• Alex Brown

Hydrogen - Energy's Elvis?

In 1974, as the U.S. was plunged into an energy crisis by quadrupling oil prices and a forty percent increase in the cost of gasoline, the New York Times asked on the front page of its business and finance section whether hydrogen was the way out of that crisis. In the 48 years since, hydrogen has had headline staying power only rivaled by the biggest of names (see: Elvis).

May 12, 1974

In October 1997, WIRED promised we were entering “The Dawn of the Hydrogen Age.” Twenty four years later, The Economist celebrated that “hydrogen’s moment is here at last.” Hydrogen never sang “Jailhouse Rock,” but there are reasons to expect it will be King.

Let’s take it back to pre-chem, Khan Academy, or wherever else you first celebrated Mole Day. The chemical characteristics of hydrogen are worth spending time on because they’re essential to understanding how we make, move, and use hydrogen. It helps that hydrogen is interesting, as far as elements go. It is defined by its abundance, density, and extraction. Hydrogen is the most available element, making up 75 percent of the universe’s mass. It’s also one of the most invisible: extremely light, colorless, odorless, and tasteless. For all its abundance and simplicity, hydrogen only occurs naturally on earth as a compound with other elements – hydrocarbons, like the ones below. To turn it into anything usable, you have to break these hydrocarbons open primarily through electrolysis or steam-methane reforming (SMR).

Each independent process to create hydrogen has its own potential inefficiencies or negative byproducts, which impact the cost, end-market, and color. Each also has a chemical equation, which I’ve included below for fellow chemistry fans.

When it comes to water, hydrogen (H2) is separated from oxygen in a process called electrolysis. This happens in an electrolyzer, an electrochemical cell consisting of a cathode and anode. By running an electrical current through the water, you can separate it into oxygen and hydrogen gas.

Fans of Department of Energy originals can see the process mapped out above. But for people who like to keep it old school: 2 H2O (l) → 2 H2 (g) + O2 (g). All that electrolyzers need to run is electricity and water, and the only byproduct is oxygen. The hydrogen they make is considered green for this reason.

Methane can be reformed to produce hydrogen through a process called Steam-Methane Reforming (SMR) – this is how most of the 10 million metric tons of hydrogen produced in the U.S. every year is currently made. Because natural gas is the feedstock, this process has the potential to be both cheap and dangerous for the environment. In a reformer, high-temperature steam reacts with methane to produce hydrogen, carbon monoxide, and carbon dioxide. An SMR plant emits between 8 and 12 kg of CO2 for each kg of hydrogen produced.

First, the methane is reformed, reflected here: CH4 + H2O (+ heat) → CO + 3H2

In a subsequent reaction in the water-gas shift, carbon monoxide is reacted with water to produce carbon dioxide and hydrogen: CO + H2O → CO2 + H2

Emitters worried about the footprint of SMR can capture the resultant CO2 and sequester it, making their hydrogen blue in the process. The economics of doing so have been substantially improved by the passage of the Inflation Reduction Act in August. The IRA (whose impacts we’ve written about elsewhere) expanded the duration, eligibility, and availability of 45Q tax credits for blue hydrogen projects – increasing the per-ton tax credit from $60 to $85 for sequestered CO2.

We might be missing colors – gold, pink – but you get it: the pathways to produce hydrogen in a clean way are real and numerous.

The cost roadblocks that have existed for green hydrogen producers are disappearing – fast.

The marginal cost of low-carbon power is rapidly approaching zero. That has spurred the question – what industrial behavior changes does that enable? One answer: massive deployment of green hydrogen.

Grey hydrogen has historically been cheap. With natural gas and coal as cheap and readily available inputs, industrial customers could pick it up for as little as $1/kg. However, increasing natural gas costs have pushed the price of grey hydrogen in some parts of the world to higher than $8/kg in October. It was even higher this summer at $10/kg. At the same time, costs of green hydrogen that have been high are falling precipitously. The two biggest drivers of green hydrogen cost are 1) electricity and 2) electrolyzer equipment. When it rains, it pours: both are getting cheaper. The cost of utility-scale solar has declined 82 percent since 2010, and it’s expected to continue. Solar cost an average of $34 per MWh in 2020 – by 2035, it could cost as little as $22. Meanwhile, the cost of a PEM electrolyzer fell almost $2,000 between 2018 and 2020. RMI estimates costs could drop by as much as 70 percent between 2026 and 2030. If you get a sense of déjà vu thinking about the green hydrogen cost curve, it’s because we think it looks a lot like utility-scale solar.

NREL documenting a decade of cost declines in utility-scale PV

Costs are going to go even lower.

Even before the passage of the Inflation Reduction Act, green hydrogen costs were expected to be low due to declining costs in electricity and electrolyzers. Projections estimated green hydrogen in 2030 might go for anywhere from $1/kg to $2/kg. In a post-IRA world, we’re no longer asking whether prices will go low or even how low they’ll go. We’re waiting to see just how close to or below zero they get.

The Production Tax Credit (PTC) offers producers $3/kg for green hydrogen – notwithstanding other regulatory regimes (like California’s LCFS) that make the numbers look even nicer, hydrogen is basically going to be free. In fact, there are many cases where the price of hydrogen will likely be negative.

There are a lot of interesting developments that will come from that, but one thing is certain: we’re going to make a #&$!-ton of hydrogen.

We’re investigating what that will look like across:

  • Use cases (old and new)

  • Infrastructure (production, transportation, storage, etc.)

  • Disruptions to other fuel sources

We’ll try to dissect each of these pathways in the next installment of this mini-series on the universe’s most abundant element.

And if these are things you’re working on, or if you have another view about what this all might mean, we’d love to chat with you – send me a note at alex@keyframecapital.com.

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