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Picture: 123RF
Picture: 123RF

Hydrogen power has attracted hype and disillusion before. But with increased realism, policy support and the pressing need for carbon-free energy, will it be third time lucky?

There is no easy answer. Despite being the universe’s most abundant element, pure hydrogen is difficult to source and contain, making its journey towards being the ubiquitous fuel bumpy at best. False dawns — the 1970s’ oil crisis and the 1990s, when climate change initially shot up political agendas — have left some jaded.

The sheer difficulty and cost of producing, transporting and containing hydrogen has caused others to put it in the “too difficult” basket. However, complex geopolitics affecting energy security and the growing intent about carbon emissions have transformed the debate, causing many observers to believe that “this time it’s different”.

Evidence gives credence to this hope as recent analysis noted more than 1,000 hydrogen projects under way globally. The private equity industry alone committed almost $8bn to hydrogen investments in 2022. The possibility of “low carbon hydrogen” is a tantalising prospect for those looking to promote prosperity without damaging the environment. 

This comes in the form of “green hydrogen” produced from water via renewable energy-powered electrolysis, “blue hydrogen” produced by separating hydrogen from natural gas and capturing and storing the carbon dioxide, or “white hydrogen”, which is generated by natural geochemical processes deep inside the earth’s crust.

The technology to produce and extract these forms of hydrogen exists, but it is expensive and, like other sustainable technologies, the costs will only fall with deployment at scale.        

There is certainly no shortage of potential uses for hydrogen, but practical challenges must be addressed about storage, transportation, cost, regulation, safety and supply chains. We remain years — and a string of technical breakthroughs — away from green or blue hydrogen becoming a commercially viable replacement for fossil fuels.

Few alternatives

The argument has shifted from creating a “hydrogen-based economy” to understanding the potential role green and blue hydrogen can carve out in the global push to decarbonise. The emerging consensus is that the clearest use case for hydrogen will be in hard-to-decarbonise areas of the economy such as heavy industry.

Steelmaking is an example; the industry is responsible for 7%-9% of global emissions, and as manufacturers move towards electric arc furnaces there appear to be few sustainable alternatives to hydrogen.

There are also persuasive arguments in large-scale transportation, which according to the EU is responsible for about 3% of global emissions, and aviation (about 2% of total emissions). 

Perhaps the greatest obstacle hydrogen faces is that renewable energy capacity is nowhere near large enough to create the amount of green hydrogen required for 2050 climate goals. The European Commission came up with 10-million tonnes of hydrogen being produced by 2030; it’s a huge ask.

Energy security concerns have also concentrated minds on the need to ramp up renewable energy production. The EU wants renewable power to make up 42.5% of its energy mix by 2030, but the share stands at 23% as of 2022. Again, it is a huge ask. Where that production happens will also be of interest. China is already big in electrolyser production and will get bigger. It is the one to watch.

As another challenge is the difficulty of transporting hydrogen gas, projects either require infrastructure upgrades, to be built on the doorstep of end users, or require hydrogen to be blended into and out of another form (such as green ammonia) so that transportation can feasibly occur. 

To succeed, industry players require state support to attract capital and manage project risk until markets and supply chains can develop. There has been progress, with 41 governments announcing hydrogen strategies by 2023. In the US the Inflation Reduction Act offers a generous $3/kg in subsidy for green hydrogen projects. The UK is also moving forward with its approach of running competitions for government support.

Investment allowance

In SA, green hydrogen has likewise been identified as one of the three priority areas in the government’s Just Energy Transition Investment Plan. Akin to other countries across the continent, investments in the nascent green hydrogen sector seek to set SA up to become a world-leading exporter of green hydrogen by incubating local green hydrogen ecosystems.

As part of the strategy, finance minister Enoch Godongwana announced in February in his annual budget speech an investment allowance for producers of hydrogen-powered vehicles to claim 150% of qualifying investment spending in the first year.

Irrespective of the incentives offered by governments worldwide, clarity is needed on the regulation that will underpin and support this new industry. Policy support and targets need to be turned into workable regulation and subsidy schemes to stimulate supply and demand and de-risk investment, while also making the industry safe and investable. Previously lauded as a panacea to energy-related problems, more credible visions now dominate the conversation.

While it is easy to imagine green energy sources working together to tackle climate change, these sectors are often competing to demonstrate their utility at scale and lustre to investors. Such thinking reflects a newfound pragmatism — hydrogen is not the sole elixir to decarbonise the world. Its appeal is as a targeted, tactical part of the energy transition, a specialist role that becomes vast if applied globally.

The mistake is to assume it will succeed overnight. In fact it still requires much support from government and commitment from industry.

• McDonald is co-head of Herbert Smith Freehills’ global energy practice. Ernst Muller, senior associate in the firm’s ESG practice in Johannesburg, contributed to the article. 

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