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Australia's hydrogen exports - Potential Pitfalls

Gavin  Mooney's picture
Solutions Advisor, SAP

Hi, my name is Gavin Mooney. Thanks for taking time out to read my profile. I am a Melbourne-based Solutions Advisor with SAP and help Utilities to simplify, innovate and run better with SAP...

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  • Dec 24, 2019

Hydrogen production by SMR - Steam Methane Reforming (Image credit: Student Energy)

This is a continuation of the third and final part in my series of articles on hydrogen. It addresses several of the arguments against Australia developing a hydrogen economy based around exports.

1. What if Japan decides to generate its own clean energy?

That would be a problem. However, it’s not considered likely due to a lack of suitable sites. Japan has great geothermal potential, but in mostly mountainous sites. The best large-scale hydro sites have already been exploited. Onshore wind faces land use restrictions. So solar and offshore wind present the best opportunities. But the weather includes a rainy season and regular snowfall so isn’t great for solar.

So offshore wind is probably Japan’s best opportunity. But even then there are challenges. If we look beyond the lengthy environmental impact assessment process and other bureaucracy, there are engineering challenges such as frequent natural disasters and the depth of Japan’s seabed close to the shore. Add to that poor grid connectivity in remote areas, weak interconnection between Japan’s smaller grids, two different frequencies in use and no interconnectors to other countries and it’s easy to see why Japan is also looking to energy imports.

2. Is Japan serious about hydrogen?

Japan appears to be as serious as is possible about committing to hydrogen. It published its Basic Hydrogen Strategy in 2017, it is the global leader in realising a “Hydrogen-based society” and several demonstration projects are being led by Japanese companies or government-owned organisations.

In addition, the use of hydrogen enables Japan to achieve the “3E+S” goal, which is the basic energy policy of the Japanese government. Japan is planning to use the Tokyo 2020 Olympic and Paralympic Games to showcase Japan’s state of the art hydrogen technology by powering the Olympic village with hydrogen as well as the official buses and other vehicles. 

3. Why Australia? What about competition?

Yes, there are certainly other countries (such as Qatar, Norway and the US) lining up to supply low carbon hydrogen to Japan, Korea and others. The good news is that there is plenty of demand to go around. For example, the modelling of Australia’s potential exports is based on Australia achieving a market share of around 20% of the Japanese and 10% of the South Korean imports.

4. Why would countries import renewable (green) hydrogen if SMR + CCS (blue) hydrogen is cheaper?

They probably wouldn’t. However, CCS at scale remains unproven. And who can guarantee that all the stored carbon dioxide will remain underground forever? America’s flagship CCS project was abandoned after 11 years and $7.5 billion after failing to produce commercially viable technology. Even CEO of Murray Energy, Robert Murray, says CCS “does not work”. 

5. Wouldn’t it be cheaper for Japan to produce their own hydrogen?

Notwithstanding that Japan doesn’t have great renewable energy potential and that there are questions over SMR at scale as already discussed above, let’s look at this from two angles:

First, let’s assume that Japan does generate its own renewable energy. The sites are challenging so it’s not that cheap, but it is produced locally so there are no shipping and handling costs that Australian hydrogen has to contend with. How much cheaper does Australian electricity have to be to make Australian hydrogen competitive with Japanese hydrogen?

The answer is A$40/MWh according to research from McKinsey summarised in the chart below. Even if Japan were to go down this path, it’s questionable whether it could generate enough energy to meet its needs.

Of course, if Japan could generate clean energy at a reasonable price that would probably undermine its whole Basic Hydrogen Strategy.

Second, what is the premium Japan is willing to pay for consuming clean hydrogen instead of the cheaper locally produced hydrogen from SMR without CCS? The answer, shown on the chart below, is about A$100 per tonne of carbon dioxide. That sounds like quite a lot, but Japan has made a commitment to its Paris agreement targets and needs to find a way to meet them. So brown hydrogen isn’t really an option. 

No alt text provided for this image

Source: McKinsey

6. Can exported hydrogen compete with LNG on cost?

What is the cost of LNG? The price that Australia’s export partners are paying is certainly not the spot price. This article suggests Japan currently pays around US$10/mmBTU and that figure is also backed up by Japan’s Hydrogen Strategy document.

  • 1mmBTU contains 293 kWh of energy
  • That’s equivalent to 8.9 kg of hydrogen.
  • US$10/mmBTU is therefore US$1.13/kg of hydrogen or A$1.61/kg of hydrogen.

Another way to arrive at a number is to take the value of Australian LNG exports, now said to be worth $50 billion a year. We know that the volume of exported LNG is about 70 Mt, which is equivalent to about 30 Mt of hydrogen. Dividing one by the other suggests countries are paying an equivalent of A$1.67/kg of hydrogen.

Interestingly, Japan’s document says that US$10/mmBTU is equivalent to ¥13.3/Nm3 which gives a higher number of A$2.16/kg of hydrogen at today’s exchange rates but the US$ <> ¥ exchange rate used in the document may have changed.

Either way, these numbers are a lot less than our A$4.61/kg predicted price in Japan for 2025.

However, given that the costs of electricity and electrolysers are expected to continue to fall, and there’s a good chance LNG prices will increase, it’s quite possible that delivered hydrogen prices will match or beat LNG export prices by 2050. Large scale solar today costs about 1/10th what it cost 10 years ago. Who would have forecast that within a decade? 2050 is three decades away. Where were wind and solar three decades ago?

Having said that, in other countries looking to their own hydrogen economies, if they do not have such cheap renewable energy and may have cheaper LNG, it’s quite possible that hydrogen prices will never match LNG without the establishment of a carbon price.

7. Is all this talk of a hydrogen economy just going to boost fossil fuel generation?

Not likely. The demand from Japan and Korea is for clean hydrogen, which means renewable “green” hydrogen or “blue” hydrogen produced via SMR + CCS. Not “brown” hydrogen just produced via SMR without CCS.

If, at some point in the future, CCS becomes viable at scale then blue hydrogen would be a realistic option but costs for green hydrogen will continue to fall and are expected to pass SMR + CCS by 2040.

It’s no secret that renewable energy is getting cheaper and cheaper. In addition, there are expected to be significant reductions in electrolyser costs. The chart below shows how electrolyser capex costs are expected to decrease up to 70% by 2030 and then continue to fall due to the industrialisation of large-scale electrolyser production.

Expected reduction in large-scale electrolyser systems (A$/kW)

No alt text provided for this image

Source: McKinsey

As electrolyser costs continue to fall, at some point the cost of producing green hydrogen by electrolysis becomes cheaper than blue hydrogen from SMR + CCS (see chart below).

Reduction in green hydrogen production costs as electrolyser costs fall

No alt text provided for this image

Source: McKinsey

This point may not be too far away and given that coal fired power stations have a design lifespan of 40-50 years it is hard to imagine anyone funding new coal plant to make hydrogen. 

8. So what is the biggest issue?

The biggest issue that has the potential to stop the hydrogen economy in its tracks is if demand for hydrogen doesn’t materialise. As mentioned at the start of the main article (and reiterated in Australia’s National Hydrogen Strategy released last month, graph below) there is a large range of forecast demand and that will have a huge bearing on the future size of a renewable hydrogen industry.

Range of possible hydrogen demand over the next three decades

No alt text provided for this image

Source: Australia’s National Hydrogen Strategy

Thanks to Godart van Gendt for providing the graphs from McKinsey.

Disclaimer: I’ve done my best to provide accurate calculations but humans are prone to error so I encourage anyone who finds any inconsistencies to let me know and I can update the article.

Matt Chester's picture
Matt Chester on Dec 24, 2019

Not likely. The demand from Japan and Korea is for clean hydrogen, which means renewable “green” hydrogen or “blue” hydrogen produced via SMR + CCS. Not “brown” hydrogen just produced via SMR without CCS.

Can you expand on this? Is it just saying that these nations want their hydrogen to be clean? Or is there something regulatory that will require the hydrogen to be green rather than brown?

Gavin  Mooney's picture
Gavin Mooney on Jan 2, 2020

Hi Matt - the nations need to decarbonise to meet their Paris commitments. While the Hydrogen Strategy presents a roadmap for Japan, I don't believe it is enshrined in law. However the decarbonisation effectively is, and hydrogen represents a means to that end, as long as it's clean hydrogen. 

Bob Meinetz's picture
Bob Meinetz on Dec 24, 2019

"The biggest issue that has the potential to stop the hydrogen economy in its tracks is if demand for hydrogen doesn’t materialise."

Gavin, demand is the second biggest issue.

The first is verification. It is currently impractical, if not impossible, to distinguish brown  / green / blue hydrogen from each other. One atom of hydrogen is one electron orbiting around one and proton and one neutron. Each atom is exactly identical to every other - a fundamental tenet of quantum mechanics.

A fundamental tenet of economics is that when demand for a product arises, and the identical product can be manufactured in a variety of methods, the seller will choose the least expensive method of manufacture. If the product is hydrogen and he chooses to lie about the method of manufacture (he will), it will not only be impossible to prove him wrong, it will be impossible to prove him right.

With verification impossible, there is no added value to green, blue, brown, or orange hydrogen. Buyers will buy the cheapest hydrogen they can find which will, assuming hydrogen produced at a lower cost is unavailable, will invariably be SMR - "brown" hydrogen - labeled as "green".

Can hydrogen be produced more cheaply than SMR? Electrolysis using renewable energy, at the scale and reliability of supply necessary to support demand, would be prohibitively expensive. Though there are indications electrolysis could be marginally competitive using high temperature gas (nuclear) technology, both alternatives would have the added expense of infrastructure development and investment in order to compete with SMR, for which supply and distribution chains are already well-established.

Until these formidable challenges are overcome, it's safe to assume hydrogen is less than useless as a tool for fighting climate change. Less than useless, because the pursuit would both prolong dependence on methane and waste critical time - a commodity more precious than any, and one renewables advocates have already demonstrated consummate skill at squandering with abandon.

Gavin  Mooney's picture
Gavin Mooney on Jan 2, 2020

Oh ye of little faith Bob! It's an interesting scenario. If Australia were to supply hydrogen to Japan and other countries at the scales suggested in my article, there would have to be a big ramp up of hydrogen production. This would be acompanied by the usual media coverage (such as this and it would be clear what was being built in Australia. It would also be clear which port a Japan-bound ship had departed from. I don't think it is likely that SMR production facilities could be ramped up and covertly used to export a million tonnes of hydrogen a year "on the side" without anyone noticing. 

Or perhaps it's a scenario for blockchain to prove provenance. 

And how long before renewable hydrogen is cost competitive with SMR+CCS? 

Bob Meinetz's picture
Bob Meinetz on Jan 3, 2020

Gavin, why anyone would have faith in renewables in 2020 is beyond me!

"I don't think it is likely that SMR production facilities could be ramped up and covertly used to export a million tonnes of hydrogen a year "on the side" without anyone noticing."

Doesn't matter - Australian renewables will never be capable of producing the 105 TWh/yr it would take to make a million tonnes of hydrogen anyway.

Australia: renewables investment down 60%; experts say unreliability is to blame

And how long before renewable hydrogen is cost competitive with SMR+CCS?

Since neither is cost-competitive now, that's a rhetorical question without an answer - kinda like "what's the sound of one hand clapping?"

Gavin  Mooney's picture
Thank Gavin for the Post!
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