Green hydrogen: Opportunities for industrial development through forward linkages from renewables
Tilman Altenburg, Nele Wenck, Smeeta Fokeer, and Manuel Albaladejo
Apr, 2024
#Trade and FDI
#Environment and climate change
#Energy
Green hydrogen will be a key element in any decarbonisation strategy. All major economies are investing heavily in green hydrogen, and often also in international energy partnerships to secure long-term imports. This creates new opportunities for industrial development. Countries which are well-endowed with renewable power sources can induce investments in electrolyser plants and related methanol and ammonia industries, which then offer low cost inputs for energy-intensive industries (steel, aluminum, base chemicals, fertilisers) and manifold downstream industries that use green steel or chemical feedstocks. To actually build such renewables-based value chains requires proactive industrial policies.
The fuel of the future
Almost all countries have committed to decarbonizing their economies in the coming decades. Likewise, many large corporations announced plans to cut their carbon footprints to net-zero. This requires a massive upscaling of renewable power – not only to replace fossil fuel-based power plants, but also for the purpose of electrifying a wide range of end-uses, including road and rail transport, heating and cooling. Moreover, a considerable share of the renewable energy will have to be dedicated to the production of green hydrogen to substitute fossil fuels in “hard-to-abate” activities that cannot, or not easily, be electrified. This applies mainly to the production of steel and base chemicals as well as for aviation, shipping and long-haul trucking.
The fuel of the future
Almost all countries have committed to decarbonizing their economies in the coming decades. Likewise, many large corporations announced plans to cut their carbon footprints to net-zero. This requires a massive upscaling of renewable power – not only to replace fossil fuel-based power plants, but also for the purpose of electrifying a wide range of end-uses, including road and rail transport, heating and cooling. Moreover, a considerable share of the renewable energy will have to be dedicated to the production of green hydrogen to substitute fossil fuels in “hard-to-abate” activities that cannot, or not easily, be electrified. This applies mainly to the production of steel and base chemicals as well as for aviation, shipping and long-haul trucking.
Demand for green hydrogen is therefore expected to expand rapidly. According to IRENA’s (2021) 1.5°C Scenario, demand for hydrogen will amount to 74 EJ, 21% of the world’s total final energy consumption, by 2050, of which two-thirds will be for green hydrogen. Many governments and large corporations have recognized the strategic importance of green hydrogen and started to invest heavily.
Green hydrogen is still expensive, about twice as much as grey hydrogen. At it’s current cost, it cannot compete with hydrogen produced with fossil fuels, but this is expected to change for three reasons: First, carbon pricing increases the cost of alternative fossil fuels, and public and private standards are making the use of low carbon alternatives compulsory; second, global average prices of renewable power are rapidly decreasing – by 80% since 2010; third, technological innovation and economies of scale are expected to substantially reduce the cost of electrolysers and improve the efficiency of renewable energy conversion. According to Strategy@ (2020), green hydrogen will already in 2030 be cheaper than blue and competitive with grey hydrogen. In 2050, it will be clearly the lowest cost option. IRENA (2020a) calculates the same trend for green hydrogen generated using solar or wind resources compared to blue hydrogen (Figure 1). Several large corporations have set the target of producing green hydrogen at $1-2/kg already in 2025. It should be noted, however, that such calculations are fraught with uncertainties, as they make assumptions about global policy driving carbon prices up and electrolyser technology becoming considerable cheaper.
Green hydrogen is still expensive, about twice as much as grey hydrogen. At it’s current cost, it cannot compete with hydrogen produced with fossil fuels, but this is expected to change for three reasons: First, carbon pricing increases the cost of alternative fossil fuels, and public and private standards are making the use of low carbon alternatives compulsory; second, global average prices of renewable power are rapidly decreasing – by 80% since 2010; third, technological innovation and economies of scale are expected to substantially reduce the cost of electrolysers and improve the efficiency of renewable energy conversion. According to Strategy@ (2020), green hydrogen will already in 2030 be cheaper than blue and competitive with grey hydrogen. In 2050, it will be clearly the lowest cost option. IRENA (2020a) calculates the same trend for green hydrogen generated using solar or wind resources compared to blue hydrogen (Figure 1). Several large corporations have set the target of producing green hydrogen at $1-2/kg already in 2025. It should be noted, however, that such calculations are fraught with uncertainties, as they make assumptions about global policy driving carbon prices up and electrolyser technology becoming considerable cheaper.
Green hydrogen as an opportunity for industrial development
Countries with abundant solar, wind and geothermal power endowments are likely to benefit the most from the new industrialization paths derived by the shift to green hydrogen. This is good news for many low- and middle-income countries as IEA (2019) estimates that the most attractive sites for producing green hydrogen on the basis of solar and wind energy are located in Africa, the Middle East, Southern Asia and the Western parts of South America.
There are four main channels through which green hydrogen can, directly or indirectly, spur industrial development along a range of “renewable energy => hydrogen => steel or chemicals => downstream industries” value chains.
1. Replacing fossil fuels in the power sector requires enormous investments in renewable power. Demand for green hydrogen stemming from the hard-to-abate economic activities further increases the demand for renewable energy. Thus, solar and wind farms, geothermal and hydropower projects as well as the use of biomass will attract enormous investments in favourable locations. Countries with the right factor endowments that also manage to improve the techno-institutional capabilities required to run power projects efficiently will greatly benefit from the expected demand boom. Some may also become competitive in the manufacture of parts and components, in related technologies such as smart grids and energy storage as well as in financial and project management services.
2. The conversion of renewable power into green hydrogen requires investments in electrolysers. While green hydrogen can be easily stored and used directly in some industrial processes, it needs to be converted into higher energy density products (such as methanol or ammonia) for other processes and easier storage and transportation. Figure 3 shows the manifold industrial linkages of renewable power and green hydrogen.
1. Replacing fossil fuels in the power sector requires enormous investments in renewable power. Demand for green hydrogen stemming from the hard-to-abate economic activities further increases the demand for renewable energy. Thus, solar and wind farms, geothermal and hydropower projects as well as the use of biomass will attract enormous investments in favourable locations. Countries with the right factor endowments that also manage to improve the techno-institutional capabilities required to run power projects efficiently will greatly benefit from the expected demand boom. Some may also become competitive in the manufacture of parts and components, in related technologies such as smart grids and energy storage as well as in financial and project management services.
2. The conversion of renewable power into green hydrogen requires investments in electrolysers. While green hydrogen can be easily stored and used directly in some industrial processes, it needs to be converted into higher energy density products (such as methanol or ammonia) for other processes and easier storage and transportation. Figure 3 shows the manifold industrial linkages of renewable power and green hydrogen.
3. Countries which achieve abundant production of renewable power, green hydrogen and its derivatives at low cost, will inevitably become attractive for a range of energy-intensive industries including the steel and chemical industries, which in turn provide the inputs for many downstream industries, from automotive to pharmaceutical and fertilizer industries. As pressure to decarbonize increases, availability of renewables and green hydrogen becomes an important pull-factor for the relocation of industries. This “renewables pull” (SCI4climate.NRW 2021) can already be observed in the automotive industry, where aluminum parts and carbon fibers are in some cases sourced from low-cost locations for renewable power.
4. Advanced innovation systems and industry 4.0 technologies can help countries overcome the costs and inefficiencies associated with green hydrogen production while exploiting the growing market for hydrogen-based technology exports. This includes markets for fuel cell technology, hydrogen-based steelmaking technologies, tankships and synthetic fuels using a range of digital solutions such as big data analytics, digital twins, sensoring, artificial intelligence and block chain-based traceability systems.
4. Advanced innovation systems and industry 4.0 technologies can help countries overcome the costs and inefficiencies associated with green hydrogen production while exploiting the growing market for hydrogen-based technology exports. This includes markets for fuel cell technology, hydrogen-based steelmaking technologies, tankships and synthetic fuels using a range of digital solutions such as big data analytics, digital twins, sensoring, artificial intelligence and block chain-based traceability systems.
Industrial development through forward linkages from renewables: Strategy matters
The trend is clear: Green hydrogen will be a key element of the future global economy. Governments, industry and other stakeholders need to find out how they can adapt their industrial development strategies to the new framework conditions. This not an easy task, and it requires multi-stakeholder strategies (ESMAP 2020).
Societal stakeholders need to identify which of the various value chains outlined above can be exploited in line with their factor endowments, geographical advantages and technological capabilities. Each value chain requires different investments in renewables, electrolysers, grids, ports and pipelines. Taking the right decisions is complicated, given the uncertainty about prices and technologies. Demand for green hydrogen depends on a range of political decisions in major economies: on the level of carbon prices, support of renewable energy deployment, acceptance of alternatives such as carbon capture and storage and nuclear energy, willingness to adopt protectionist measures as well as geopolitical considerations about energy security. All these factors may accelerate or decelerate the demand. Also, green hydrogen deployment depends on complementary large-scale investments in new technologies, for example tankships, thereby creating uncertainty about transport options and costs. If countries wish to exploit renewable energy and green hydrogen to attract energy-intensive industries, they need to consider a wide variety of factors affecting the choice of location for these industries, from inter-industry linkages and availability of qualified work force to investment climate issues. Importantly, safeguards are needed to ensure that green hydrogen industry development does not exacerbate existing water scarcity or land use conflicts and that industry demands and exports do not undermine electricity supply for private consumption. Thus, a range of new regulations need to be adopted, and countries need to join international initiatives to develop common safety and environmental standards.
An increasing number of countries are developing green hydrogen roadmaps and strategies. Most industrialised countries will be net importers of green hydrogen. Their strategies aim to decarbonize their industries, secure the import of green hydrogen, shield their industries from unfair competition from countries with less ambitious decarbonisation policies, and exploit early mover advantages. Some countries – Australia, for example – are home to energy-intensive industries and plentiful renewable power sources. Those countries are particularly well-positioned to reap early mover advantages in green hydrogen.
For many developing countries, green hydrogen is a promising export option. Those countries usually have smaller domestic industries demanding green hydrogen, but many are endowed with abundant renewable energy resources and large areas of barren land. An increasing number of potential exporters are also developing green hydrogen strategies, including Chile, Uruguay, South Africa, Brazil, Saudi Arabia, Ukraine, Turkey, Vietnam and Morocco (IRENA 2020b). The strategic choice here is whether to envisage green hydrogen as a new export commodity (corresponding to our channels 1 and 2) or a stepping stone towards the development of complex industrial value chains (channels 3 and 4). In the first scenario, countries well-endowed with solar, wind and other renewable power resources encourage investments in energy parks, electrolysers and related feedstocks as well as the required export infrastructure, including pipelines and ports. Such investments, if managed well, may boost export revenues; yet, they tend to be capital-intensive, with very limited effects in terms of employment creation and technological learning. In the second scenario, governments see low-cost renewable power and green hydrogen as the basis for creating industrial clusters and value chains with higher value added.
A modified version of this blog has been published on UNIDO’s Industrial Analytics Platform: https://iap.unido.org/articles
Societal stakeholders need to identify which of the various value chains outlined above can be exploited in line with their factor endowments, geographical advantages and technological capabilities. Each value chain requires different investments in renewables, electrolysers, grids, ports and pipelines. Taking the right decisions is complicated, given the uncertainty about prices and technologies. Demand for green hydrogen depends on a range of political decisions in major economies: on the level of carbon prices, support of renewable energy deployment, acceptance of alternatives such as carbon capture and storage and nuclear energy, willingness to adopt protectionist measures as well as geopolitical considerations about energy security. All these factors may accelerate or decelerate the demand. Also, green hydrogen deployment depends on complementary large-scale investments in new technologies, for example tankships, thereby creating uncertainty about transport options and costs. If countries wish to exploit renewable energy and green hydrogen to attract energy-intensive industries, they need to consider a wide variety of factors affecting the choice of location for these industries, from inter-industry linkages and availability of qualified work force to investment climate issues. Importantly, safeguards are needed to ensure that green hydrogen industry development does not exacerbate existing water scarcity or land use conflicts and that industry demands and exports do not undermine electricity supply for private consumption. Thus, a range of new regulations need to be adopted, and countries need to join international initiatives to develop common safety and environmental standards.
An increasing number of countries are developing green hydrogen roadmaps and strategies. Most industrialised countries will be net importers of green hydrogen. Their strategies aim to decarbonize their industries, secure the import of green hydrogen, shield their industries from unfair competition from countries with less ambitious decarbonisation policies, and exploit early mover advantages. Some countries – Australia, for example – are home to energy-intensive industries and plentiful renewable power sources. Those countries are particularly well-positioned to reap early mover advantages in green hydrogen.
For many developing countries, green hydrogen is a promising export option. Those countries usually have smaller domestic industries demanding green hydrogen, but many are endowed with abundant renewable energy resources and large areas of barren land. An increasing number of potential exporters are also developing green hydrogen strategies, including Chile, Uruguay, South Africa, Brazil, Saudi Arabia, Ukraine, Turkey, Vietnam and Morocco (IRENA 2020b). The strategic choice here is whether to envisage green hydrogen as a new export commodity (corresponding to our channels 1 and 2) or a stepping stone towards the development of complex industrial value chains (channels 3 and 4). In the first scenario, countries well-endowed with solar, wind and other renewable power resources encourage investments in energy parks, electrolysers and related feedstocks as well as the required export infrastructure, including pipelines and ports. Such investments, if managed well, may boost export revenues; yet, they tend to be capital-intensive, with very limited effects in terms of employment creation and technological learning. In the second scenario, governments see low-cost renewable power and green hydrogen as the basis for creating industrial clusters and value chains with higher value added.
A modified version of this blog has been published on UNIDO’s Industrial Analytics Platform: https://iap.unido.org/articles
Reference
ESMAP (2020). Green hydrogen in developing Countries. World Bank, Washington, DC.
IEA (2019). The future of hydrogen, seizing today’s opportunities. International Energy Agency, Paris.
IRENA (2020a). Global renewables outlook: Energy transformation 2050. Paris.
IRENA (2020b). Green hydrogen cost reduction: Scaling up electrolysers to meet the 1.5⁰C climate goal. International Renewable Energy Agency, Abu Dhabi.
IRENA (2021). World energy transitions outlook: 1.5°C pathway, International Renewable Energy Agency, Abu Dhabi.
SCI4climate.NRW (2021): Conceptualisation of the potential renewables pull Effect, Wuppertal.
Strategy& (2020). The dawn of green hydrogen.
ESMAP (2020). Green hydrogen in developing Countries. World Bank, Washington, DC.
IEA (2019). The future of hydrogen, seizing today’s opportunities. International Energy Agency, Paris.
IRENA (2020a). Global renewables outlook: Energy transformation 2050. Paris.
IRENA (2020b). Green hydrogen cost reduction: Scaling up electrolysers to meet the 1.5⁰C climate goal. International Renewable Energy Agency, Abu Dhabi.
IRENA (2021). World energy transitions outlook: 1.5°C pathway, International Renewable Energy Agency, Abu Dhabi.
SCI4climate.NRW (2021): Conceptualisation of the potential renewables pull Effect, Wuppertal.
Strategy& (2020). The dawn of green hydrogen.
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