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The battle for clean hydrogen: Utilities vs. Big Oil
The undisputed, most diabolical molecule in the world…
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All aboard the hype train
If you haven’t heard yet, hydrogen has become… kind of a big deal. I’m talking leather-bound books and smells of rich mahogany important.
Just about every day you can find another major hydrogen announcement: whether it’s a new start-up, a corporation making a major investment, or the next SPAC deal… hydrogen has officially boarded the hype train.
And don’t get me wrong – I’m a big believer in the potential of hydrogen (H2) in a net zero economy. However… hydrogen is relatively niche today, has a high carbon footprint (~10 kg of CO2 per kg H2 produced), and its applications are concentrated almost entirely in ammonia production and oil refining.
The natural question is how do we get from a small, concentrated, carbon intense industry to a massive, wide-spread, low-carbon hydrogen future?
Said simply: Scale, new technologies, & infrastructure
Now… I’ve Mused on the importance of the above three factors in the past, and I don’t want to simply regurgitate one of many forward-looking analyses of how the hydrogen economy might evolve (like this one!).
So instead, I’d like to highlight what I see as one of the more intriguing dynamics at play…
The battle between utilities and oil giants: electrons vs. hydrocarbons
Let’s dig in and see how this struggle is defining the hydrogen battlefield today and how it will shape the future. Specifically:
What do you need to know about clean hydrogen?
What exactly is this battle I’m referring to?
And what does this all mean for the future?
Clean hydrogen, 101 📚
As with all Musings, let’s start with a grounding of what you need to know when it comes to clean hydrogen. If you are already a hydrogen whizz, feel free to skip ahead.
To know your future you must know your past, right? Some quick stats on the current hydrogen industry…
Size: roughly ~$100Bn globally; net-zero projections expect a >10x growth of this market by 2050
Use-cases: more than ~70% of hydrogen is used to make ammonia (fertilizers) and refine oil and gas. Very little goes to things like fuel cell vehicles…
Cost: most industrial hydrogen is produced around $1-1.5/kg today. For reference, today’s clean hydrogen can cost >$4/kg.
Structure: lastly, the market is extremely centralized. Hydrogen is often produced and consumed on the same industrial sites, thus not transported long distances.
Why do people get so excited about hydrogen? Well… hydrogen is extremely energy dense on a weight-basis, but not a volume-basis. This means if H2 gas is compressed and made dense, it can be a suitable substitute for energy dense, liquid fossil fuels.
Future applications of clean hydrogen generally fall into 3 buckets:
Natural gas replacement: for both power and heating, hydrogen is a potential blending gas or a full replacement for natural gas. In most cases this isn’t a 1:1 replacement, and people discuss blending limits without infrastructure upgrades of ~10-15%, but hydrogen naturally lends itself to these applications.
Heavy transportation: where batteries are too heavy or not energy dense enough to be loaded onto transportation vessels, hydrogen can play a role. For example, long-haul trucking, marine applications, or even hydrogen planes.
Heavy industry: hydrogen is also touted for its industrial applications, most notably in the expansion of ammonia, its role as an energy feedstock, and in substitutes for steel manufacturing processes.
Clean hydrogen technologies
While I dislike the “colors” assigned to clean hydrogen tech rather than focusing on carbon intensity, let’s use them to understanding the space:
Green: the “electrons” route, green hydrogen is the production of H2 using water, electricity, and some fancy chemistry. Green hydrogen technologies deserve an entire column on their own, but needless to say there is a lot of innovation taking place to make this route more flexible to operate, lower cost, and more robust.
Blue: this route is essentially a modification of how hydrogen is made today. Steam methane reforming (SMR) is the technical process used to make hydrogen from natural gas, and if you add a carbon capture system to the backside of this process, you can deliver low carbon hydrogen without much modification.
Turquoise: methane pyrolysis, or using extremely high temperatures to turn methane (CH4) into hydrogen and solid carbon. Pyrolysis is a well established technology, but innovation here is on more operable and efficient plants.
The above certainly doesn’t cover everything, for example photocatalytic routes (light causes the reaction), but it’s a good starting point. And remember — carbon intensity is what matters for hydrogen, not any fancy color assigned to the technology.
All the rest…
There’s a lot more involved in a complete hydrogen economy than just making a molecule. Hydrogen will need to be 1) transported in pipes, trucks, or ships; 2) compressed for use and transportation; and 3) stored for long periods of time. All of these steps cost money, take energy, and add additional complexity to the value chain.
Electrons vs. Hydrocarbons 🥊
Now for the main event!
For better or worse, most conversations regarding clean hydrogen boil down to a debate about which technology will win — which is cheapest? Most wide-spread? Lowest carbon intensity?
While interesting, I think these debates can hide the real battle at hand – that between incumbents battling for the future of an industry that could meet >15% of primary energy demand in the future! Utilities vs. Big Oil.
A brand-new, trillion-dollar industry. BIG stakes.
Why a battle? Well, any transformation that takes place must be spearheaded by a group of pioneers – whether it’s a grassroots political movement or Elon Musk with electric vehicles.
In the case of hydrogen, the pioneers with the most to gain and the most resources to drive change happen to be utilities & oil companies.
Let’s take a look at the ‘stat-sheet’ for this matchup and see who’s primed to win.
Once doomed by the ‘death spiral’ of diminishing electricity demand, utilities are now facing a good problem of growth. A net-zero future is expected to have upwards of ~3x the electricity demand globally when compared to today, and a large part of that projected demand beyond 2030 is allocated to green hydrogen applications.
Pure upside: first and foremost, utilities have the ‘will to win’. Hydrogen is pure upside, and little to no downside. Electrolyzers provide another home for electrons, more infrastructure build out, and flexibility for the grid. This has led to nearly 50GW of green hydrogen capacity announced through 2030
Clean slate: utilities also have the good-fortune of having a relatively clean slate — they aren’t inherently tied to fossil fuels. Currently on the leading edge of clean energy deployment, utilities are building their case to expand their transformation with a green hydrogen future.
Technology: lastly, there is a large amount of momentum on the green hydrogen front. CAPEX for electrolyzers is expected to drop >70% over the next decade, and green electrons from the grid are getting cheaper and cheaper to fuel this technological pathway.
Learning curve: On the flip side, a ‘clean slate’ means utilities aren’t the incumbent hydrogen industry. Hydrogen is a complex molecule to handle — it’s extremely small and can weaken metal structures, it is highly flammable, and it has to be compressed significantly to transport long distances. Lots to learn!
Cost requirements: For a cost target of ~$1/kg produced hydrogen, you need $10-30/MWh delivered clean electrons for at least ~50% of the day with electrolyzers that are significantly cheaper than they are today. While those numbers won’t be completely out of reach in 5-10 years, the geographic and market conditions needed to meet them won’t nearly be ubiquitous.
Oil & Gas 🛢️
You’d expect the industry that produces and consumes almost 100% of hydrogen today to be well positioned to win in the future, right? Maybe…
Incumbents: Oil companies have a huge advantage with their existing production assets, infrastructure, and know-how when it comes to hydrogen and its applications. This is a major advantage, pending they choose to leverage it…
Energy foundation: The technological routes to clean hydrogen derived from natural gas (blue, turquoise) offer straight-forward energy economics. While they aren’t as energy efficient as consuming a methane molecule directly, the existing scale of technologies like SMR and pyrolysis make for a strong head-start to reach cost-competitive clean hydrogen.
Oil companies tend to be hyper-logical and quantitative actors. This offers two major weaknesses when transitioning to a H2 economy:
Pride of molecule: As mentioned, H2 is seen as a less competitive form of energy. Bang for your buck, you are essentially downgrading the energy quality of a hydrocarbon to get to pure hydrogen. This means if you aren’t sold on the urgency to reduce carbon emissions, you will be resistant to transition…
Double-edged sword: Where hydrogen is pure upside for utilities, it’s both upside & downside for OilCos. In most cases, a new molecule of hydrogen consumed will be a hydrocarbon molecule that isn’t consumed. This means that oil companies aren’t entirely incentivized to transition…. unless they are convinced the alternative is a utility taking their business.
So… read the stat-sheet and make your own bets, but right now the house is strongly favoring green hydrogen.
What does this all mean for the future? 🔮
Before we close, let’s pump the brakes for a second… the jury is still out on just how large of a role hydrogen will play in the future energy economy.
While it’s true that hydrogen is one of the few options to decarbonize heavy industry and heavy transportation, if the infrastructure and technology barriers are not tackled… we’ll have to find another option for carbon reduction and removal.
With that said, the struggle highlighted above hammers home a few key lessons.
Change is happening – whether we like it or not
Fighting to hold onto the past doesn’t often work out well… and history is written by the victors. Hydrogen will be another example. The industry that most fully embraces change will be best positioned for the future.
Manufacturing scale wins… again!
One key advantage of electrolyzers are the way they lend themselves to large scale manufacturing. Most blue and turquoise hydrogen technologies are still designed for large scale facilities that leverage economies of scale. We learned it with solar, and then with batteries… there’s a good chance scale wins again with hydrogen…
The existing industrial base is the linchpin for change
We need all hands on deck for this transition. Once again… existing industrial giants lie at the center of the energy transition. Their engagement is just about the only shot we have to succeed… let’s get going!
Stay tuned for future rounds of this heavy-weight bout – and don’t forget to keep your eyes on the up-and-comers looking to make a name for themselves. If hydrogen doesn’t reach its full potential, we’ll need even more carbon capture and sequestration systems! Until next time…
I use “utilities” a bit liberally here. Generally I mean people who make electrons (utilities, renewable developers, even European oil majors) when I say utilities, and people who make hydrocarbons (oil and gas companies) when I say Oil Giants / OilCos / O&G
Context: that’s about 50% of current solar capacity in the USA