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Mind the supply gap!

The road to COP26 blog series

Hydrogen has the potential to solve some problems being faced in the energy transition. However, the strength of hydrogen, its wide applicability in multiple demand sectors, could just as well turn into its weakness if we are not able to minimize the expected supply gap.

Hydrogen has the potential to play an important role in the energy transition. It has a wide applicability as an energy carrier and for some hard-to-abate sectors it is currently one of only a few alternative(s) to decarbonize processes. This is recognized as a viable option by the industry as can be seen in the many project announcements to kick-off the hydrogen economy.

Deloitte research identified the industrial sectors, such as the steel sector, as the most promising sectors for hydrogen. In the medium term, high potential areas are in the mobility sector either directly in heavy road transport or indirectly via synthetic fuels and ammonia, in marine transport and aviation. But this fast-growing market is likely to face growing pains as a large supply gap is expected to emerge, with potentially large effects.

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Hydrogen supply vs demand

To assess this supply gap, let’s first get a better understanding of the demand for hydrogen. We can make a distinction between direct and indirect hydrogen demand. Direct demand relates to the use of hydrogen in end-use applications, e.g. feedstock, fuel cells in vehicles, and various chemical processes. Indirect demand refers to the utilization of hydrogen in various conversion processes to create ammonia, methanol, or to create synthetic fuel production. Both types of demand are expected to increase in the decades to come.

Scenarios developed by Gasunie determined a medium demand scenario of 2,5 Mt in 2030 that increases to 4,7 Mt in 2050, but these do not include the shipping and aviation sectors. On a European level, demand volumes are expected to run up to 30 Mt for 2030 and over 100 Mt in 2050 as forecasted by Hydrogen4EU, in collaboration with Deloitte. Although large uncertainties still exist this gives an indication of what is expected on the demand side.

Now let’s have a look at the supply side. There are multiple ways of producing hydrogen (green, blue, and grey ). Green hydrogen is produced by electrolysis using renewable electricity. Blue hydrogen is hydrogen produced from natural gas where the released carbon is captured and stored. This is seen as low carbon, as (most of) the emissions are not dispersed in the atmosphere. Grey hydrogen is produced from fossil fuels without carbon capture. Although grey hydrogen production is a mature process and can be easily scaled up to reach the demand volumes, it is not expected to play a significant role in the future hydrogen economy as the overriding goal of the transition is, and should be, decarbonization. Moreover, the focus of the zero-carbon economy in 2050 is set on green hydrogen, with a role for blue hydrogen as a transition gas.

With the zero-carbon economy in mind, let’s take a closer look at the green hydrogen supply and demand expectations, based on announced projects. Deloitte research, focusing on German, Dutch and Belgian markets, identified a significant disbalance between the supply and demand volumes; the supply gap. As demand follows an expected curve towards 25.8 Mt in 2050, today announced hydrogen production capacity is expected to reach a supply of 3 Mt in 2050. With an estimated maximum import level of 15 Mt, this indicates the strong need for more and larger scale green hydrogen projects in Europe to meet demand in a net-zero energy system. Or are other alternatives in place that we could consider?

Supply limits and import dependency

To minimize the supply gap there are a few options:

  • Increasing green hydrogen supply: Increasing green hydrogen supply volumes would be most straightforward. For green hydrogen, its potential depends upon upscaling of electrolysis technology, for which economies of scale is to be realized on the international market. Domestic efforts are restrained by the limited and volatile availability of renewable electricity, which increases the complexity to scale and decrease costs. The limited land space in Northwestern Europe for renewable energy production and the simultaneous increase of the electrification of final energy demand decreases green hydrogen’s ability to minimize the supply gap.
  • Increasing blue hydrogen supply: An alternative would be to further increase blue hydrogen volumes. However, since Europe’s largest gas field, the Groningen gas field, is minimizing production, import dependency would increase to provide the desired natural gas supply.
  • Importing hydrogen: What’s left is importing hydrogen. Hydrogen import is expected to play an important role to decrease the supply gap. But its development is still very uncertain. Importing hydrogen via pipeline over long distances is favorable but increases transportation costs. Importing via ship dramatically increases conversion losses (from liquefaction or other conversion processes e.g. via ammonia). Direct import of green hydrogen as an alternative also further increases the Dutch import dependency on energy. Energy import already accounts for 65%, and is expected to increase to 80% according to EBN. Moreover, reliance on import is putting trust in the emergence of hydrogen production in less stable parts of the world, like the North of Africa and the Middle East; regions where renewable electricity is cheap, but which are close enough to enable import via pipeline.

Supply gap effects

The inability to satisfy the hydrogen demand will result in a disbalance in the market that disturbs pricing mechanisms and may lead to price effects. Logically, events like these will be counterproductive for the transition to a hydrogen economy. Therefore the emergence of hydrogen as a replacement of conventional fuels and gasses as the dominant source for production processes must go hand in hand with the development of hydrogen supply. That in itself should be a warning. Although the market might want to move faster, it is likely to be constrained by the development of supply. Over-reliance on hydrogen import at large scale could result in disappointments, given the challenges that hydrogen import at scale will face.

Cross-sectoral guidance

To deal with the future supply gap, efficient utilization of hydrogen is crucial, which would require a structured approach. As significant volumes are desired in all sectors to enable scale and decrease costs, constructive decisions should be made regarding which demand sectors to target first. The most likely candidates for this are the hard-to-abate sectors with the least alternatives for decarbonization. Moreover, effective support for the further build-out of supply should be considered. Hydrogen experiences momentum and cross-sectoral steering is needed to support the development of the hydrogen market. This requires guidance by the government to steer market forces in the right direction.

To conclude, hydrogen clearly has the potential to solve some problems posed by the energy transition. However, the strength of hydrogen, which is its wide applicability in multiple demand sectors, could just as well turn into its weakness if we are not able to minimize the expected supply gap.

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