INTERVIEW: Sustained high European gas prices making green hydrogen competitive -- ETC

The balance is tipping in favor of green hydrogen over gas-based production pathways in Europe, with natural gas prices looking set to remain elevated as the region pivots from Russian fossil fuels, the Energy Transitions Commission told S&P Global Commodity Insights.

Sustained high gas prices increasingly advantage renewable hydrogen production over steam methane reforming technologies with carbon capture and storage, and the risk of future gas price volatility have compounded this, Mike Hemsley, the ETC's head of Strategic Analysis and Insights, said in an interview May 26.

"Initially, it was a question of how long will these gas prices last in order to tip the balance," Hemsley said. "Now the view is that these are sustained, it will be at least a year or longer and probably then take time to decline."

Green hydrogen production costs were already competitive with blue and gray hydrogen at current gas prices, an analysis by the ETC showed.

In average locations currently, green hydrogen production could be produced at $5/kg, below the $7/kg cost of gray hydrogen production with gas prices at $35/MMBtu, the ETC said in a report published in May.

Gas prices in Europe have remained above $20/MMBtu since the start of 2022, averaging more than $30/MMBtu, S&P Global data showed.

The ETC report, Building energy security through accelerated energy transition, published in response to Russia's invasion of Ukraine and the ensuing European energy crisis, also showed green hydrogen in favorable locations becoming cost competitive with gray and blue hydrogen by 2025, even with gas prices as low as $1/MMBtu.

The price developments could call into question assumptions that CCS-enabled steam methane reforming could provide initial large hydrogen volumes in the medium term before green production ramps up later in the decade.

"The view was that it might be quicker to switch some of the existing gray producers to fit carbon capture and storage in order to produce larger volumes of blue hydrogen," Hemsley said.

That business case had been thrown into question because of the gas price.

"The ultimate volumes we might see in the shorter term might be impacted from it. We do expect you can bring on large volumes of green hydrogen, but not until at least the second half of this decade," he said.

There was also a risk with blue hydrogen projects that they could increase gas demand at a time when Europe was aiming to reduce consumption, as well as a risk that such projects could lock in demand for several years.

However, more significant could be the opportunity cost of using low-cost gas in hydrogen production, when a high price could be achieved in the gas market.

Low-cost gas producers with low volatility, such as the Middle East and US, were likely to still favor blue or gray hydrogen production in the near term, the ETC said, noting that these producers were likely to prioritize natural gas exports over hydrogen production, should prices remain high.

Ambitious EU plans

The EU's REPowerEU package was ambitious, but a lot could be realized in the time frame to 2030 depending on implementation, Hemsley said.

"There's been a realization that Europe is already off track for its medium-term 2030 goals. Europe is behind to a more limited extent on solar, but definitely behind on wind," he said.

A "step change" in development was needed to deliver on the package via swifter permitting of renewables and the development of associated grid infrastructure. It remained to be seen, however, if there was enough political will in Europe to implement the far-reaching changes, he said.

Natural gas was still viable as a transition fuel in Europe in the near term, Hemsley said, though it has a declining role on the pathway to net-zero.

The EC has said renewable hydrogen could displace up to 50 Bcm natural gas, but directing green hydrogen to the right sectors would be key to securing the energy transition, Hemsley said.

The ETC sees a large role for hydrogen in a decarbonized industrial sector and a limited role in transport, particularly the heavy transport sector.

In addition, blending into the gas grid could be an option to boost demand, Hemsley said.

"What we've always said on gas grid blending is that it's not a bad backstop if you can't use the hydrogen in other places. But let's be clear, it doesn't actually reduce your emissions that much, and hydrogen is better used in harder-to-abate sectors."

Hydrogen supplies

Splitting the EU's renewable hydrogen supplies between local production and imports was a good strategy to ensure diversification, Hemsley said.

The EU is targeting 10 million mt/year of green hydrogen production, with an additional 10 million mt/year of imports by 2030.

Key to implementing the EU's hydrogen goals would be to ensure the demand-side incentives are there for consumers, and building out sufficient renewables capacity in time, he said.

Some renewable hydrogen projects would be able to come online before 2025, though the bulk of green hydrogen production at scale would be up and running closer to 2030, Hemsley said.

S&P Global's Hydrogen Production Asset Database shows 1.7 million mt/year of announced renewable hydrogen production capacity projects in Europe scheduled to start by 2025, rising to 5.4 million mt/year by 2030. The figures include non-EU European countries. Adding low-carbon hydrogen projects boosts the production capacity to about 9 million mt/year by 2030.