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Blue and green hydrogen essential for energy transition, but key challenges remain: bank

Highlights

UK grid balancing costs 55% higher YTD

Water management, availability critical for green hydrogen growth

London — Both blue and green hydrogen could both play a key role in the energy transition, but challenges remain before commercial viability can be achieved, an equity analyst said Oct. 19.

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Blue hydrogen produced from fossil fuels with carbon capture technology is more likely to be an area of growth over the next decade, while green hydrogen produced from renewables would become more meaningful from 2030 onwards, RBC Capital Markets' equity analyst Biraj Borkhataria said in a note.

"In our view, three main challenges limit the development of green hydrogen: cost, power grid and supply chain constraints," Borkhataria said as he outlined key takeaways following a recent panel discussion on hydrogen's future role in the energy transition.

Current economics favor consumption of hydrogen produced from fossil fuel sources over renewables, although that could change as carbon prices go higher, Borkhataria said.

In its latest daily cost of production price assessments at key regional hubs and through key production pathways, S&P Global Platts assessed the Netherlands SMR hydrogen without carbon capture and storage price, including both carbon and capex, at Eur1.4575/kg on Oct. 16, compared with a Netherlands PEM Electrolysis price of Eur3.6124/kg.

In a $50/mt carbon price scenario, RBC expects blue and green hydrogen costs to fall into a range of $1.50-$2.60/kg by 2030, the analyst said.

An even higher carbon price would swing demand toward green hydrogen over time, RBC said.

"Reducing the cost of electrolysis is key to improving the economics of green hydrogen," Borkhataria said, pointing to an expected 50% reduction in costs over the next decade due to economies of scale.

"We expect an unequal development of blue/green hydrogen across geographies, with blue and green approaches converging in regions where renewable energy is more widely available and less costly."

UK grid balancing costs up 55%

Power grid balancing costs also are expected to create both challenges and opportunities for green hydrogen over the next decade to utilize excess grid capacity for storage, Borkhataria said.

In the UK, grid balancing costs have reached over GBP1 billion, 55% higher on a year-to-date basis from 2019, the analyst said.

Growth in demand for electricity by electric vehicles along with a continued focus on renewable electricity for power generation is expected to challenge the grid at the same time as creating an opportunity for green hydrogen.

Transportation and storage also present challenges for hydrogen on its path toward commercial viability, Borkhataria said.

Several different grid-scale hydrogen projects are currently being tested around the world, including Japan's green 10 MW hydrogen plant at Fukushima, which is powered by a 20 MW solar array and hydrogen storage facility.

For storage, its potential is to ease the challenges of curtailment as it can store excess renewable electricity as green hydrogen through electrolysis, and produce power back into the grid cleanly.

The availability of water, which is used in electrolysis to create hydrogen, along with water management and treatment, could also become critical factors for hydrogen's success over time, he said.

"Every kilogram of hydrogen involves around 9 kg of water, both in the electrolysis process and in the fuel cell," Borkhataria said. "Thus, as the green hydrogen economy grows, water management, treatment and distribution could become critical factors in its success over time."