Should you invest in hydrogen? A simple step-by-step guideline
In today’s discourse on climate solutions, hydrogen has emerged as a prominent contender. Touted as a key player in decarbonization efforts across various sectors, from transportation to industry, hydrogen holds undeniable allure. Projections suggest that hydrogen will become increasingly affordable in the foreseeable future, adding to its appeal.
Whether you’re an industrial stakeholder seeking avenues for decarbonizing operations or an investor eyeing the potential of clean hydrogen production,
a common question arises: Is investing in hydrogen the right move?
Navigating this decision can be challenging amid the wealth of information available online, often leading to a clouded judgment. This article aims to provide a straightforward guideline for those intrigued by hydrogen’s potential. By offering clarity and insight, this guideline aspires to serve as a navigational tool for industrial players, policymakers, and consumers alike, empowering them to make well-informed decisions regarding hydrogen investment.
Simple Flowchart to Assess Hydrogen Competitiveness
To streamline your decision-making process, I’ve devised a straightforward flowchart based on techno-economic analysis of hydrogen competitiveness. Please refer to the accompanying figure for a visual representation.
As depicted in the flowchart, the primary recommendation is to utilize hydrogen where it serves as a feedstock rather than an energy source. Sectors such as fertilizer and petrochemical industries have traditionally relied on grey hydrogen as a feedstock, necessitating a transition to clean hydrogen for decarbonization.
Using hydrogen as an energy source presents challenges. One might question why not utilize electricity instead, given its versatility in conversion to various forms of energy — be it motion through electric motors, converting to heat via heat pumps, microwaves, and more.
Before concluding that hydrogen is the sole viable option for decarbonizing your sector, it’s crucial to critically evaluate why alternative options aren’t feasible.
I refrain from recommending hydrogen as an energy source primarily due to its inefficiency, which translates to higher costs. For a detailed examination of hydrogen efficiency and cost considerations, please refer to separate articles accessible via this link:
https://dannykusuma.medium.com/hydrogen-hype-a-story-of-energy-loss-f37a592331c8
While this flowchart offers a simplistic overview, the subsequent sections will delve into a more systematic and methodical approach to decision-making.
Step 1: Explore Decarbonization Alternatives
As the adage goes, “there are many roads to Rome.” Before making any investment decisions, it’s imperative to explore all available avenues for decarbonizing your sector.
While hydrogen may seem like an attractive option, it’s essential to recognize that it’s not necessarily the sole solution for decarbonizing your business. Let’s consider an example:
Imagine you run a trucking company. The allure of hydrogen fuel cell trucks, capable of covering vast distances without frequent refuelling, may be enticing. However, it’s crucial to begin by evaluating all potential alternatives. Electric trucks present a viable option worth considering. If you find yourself leaning towards hydrogen, take a moment to thoroughly assess why electric trucks might not meet your requirements.
Furthermore, simpler alternatives such as purchasing biodiesel fuel to sustain your current fleet of internal combustion engine (ICE) trucks should not be overlooked.
By conducting a comprehensive exploration of decarbonization alternatives, you can make a more informed decision that aligns with your business needs and sustainability goals.
Step 2: Assess the Lifecycle Cost of Each Alternative
Now that you’ve identified several decarbonization options, it’s essential to compare their costs to determine the most economically viable choice.
Comparing costs involves calculating how much you would invest in each option and assessing the associated expenses over the entire product or service lifetime. However, this process is often complicated by inconsistent data and measurement units.
For instance, reports may express hydrogen costs in USD/kg, while renewable electricity prices are typically denoted in USD/kWh. To conduct a thorough assessment, it’s crucial to standardize these measurements. While some reports may refer to the levelized cost of hydrogen (LCOH), it’s essential to remember that hydrogen serves as a feedstock, not the end product. Therefore, the unit of comparison should align with your product or service.
Let’s revisit the trucking company example. Since your service primarily revolves around kilometres travelled, it’s prudent to calculate the lifecycle cost per kilometre for each decarbonization option. This entails summing all expenses, including purchasing new trucks (CAPEX), fuel procurement, maintenance costs (OPEX), and dividing by the total kilometres the vehicle can cover throughout its lifespan.
By conducting this analysis for each alternative, you can achieve an apples-to-apples comparison of lifecycle costs, expressed in USD/km.
To facilitate your assessment, the following figures present lifecycle cost comparisons for heavy-duty vehicles, aviation, and the shipping sector.
Step 3: Scenario Planning
In an ever-changing landscape, the future remains uncertain, with cost projections serving merely as predictions. To navigate this uncertainty effectively, industries must engage in scenario planning, encompassing a spectrum of optimistic and pessimistic outlooks.
Suppose your previous assessments indicate that the hydrogen option emerges as the most economically favorable (with the lowest lifecycle cost). Before finalizing your decision, it’s prudent to explore various scenarios concerning the future hydrogen market.
Assuming the utilization of green hydrogen, its cost is influenced by multiple factors, primarily electrolyzer efficiency, renewable electricity (RE) prices, and hydrogen transportation expenses. Any evolution in these factors — be it through innovation, policy improvements, or other developments — can significantly impact the future price of hydrogen.
Additionally, consider other key factors pivotal for hydrogen viability in your business context. This may include manufacturing scale-up initiatives, national hydrogen strategies, and more.
For each factor, it’s essential to envisage optimistic and pessimistic scenarios, as depicted in the example below:
Moreover, practical considerations pertaining to option implementation warrant attention. While electric/battery systems may offer cost advantages, if your business requires swift refueling, hydrogen could prove more suitable. Similarly, if your plant lacks space for solar PV installation but has access to hydrogen via pipeline from a nearby refinery, opting for hydrogen might be justified despite higher costs.
By encompassing a range of potential futures and practical considerations, you bolster decision-making resilience, ensuring adaptability in the face of uncertainty.
Conclusion
Not every sector is ideally suited for hydrogen utilization. Through thorough research and techno-economic analysis, I’ve identified sectors that are most compatible with hydrogen adoption.
Visualizing this understanding can be effectively achieved using a chart with two crucial axes: the availability of alternative decarbonization options beside hydrogen, and the cost disparity between hydrogen and the business-as-usual approach.
The results of the assessments outlined in the preceding steps can be plotted on this chart. For instance, in the trucking sector, where hydrogen is one of three viable decarbonization options, it would be positioned towards the right side of the chart. The degree of cost premium or increase can be determined from the lifecycle cost assessments conducted earlier. Reports indicate that using hydrogen in trucking leads to approximately 1.5 times higher trucking costs.
By repeating such assessments across various sectors with potential hydrogen usage, a chart akin to the one depicted below can be generated:
Observing this chart, it becomes evident that sectors situated in the bottom-left corner present the most competitive use cases for hydrogen. These sectors lack feasible alternatives to hydrogen and incur relatively modest cost increases with its adoption.
Conversely, sectors in the right or top regions of the chart represent less favorable candidates for hydrogen adoption. In these sectors, alternative decarbonization options beside hydrogen are more viable, and the cost premium associated with hydrogen adoption is more pronounced.
To enhance clarity, I’ve categorized these sectors into boxes:
These findings align with reports from sources such as the Energy Transition Commission, which provided inspiration for the chart depicting hydrogen usage in various sectors:
Similarly, IRENA delineates sectors better suited for electrification versus hydrogen:
Lastly, Michael Liebreich’s “hydrogen ladder” offers a straightforward framework for understanding hydrogen adoption:
With the information and methodological steps provided in this article, you now possess a solid foundation to assess whether investing in hydrogen aligns with your objectives.
Good luck!
