Dog days of hydrogen evangelism
Raw economics has blown up cute ideas
Boom gone bust
In July, global oil giant BP quietly backed out of its majority share in a $55 billion green energy hub in Western Australia's Pilbara region.
The original idea was to build enough solar and wind to produce, in addition to abundant electrons, 10 million tonnes of the green ammonia each year1. For the unacquainted, that’s an absolute truckload and a half.
The clean2 fuel would then be shipped overseas via a new $550 million cargo facility being built at Lumsden Point (halfway between Broome and Exmouth) by the WA state government, crucially, with with federal funding.
Alas the project is now all but in the scrap heap alongside many other hydrogen pipe dreams.
Just 6-months earlier, in February, the Crisafulli LNP government in Queensland declined to commit a further $1 billion support of the Central Queensland Hydrogen Project, a similiar ambitious scheme, despite early funding from the Australian Renewable Energy Agency (ARENA). That project too now languishes on the precipice of cancellation.
Australia’s federal energy Minister, Chris Bowen, remains (somewhat) outwardly optimistic for hydrogen’s future - but if you read between the lines he sees it more as an industry policy or job creation scheme then a real part of the net zero solution.
"The Albanese government is firmly committed to seeing Gladstone's economy grow and creating new jobs for the region.
"Green hydrogen plays to Australia's unique strengths and we're unapologetic about pursuing an industry that is recognised as having an important role in the future of manufacturing and energy in Australia, and globally.
"Government support in developing hydrogen opportunities around the country provides additional certainty for projects, however how they progress ultimately remains a commercial decision for the parties involved."
The passive ‘that is recognised’ is the telltale sign here. A hedged bet that’s easily walked back.
So, have we reached the dog days of hydrogen evangelism?
The science is the issue, not the story
The physics of hydrogen production has never kept up with the policy narrative.
The National Hydrogen Strategy, originally written in 2019 by the Morrison Government, proposed hydrogen investments in residential, commercial, industrial, and transport infrastructure - many of which we now know will not come to fruition.
This analysis by the Grattan Institute explains why. Electrolysis to produce hydrogen (i.e. by splitting water into its hydrogen and oxygen molecules) is incredibly energy intensive.
Australia currently does not have sufficiently cheap electricity to produce hydrogen at a cost point to useful for most industrial purposes.
In the vast majority of residential and commercial instances, it is simply easier and cheaper to electrify appliances, rather than converting gas lines and vehicles to run off hydrogen blends.
Some use cases are clearly non-starters
Using hydrogen to power residential homes is a folly. Switching homes to hydrogen requires upgrading major parts of the current gas network, and changing all gas appliances to make them hydrogen-compatible.
Current gas appliances can tolerate only a maximum of ~13 per cent of hydrogen blended with natural gas. Domestic appliances that can use 100 per cent hydrogen (which exist only as prototypes at present) are likely to cost 20-to-30 per cent more than gas appliances do now.
The other fools errand is using hydrogen to power passenger vehicles. While hydrogen powered fuel cells are viable for electric cars (with a small but consistent market share), the technology is competing against traditional EVs that use lithium iron batteries - and their established and growing charging network.
Even excluding the efficiency argument (roughly 90 per cent for EVs vs 35 per cent for hydrogen), the capital costs of building hydrogen refuelling stations is enough to sink the technology. Despite valiant efforts by the likes of Toyota, it’s only a matter of time until EVs mop up their market share.
Even the best edge cases rely on heroic assumptions
Be it blatant industry policy, or a critical national security initiative, making green steel in Australia continues to be a tricky beast. Yes, primary3 steelmaking is emissions-intensive, and yes, hydrogen can replace coking coal as a reducing agent (producing water vapour rather than CO2 as a by product).
But in practice, the economics of this market are brutal.
A tonne of steel made with hydrogen rather than coking coal requires nearly 50 kilograms of the stuff - produced, ideally, by renewables that aren’t needed elsewhere in the grid.
Therein lies the rub. Every kilowatt-hour of electricity diverted to electrolyse water for hydrogen is one not used to directly decarbonise the grid. In practice this ‘second step’ (sunlight to electrons, electrons to hydrogen) is proving a step too far.
This also doesn’t consider the need for enormous battery storage capacity and very carefully designed PPAs to meet minimum supply requirements.
Saul Griffith has been banging this drum for a long while. When discussing hydrogen for steelmaking with David Roberts he explained:
It's just a very expensive way to do everything. We will do some hydrogen, and you need it for ammonia and you might need it for steel making, but only the redox component, not for the energy component.
Griffith goes on to explain it’s only the most rusted on evangelists that are still spruiking using hydrogen as a heat source for green steel:
The energy cost of coal into steel making is about a half a cent a kilowatt hour equivalent in heat. The energy cost of natural gas in steel making is about one cent per kilowatt hour in heat. The Australian stretch goal for hydrogen is $2 a kilogram, which is copied from America's $1 a kilogram, that's six or seven cents a kilowatt hour at the electrolyzer that's before you've transported or shipped it, it'll be 12 cents in any reasonable optimistic estimation.
So you're not going to make steel with a lot of hydrogen because you're going to make steel cost five or six times as much.
Modern electric arc furnaces (EAFs) skip the middle man - producing sufficient heat straight from electrons in the grid.
Export ambitions are really thought-bubbles
Nowhere is the big-H wishful thinking more acute than in Australia exporting hydrogen to the world.
It’s a convenient narrative. Japan has very little land for renewables, and is eager to import green energy. So, can Australia seize the opportunity?
Unlikely. There’s enormous obstacles that fall into two main buckets:
First, hydrogen export is thermodynamically inefficient. Energy is lost at every stage of the hydrogen lifecycle:
Splitting water into hydrogen and oxygen through electrolysis consumes vast quantities of (ideally renewable) electricity, with losses of 25–30 per cent at least.
Liquefying that hydrogen for transport - requiring chilling it to a frigid -253°C - costs another 10–20 per cent of the original energy.
Re-gasifying it on arrival in Japan and converting it back into usable power for the grid incurs further losses of 15-30 per cent.
By the time it reaches an end user’s power socket, only about a third of the original electrons survive the journey.
Second, hydrogen is expensive to move - especially all the way from Australia:
It seeps through metal pipes, corrodes and embrittles storage tanks, and requires specialised cryogenic ships that do not yet exist at scale.
Yes producers can convert it into ammonia (a far more stable compound) which can be shipped more easily. But then it must be cracked back into hydrogen at its destination. That process, too, is costly and energy-intensive.
Australia isn’t exactly know for it’s abundant deep water ports with loads of free capacity (either on the port land itself for new infrastructure or spare berths for ships). Building (or expanding) new ports is a timely and costly exercise, even without clunky environmental approvals.
Through this whole journey, the unit economics are fighting against LNG use cases, which require no new custom built kit.
Niche solutions met with vague policy
So which hydrogen use cases are left?
There’s 2, each full of caveats.
Firstly, producing green steel in a renewable powered electric blast furnace with hydrogen as the redox agent has solid science and a proven industrial track record.
The problem is the economics. The hydrogen has to come from somewhere, and diverting electricity from the grid to split water molecules isn’t all that profitable (especially at prices north of $2).
Secondly, some ammonia production (from hydrogen) is essential for the fertiliser trade, and the shipping infrastructure to transport it already exists - helped by the fact it liquefies at −33°C vs hydrogen’s −253°C).
The good news stops here. The physics of using this technology as a vehicle for energy export by converting the tonnes of ammonia back to hydrogen is unworkable. If Japan (or another importer) wants to must ‘crack’ the NH3 back into H₂, the net result is around 60–75% total energy loss from electricity-to-end-use.
In both cases, hydrogen plays a supporting role, not a starring one.
Despite ad-hoc capital contributions to pet projects, the Commonwealth government has largely hoped private sector business cases will prove up (any) viable pathways for a hydrogen industry.
The Commonwealth’s Hydrogen Production Tax Incentive (HPTI) provides a AUD 2 subsidy per kilogram of renewable hydrogen produced for up to ten years, between 2027 and 2040 for projects that reach final investment decisions by 2030.
Based on a similar scheme to the Inflation Reduction Act in the United States, it aims to sure up projects that have high capital costs today and long-tailed revenues.
Is this good policy? It’s tough to tell, but it likely won’t make a huge difference. The current lowest cost to produce green hydrogen in Australia for domestic use cases (e.g. redox agent or ammonia input) is between $4–6/kg. Best case scenario the HPTI equates to a 50 per cent subsidy, roughly putting the hydrogen use case on-par with LNG.
As more hydrogen projects go up in smoke, capital markets are reaching a quieter consensus: it is indeed easier to just electrify everything.
Heat homes with heat pumps, power vehicles with batteries, make steel with electric furnaces. Reserve hydrogen for what cannot be done more efficiently with electrons.
Let’s hope our trading partners soon catch on.
Australia, for all its sunshine and ambition, cannot rewrite the laws of thermodynamics. Some hydrogen use cases will persist - but these are well and truly the dog days of hydrogen evangelism.
The AREH website hedges its bets on this part, claiming ‘potential for green ammonia production to export customers by mid 2030s’.
Please don’t @ me with the caveats, I know, I know.
Producing steel from scrap only requires an electric arc furnace - no hydrogen involved.