COP28 reinforces hydrogen’s essential role in the energy transition

It is hard not to be optimistic

Roel Houwer

Hydrogen energy

When countries at the COP28 climate conference hosted by the UAE announced its ‘historic’ deal to transition away from fossil fuels, clean hydrogen was at the heart of the matter. The agreement effectively called for a rapid scaling up of production of the gas.

To be precise, the accord called for a tripling of global renewable energy production by 2030 and for countries to accelerate developing low-emission technologies. These included low-carbon hydrogen, nuclear and carbon capture and storage.

Yet scaling up hydrogen production is at a critical point because equipment and financial costs have been rising at a time when government support schemes are proving slow to implement. This will hold back the attempts to limit climate change unless governments step up their financial assistance with greater urgency, although a more dovish central bank regime in 2024 could ease the pressure somewhat.

Rising costs and slow subsidies

The International Energy Agency (IEA) pinpoints the issue in its Global Hydrogen Review 2023. While stating that the number of announced low-emission hydrogen projects is expanding, it highlighted the fact that escalating costs are putting projects at risk. “For hydrogen produced from renewable energy, for example, an increase of three percentage points in the cost of capital could raise total project costs by nearly one-third,” the IEA review states.

North American and European governments are beginning to subsidise the first large-scale hydrogen projects, but slow implementation of support schemes has led to project developers delaying investment decisions. This has been aggravated by a lack of clarity about regulation, which has only recently been resolved in some jurisdictions.

Yet these hurdles seem likely to be overcome simply because hydrogen is the critical missing piece in the energy transition puzzle. That is chiefly because it can solve the energy storage conundrum, which traditional batteries do not. Green hydrogen, made by electrolysers powered by renewable energy when the sun is shining and the wind is blowing, can be stored to be turned into electricity when the natural elements are less bountiful. What is more, green hydrogen is the most practical way to decarbonise steel manufacturing.

Against this backdrop, new hydrogen projects are still moving ahead – some of them from the companies in the VanEck Hydrogen Economy UCITS ETF, which covers the entire hydrogen industry ecosystem. It’s worth noting that these companies could benefit from falling costs of capital if interest rates decline in 2024, making the ETF a possible beneficiary of lower policy rates. Annual production of low-emission hydrogen could reach 38 Mt by 2030 if all announced projects are realised, according to the IEA. That is 50% more than at the time of the agency’s 2022 Global Hydrogen Review.

Growing momentum

For instance, Dutch energy company Eneco recently announced plans for a green hydrogen production plant in Rotterdam’s Europoort industrial area. But generating green hydrogen in this way is expensive as it requires renewable energy to power electrolysers. In an unforeseen development, what could be the largest naturally occurring deposit of ‘white’ hydrogen was discovered in 2023 in France’s Lorraine mining basin, adding to smaller deposits in places like Mali. Whether white hydrogen is a material new energy source will depend on these early projects – but the Lorraine find alone could contain up to 48 million tonnes of the gas, which is more than half of the world’s current production of ‘grey’ hydrogen (produced from methane but without capturing the greenhouse gases made in the process).

A further type of low-emission hydrogen is so-called ‘blue’ hydrogen, which produces like grey hydrogen produces carbon dioxide as a by-product. However, this is then removed through carbon capture and stored safely under the ground.

Looking forward, as action to accelerate the energy transition gathers steam, COP28 could well come to be seen as a pivotal moment for industrialising low-emission hydrogen production. As well as the accord making clear that the gas is an essential part of the energy transition, the conference saw the launch of several flagship initiatives to hasten commercialisation.

Rising costs remain a hurdle to overcome, but it seems likely that governments will try to find a way to increase their support. It is hard not to be optimistic.

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