Mind the supply gap!

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.