20 years, so if you don't cover that delta for that period, the first 10-15 years, then they can't make those changes.”

But given the limits of government budgets and taxpayer patience with their money going towards ineffective climate solutions, Liebreich anticipated that the steel industry will start to move away from Europe to regions where the process will be cheaper, such as Australia, Brazil, India, China, or the US.

“Ultimately, the problem is, [politicians] can neither spend the amounts of money to get the European steel industry to green primary steel, nor can they admit that they’re going to shut down,” he said.

Lower cost gap, worse business case?

So if the best option for the climate will not win out based on the sheer cost burden on offtakers, should renewable hydrogen developers look out for other markets more willing to pay in the meantime?

“I think there are a tonne of other smaller-scale target markets that we don’t talk about enough,” said Moore, pointing to diesel, which is already heavily taxed in Europe, as having a similar cost to green hydrogen in some regions — and therefore, mobility might represent an easier switch from fossil fuels to clean H2.

“We need to be targeting more of these diesel-type operations. We’re in Rotterdam, right, there’s a port just next door that uses a tonne of diesel, and it’s extremely hard to electrify those applications. Why are we not looking at switching those to hydrogen today?” she mused.

But while the cost gap between H2 and diesel may be closer than that with gas, Marlier noted that the economics of hydrogen mobility are burdened by costs beyond production.

“When you get your hydrogen from a hydrogen station, 75% of the price of this hydrogen has nothing to do with the hydrogen molecule,” he argued, as the refuelling station’s capex and maintenance costs, as well as the cost of compression and distribution, all add substantially to the final price at the pump.

“I’m a strong believer in hydrogen mobility in specific segments — some of them will go fully battery-electric, some of them will go with hydrogen,” he added, noting that a pipeline network “will help with the business case” for H2-powered vehicles by reducing the distribution costs of the molecule.
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Published 13 October 2023, 12:25Updated 13 October 2023, 12:25