By David Stent

On Thursday the 19th of August, the Climate Council in partnership with the law firm Shearman & Sterling, hosted an intriguing panel to discuss a major topic in the energy industry: Will low-carbon hydrogen be the silver bullet in APAC?

Hydrogen has widely been earmarked as the ‘golden key’ solution to unlocking a future energy supply that is clean, green and efficient. Central to this conundrum is the participation of the region with the highest energy consumption in the world – Asia Pacific. In this webinar we have sought to uncover the opportunities, challenges and realities in developing a regional hydrogen economy, and what that may mean for the global market.

We are pleased to have welcomed: our moderator, Dan Feldman, Partner, Shearman & Sterling; Michael Sheng, Principal Investment Officer, IFC; Fangfeng Xiao, Investment Director, CNIC; Michelle Robson, AP Ventures; Mathieu Geze, VP Asia, HDF Energy; and Philip Jones, Commercial Director, Intercontinental Energy.

The debate began with an audience poll that posed a controversial position: Hydrogen produced from natural gas should NOT be part of APAC’s energy mix as it distracts from a renewable hydrogen economy – Do you agree or disagree? 58% of the audience agreed, edging out the 42% that disagreed.

This provided the panelists with a springboard to begin the discussion about the necessity of using hydrogen as a route to decarbonizing “hard to abate” sectors. Heavy industrial emissions remain a significant sticking point for global net-zero efforts, as our consumption habits demand the need for ammonia, steel, power, aviation, shipping and the like. The task at-hand was expressed by one panel member as being to “enable the transportation of green electrons to where you can produce cost-effective energy at scale.”

The definition of ‘low-carbon’ is up for debate, but for most industry participants it includes hydrogen produced from fossil fuels with the use of carbon capture, utilization and storage (CCUS) – otherwise known as blue hydrogen – as well as hydrogen produced from renewable electricity and water via electrolysis, called green hydrogen.

The controversy around blue hydrogen

But the question remained, “how low carbon is low-carbon hydrogen?”. And several panel members expressed the view that there remain a number of serious concerns relating to the emission impact of fossil fuel production and usage, even with CCUS. For these panel members, low-carbon blue hydrogen should not be seen as the solution, but as a short to medium-term route through which society can transition to a greener hydrogen economy over the long-term.

Most on the panel agreed that blue hydrogen can, at a minimum, create the space and enable demand from industrial off-takers, while supply chains are developed and downstream manufacturers are able to scale up their processes.

One panelist made the point, that while blue and green hydrogen molecules are the same, they are essentially different products. From a financial and investment perspective, the differences will have significant impacts on risk profiles, access to capital, subsidies and often customer preferences. Therefore, when considering a price for hydrogen, how do these stark differences need to be taken into account?

China’s entry into Blue H2

Both green and blue hydrogen will be important for the Asia-Pacific region as nations begin to shift their energy resources away from fossil fuels. Natural gas consumption is expected to increase substantially as the populations and economies of developing South East Asian states continues to boom. This provides the foundations for a blue hydrogen economy to be initiated and to develop demand for greener hydrogen to come to the fore.

However, in terms of APAC’s 2050 carbon neutrality goals to expand the use of zero-carbon fuels, the IEA estimates the region will require in excess of 300 million metric tons of green hydrogen. A quantity that seems out-of-reach as it stands and, when compared with blue hydrogen, will be more expensive without substantial reductions in green hydrogen production and transportation costs.

China’s record of driving down costs of renewable energy technologies and low-carbon solutions cannot be understated, so their participation in a regional low-carbon hydrogen economy is crucial. At a national level, there have been policy initiatives to drive hydrogen industries in 30 cities, with hundreds of companies participating.

Most green hydrogen investment in China predominantly goes toward “power-to-gas” utilities for power generation, with industrial-scale renewable projects increasingly receiving investment. The reality is the market remains in its nascent stages and time is required to better understand market conditions, policy developments, sources of demand and global commitments.

China has focused its planning for green hydrogen production as coming from onshore and offshore wind turbines, as well as utilizing the current overcapacity of solar assets. These assets will most likely be developed within China’s borders, but Chinese developers have begun to look at select international projects.

Scaling the market

It remains important for industrialized nations to be committed to increasing green hydrogen production to utility-scale in order to make into a commercially viable fuel. For some, the focus on green hydrogen is somewhat premature as there remain many unknowns and few predictable outcomes.

As time is running out to reach net-zero, it was felt by some panelists that this cannot be a conversation for 10-15 years time – despite this being the likely timescale for green hydrogen to become abundant. Lessons can and must be learnt from the introduction of LNG as a staple fuel source in the Asia Pacific; to test the emissions efficiency of the fuel, define the commercial value and then scale the fuel.

The speed of uptake of LNG throughout APAC led to rapid realizations of cost efficiencies. With APAC being both a demand center and a potential supply hub, only the EU is better set to develop a hydrogen economy in a similar timeframe.

One significant constraint is the lack of demand from industrial off-takers for hydrogen, hindered by the lack of policy and financial incentives offered to off-takers. Most panelists were hesitant about encouraging a regional carbon tax, feeling that such measures were overly complex. Instead, tax credits or subsidies for hydrogen itself were felt to be the most effective route to encourage offtake and reduce costs.

The panelists each gave their views of where demand will be sourced in the coming years, with these particular sectors mentioned: heavy transport and shipping, (green) ammonia, fertilizer industries, utility power sector, city gas networks and replacing gas in some industrial applications.

Policy progression/Regularity clarity

It cannot be ignored that there are regulatory barriers preventing both national and supranational efforts to advance the energy transition. Renewable developers and fossil fuel producers alike are left unsure about how Paris Climate objectives will be included in local policy, forcing a cautiously slow approach to developing the hydrogen economy. On the other hand, the shifts in focus and position by lenders towards low-carbon energy sources has been incredibly encouraging for renewables producers – yet, there remains uncertainty toward the current bankability of “pure” hydrogen projects. Like other renewables, the cost curve will continue to improve. To do so, the wealthier states involved need to maintain their commitment to the fuel and continue to drive down costs so the developing world may follow suit in the near future.