‘High risk of stranded assets’ | Blue hydrogen ‘does not make sense’ in a gas price crisis: study
Blue hydrogen projects “are high risk and likely to become stranded assets” as soon as the end of this decade, while potentially adding further woes to Europe’s gas crisis, according to a new report by US think-tank, the Institute for Energy Economics and Financial Analysis (IEEFA).
Blue H2, derived from methane with carbon capture and storage (CCS), “is an extension of the gas value chain and does not make sense as an investment during a gas price crisis”, says the study, entitled Russia Sanctions and Gas Price Crisis Reveal Danger of Investing in ‘Blue’ Hydrogen.
“If blue hydrogen projects are supported by governments and come into operation, there will be a need to increase gas imports significantly, probably at high prices, which will only lead to higher energy costs for the wider population.”
It adds that “elevated gas prices and a future tight market means blue hydrogen is no longer a low-cost solution”, saying that the forecasted cost of blue H2 in the UK has risen 36% since last year.
The 23-page report adds that using blue hydrogen for heating — as some advocate in the UK — would require at least one third more natural gas than if the latter was used directly, due to energy losses in the H2 production process. This would translate to a 10% increase in natural gas imports to Britain, which “would raise demand for gas at a time when Europe is seeking to reduce its dependence on the fossil fuel”.
“Europe is facing three challenges, namely reducing gas prices, offering a secure supply of energy, and continuing with its energy transition goals,” said IEEFA energy analyst Ana Maria Jaller-Makarewicz, who co-wrote the report. “There is only one way to meet all of them: Reduce gas demand. Investing in blue hydrogen production would do quite the opposite.”
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In April, the UK announced plans to produce 5GW of green hydrogen, and the same amount of blue H2 by 2030 — which would be subsidised under a Contracts for Difference scheme due to be launched by the end of this year.
But IEEFA says its blue H2 forecasts “suggest the technology should lose government support in the near term because green hydrogen will become cheaper to produce by 2030”.
“Since both the price of gas and UK emissions allowances have risen, not only is blue hydrogen no longer a low-cost technology, but its green rival will become cheaper to produce this decade and well before the end of blue hydrogen project lifetimes — which makes blue hydrogen a bad investment,” said IEEFA’s director of energy finance studies, Arjun Flora.
Jaller-Makarewicz added: “The gas price crisis has invalidated the business case for blue hydrogen… Investors willing to back these projects risk ending up with long-lived assets on their balance sheets that just don’t make sense.”
Instead, it would make sense for existing grey hydrogen (derived from unabated methane) in Europe to be replaced with the green variety.
“According to BNEF, just replacing current grey hydrogen demand with green hydreogen for oil refining and fertilizer production could reduce the European Union’s gas demand by 12%,” the report points out.
It also adds that 26 green hydrogen projects are due to begin construction around the world this year, but no blue H2 facilities, “demonstrating that its financial risks are already playing out in the global market”.
Climate campaigners have routinely criticised blue hydrogen due to upstream emissions of methane — a greenhouse gas more than 80 times more powerful that carbon dioxide — and because not all the CO2 produced in the methane reformation process can be captured.
In a “reality check” in the IEEFA report, the authors point out that of the few blue hydrogen projects that currently exist, the best carbon capture rates have been the 77-83% at Shell’s Quest facility in Alberta, Canada, although when including emissions from powering the CCS process, this rate falls to 68% — a far cry from the industry’s 90-95% target. A recent report from non-profit Global Witness said Quest actually emitted more carbon than it captured.
“From a a decarbonisation perspective, blue hydrogen may reduce emissions at the point of capture, but methane and CO2 emissions that escape capture may well undermine these saved emissions,” the IEEFA study explains.
David Cebon, professor of mechanical engineering at the University of Cambridge and co-founder of the Hydrogen Science Coalition, said that investment in blue hydrogen is “fundamentally counterproductive to UK energy security”.
“It will further tether the UK to increasing gas imports and rising prices at a time when we are trying to reduce our dependence on imported fossil fuels,” he pointed out. “Any government support for hydrogen needs to be for green hydrogen made from renewable electricity.”