Green hydrogen is a key element in any decarbonization strategy. All major and emerging economies are investing heavily in green hydrogen, as well as in international energy partnerships to secure long-term imports. This creates new opportunities for industrial development, particularly in countries that are well-endowed with renewable power sources. If these countries create the appropriate framework conditions, they can develop promising new industrial clusters by investing in renewable power projects and electrolysers first to then gradually attract energy-intensive steel or base chemicals investments, in addition to manifold downstream industries that use green steel or chemical feedstocks. Proactive strategies are therefore indispensable to fully reap these new opportunities for industrial development.
The fuel of the future
Nearly all countries have committed to decarbonize their economies in the coming decades. Likewise, many large corporations have announced plans to cut their carbon footprint to net-zero. This requires massive upscaling of renewable power to replace fossil fuel-based power plants and still meet the increase in global demand for electricity. Clean electricity can then be used to electrify a wide range of end-uses, including road transport, heating and cooling. At the same time, a considerable share of renewable energy will need to be dedicated to the production of green hydrogen to substitute fossil fuels in “hard-to-abate” activities that cannot be easily electrified. This mainly applies to the production of steel and base chemicals as well as in aviation, shipping and long-haul trucking. Green hydrogen should be considered complementary to electrification, and not substitutionary.
Demand for green hydrogen is expected to expand rapidly. According to IRENA’s 1.5°C Scenario1, demand for hydrogen will amount to 74 EJ, 21 per cent of the world’s total final energy consumption by 2050, of which two-thirds will be for green hydrogen. Many governments and large corporations have recognized the strategic importance of green hydrogen and have started to invest heavily. Their enthusiasm is shared by the private sector, which has registered a growing number of industry alliances and investments.
Green hydrogen is still expensive, and at the current cost, it cannot compete with hydrogen produced with fossil fuels. This, however, is expected to change for three reasons: first, carbon pricing increases the cost of alternative fossil fuels, and public and private standards are making the use of low-carbon alternatives compulsory; second, the global average price of renewable power is rapidly decreasing, namely by 80 per cent since 2010; third, technological innovation and economies of scale are expected to substantially reduce the cost of electrolysers and improve the efficiency of renewable energy conversion. Based on these expectations, IRENA estimates that green hydrogen will become cost-competitive by the mid-2030s, significantly sooner than blue hydrogen (figure below). Several large corporations have set the target of producing green hydrogen at USD 1-2/kg as early as 20252 based on the same assumptions.
Green hydrogen as an opportunity for industrial development
Because of the heavy reliance on renewable power sources, countries with high solar and wind power endowments are likely to benefit from new industrialization paths created by the shift to green hydrogen. This is good news for many low- and middle-income countries as IEA3 estimates that the most attractive sites for producing green hydrogen on the basis of solar and wind energy are located in Africa, the Middle East, Southern Asia and the Western parts of South America.
There are four main channels through which green hydrogen can, either directly or indirectly, spur industrial development.
Firstly, replacing fossil fuels in the power sector requires huge investments in renewable power. Demand for green hydrogen stemming from hard-to-abate economic activities further increases demand for renewable energy. Thus, solar and wind farms, geothermal and hydropower projects as well as the use of biomass will attract enormous investments in favourable locations. Technological capabilities and industrial clusters can be developed to manufacture (parts of) the required equipment and advance related innovations, e.g. in smart grids and energy storage.
Secondly, the conversion of renewable power into green hydrogen requires investments in electrolysers. While green hydrogen can be easily stored and used directly in some industrial processes, it needs to be converted into higher energy density products (such as methanol or ammonia) for other processes and easier storage and transportation. The figure below illustrates the industrial linkages of renewable power and green hydrogen (eH2).
Thirdly, countries that can achieve abundant production of renewable power, green hydrogen and its derivatives at low cost will inevitably increase their attractiveness for a range of energy-intensive industries, including the steel and chemical industries. These industries, in turn, provide inputs to many downstream industries, from automotive to pharmaceutical and fertilizer industries. As pressure to decarbonize increases, the availability of renewables and green hydrogen is turning into an important pull-factor for the relocation of industries. This “renewables pull”4 is already being observed in the automotive industry, where aluminum parts and carbon fiber production have been relocated to low-cost locations for renewable power.
Fourthly and finally, advanced innovation systems and Industry 4.0 technologies can help countries overcome the costs and inefficiencies associated with green hydrogen production while exploiting the growing market for hydrogen-based technology exports. This includes markets for fuel cell technology, hydrogen-based steelmaking technologies and synthetic fuels using a range of digital solutions such as big data analytics, digital twins, sensoring, artificial intelligence and block chain-based traceability systems.
Exploiting the opportunities: strategy matters
The trend is clear: green hydrogen will be a key element of the future global economy. Governments, industry and other stakeholders need to adapt their industrial development strategies to the new framework conditions. This is a challenging task and calls for multi-stakeholder strategies5.
Societal stakeholders need to determine which of the different industrial pathways outlined above can be exploited in line with their factor endowments, geographical advantages and technological capabilities. Each pathway requires different investments in renewables, electrolysers, grids, ports and pipelines. Taking the right decisions is particularly difficult given the uncertainty associated with prices and technologies. Demand for green hydrogen depends on a range of political decisions in major economies: on the level of carbon prices, support for renewable energy deployment, acceptance of alternatives, such as carbon capture and storage and nuclear energy, willingness to adopt protectionist measures, as well as geopolitical considerations of energy security. All of these factors can either accelerate or slow down demand. Moreover, green hydrogen deployment depends on complementary large-scale investments in new technologies, for example tankships, thereby generating uncertainty about transport options and costs. For a country to successfully exploit renewable energy and green hydrogen to attract energy-intensive industries, a wide variety of factors affecting the choice of location for such industries must be considered, from inter-industry linkages and availability of a qualified workforce to investment climate issues. Finally, safeguards are needed to ensure that green hydrogen industry development does not exacerbate existing water scarcity or land use conflicts. That is, a range of new regulations must be adopted, and countries need to join international initiatives to develop common safety and environmental standards.
An increasing number of countries are developing green hydrogen roadmaps and strategies. Most industrialized countries will be net importers of green hydrogen. Their strategies aim to decarbonize their industries, secure the import of green hydrogen, shield their industries from unfair competition from countries with less ambitious decarbonization policies, and exploit early mover advantages. Some countries – Australia, for example – are home to energy-intensive industries and plentiful renewable power sources. Those countries are particularly well-positioned to reap early mover advantages in green hydrogen.
Green hydrogen is a promising export option for many developing countries. These countries usually have smaller domestic industries and demand for green hydrogen is therefore lower, but many of the countries are endowed with abundant renewable energy resources. An increasing number of potential exporters are also developing green hydrogen strategies, including Chile, Uruguay, South Africa, Brazil, Saudi Arabia, Ukraine, Turkey, Viet Nam and Morocco6. The strategic choice here is whether to envisage green hydrogen as a new export commodity (corresponding to our channels 1 and 2) or as a stepping stone towards a diversified and knowledge-based economy (channels 3 and 4). In the first scenario, countries well-endowed with solar, wind and other renewable power resources will need to encourage investments in energy parks, electrolysers and related feedstock as well as the required export infrastructure, including pipelines and ports. Such investments, if well-managed, can boost export revenues; yet they tend to be capital-intensive, with very limited effects in terms of employment creation and technological learning. In the second scenario, low-cost renewable power and green hydrogen are taken by governments as the basis for creating industrial clusters and value chains with higher value added. Other countries such as South Africa and Brazil have already settled on a hybrid option by engaging in both pathways.
Under these premises, irrespective of whether they are renewable energy rich or poor, countries need to proactively adapt their industrial strategies now to anticipate what the increasing global adoption of green hydrogen will imply for their industrial development in the coming decade. Green hydrogen is here to stay and no country wants to be left behind.
An adapted article has also been published on the Sustainable Global Supply Chains Network.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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