CCL does not advocate any particular technology or approach to decarbonising the UK’s economy. We simply propose to make fossil fuels more expensive so that alternatives (from loft-insulation to nuclear fusion) can thrive. So, you may think that this week’s announcement, by the UK government, of a strategy to promote development of hydrogen is not really of direct interest to us. I disagree because the associated government consultation is an opportunity for us to promote carbon pricing.
I should first say a few words about the hydrogen economy itself. Green hydrogen involves using excess renewable energy (e.g. from a windy afternoon in a sunny summer) to generate hydrogen gas by electrolysis of water. This is not a very efficient process but, as the alternative is to shut down expensive solar and wind farms, it’s a good way to use the spare power. The hydrogen can then be used for hard-to-decarbonize purposes such as heavy transport, ore-processing and space-heating. The hydrogen can even be stored and burned later in power stations to provide clean, backup electricity when renewable energy falls short of demand (e.g. on a calm winter’s evening).
Green hydrogen is not the only low-carbon route to this hydrogen economy. So called blue-hydrogen involves the, currently standard, hydrogen manufacturing technique of obtaining it from natural gas. The process produces carbon dioxide as a side product and this is currently just fly-tipped into the atmosphere. But it could be captured and permanently stored geologically. This is a cheaper way to make low-carbon hydrogen than hydrolysis but price-projections suggest this will no longer be true by 2030 because of the plummeting cost of renewable electricity.
In fact, those same price projections imply that, by 2050, green hydrogen should be cheaper than natural gas and cheaper than the coke currently used for smelting iron ore. If these price predictions are correct then the hydrogen economy is coming anyway, regardless of government policy or of carbon pricing.
However, decarbonisation from 2050 is simply too late. If the UK is to get to net zero by 2050, and if hydrogen is to be part of the journey, we need it to become economic much sooner. And that’s where carbon-pricing comes in. A back of an envelope calculation (see below) shows that hydrogen would be a cheaper energy source than natural gas if we have a carbon-price of £130/tonne CO2 in 2030. We could get to that by starting at £15/tonne next year and increasing it by £15/tonne each year.
Using hydrogen instead of coke for ore-processing comes to a similar conclusion. It’s going to be economic anyway by 2050 but, to make it economic in 2030, we need a carbon price. The price needs to be at least £50/tonne CO2. A price increase of £15/tonne every year would make green hydrogen better value than coke in the mid 2020s. Goodbye Cumbrian coalmine, hello Cumbrian solar-powered hydrogen plant?
**And here’s the back of an envelope**
School chemistry tells us that 1 tonne of CO2 is produced by burning 390 kg of methane. It also tells us that we could get the same amount of energy by burning 180 kg of H2.
Wholesale natural gas prices fluctuate a great deal but typical prices over the last few years have been around $10/MBtu. Furthermore, we need 21.5 kg of methane to generate 1 MBtu of heat and so these numbers imply methane prices are about $0.50/kg. Hence, one tonne of CO2 is produced by burning 390kg x $0.5/kg = $185 worth of natural gas.
Green hydrogen, on the other hand, currently costs about $3/kg although this price is expected to fall to $2/kg in 2030 and to $1/kg by 2050 (S&P Global, 2020). Thus, today, buying 180kg of hydrogen to replace the fossil energy associated with a tonne of CO2, would cost $540. However, this will fall to $360 in 2030 and to $180 by 2050.
Hence, to make hydrogen competitive with natural gas, in 2030, requires a carbon price of $360 – $185 = $175/tonne CO2. That’s about £130/tonne.