Driving Decarbonization: Lessons Learned from Europe That Can Help Unlock the U.S. Clean Hydrogen Economy
Environmental experts consider decarbonization to be among the most important keys to minimizing the effects of climate change. While the transition to a low-carbon economy may present challenges, it also offers opportunities for innovation, the creation of new jobs, and sustainable economic growth.
Accordingly, the U.S., like Europe and other parts of the world, has put an increased focus on decarbonization across its economy. With the U.S. rejoining the Paris Climate Agreement in 2021, goals have been set to achieve a 100% clean electrical grid by 2035 and net-zero carbon emissions by 2050.
Over the past 10 years, the U.S. has more than doubled its electricity generation from renewable energy sources. In 2022, the share of electricity generated from renewable sources including hydro in the U.S. was about 21%. If you add in nuclear generation, which is a carbon-free power source, the percentage of clean electricity in the U.S. increased to more than 40%.
Clean Hydrogen Can Be a Key Technology for Decarbonization
Conventional hydrogen production, derived from hydrocarbons, emits a significant amount of carbon dioxide, contributing to 2.4% of global greenhouse gas emissions. However, hydrogen’s high conversion efficiency and versatile applications make it a promising alternative to fossil hydrocarbons. To unlock hydrogen’s full potential, sustainable and climate-friendly methods of production must be adopted.
Establishing an intricate cross-sector hydrogen value chain is vital for a sustainable and clean hydrogen economy. The value chain would involve various sectors collaborating to ensure environmentally friendly production, distribution, and utilization of hydrogen. The three key sectors include production, storage/transport/logistics, and downstream applications in power and heat, raw materials, and mobility.
In the production sector, transitioning from “gray” hydrogen (derived from hydrocarbons) to “blue” hydrogen (combined with carbon capture, utilization, and storage technology) and eventually to “green” hydrogen (produced via electrolysis with renewable electricity) is crucial for decarbonization.
For storage, transport, and logistics, hydrogen can be stored in salt caverns and transported through existing natural gas infrastructure, which could be retrofitted for renewable energy transport. Conversion to liquid hydrogen or derivatives enables global supply via ships, rails, and trailers.
In downstream applications, hydrogen can be used for energy applications, substituting traditional fossil fuels in industries such as cement, steel, chemical, and petrochemical. Clean hydrogen-based chemicals offer low-carbon alternatives, and technologies like methanol-to-olefins hold potential for sustainable feedstock production. Hydrogen and its derivatives also find applications in hard-to-electrify sectors like maritime and aviation.
The U.S. Makes Investments in Hydrogen
In the past, hydrogen was not necessarily seen as a potential energy source for the U.S. economy. This is partly because the U.S. has its own oil and gas reserves, making them among the country’s most cost-effective resources.
In contrast, Europe recognized early on that hydrogen could be a cornerstone of a sustainable economy and has actively pursued it in recent years. Spurred by the Paris Climate Agreement, Europe has repeatedly funded hydrogen projects, including those designated as Important Projects of Common European Interest (IPCEI), for which $8.8 billion has been allotted.
However, due to recent government initiatives, the U.S. is an ideal place to build a clean hydrogen production industry, with ample space for renewable energy production sites and the ability to produce low-cost renewable electricity.
IRA Could Create Negative Production Costs for Hydrogen
To successfully kickstart clean hydrogen production, the U.S. has created attractive incentives that investors have only recently started to act on. The Inflation Reduction Act (IRA) was signed into law at the end of 2022 and commits $369 billion in funding for a range of renewable energy projects, including the generation of renewable electricity and the production of clean hydrogen.
The funding and incentives for building a clean hydrogen economy are currently unmatched. The IRA provides funding for clean hydrogen production of up to $3/kilogram (kg). Stacked with the Renewable Energy Production Tax Credit of up to $26/MWh (equivalent to about $1.3/kgH2), the production of clean hydrogen can even reach a point of relative “cost-effectiveness,” ignoring the government expenditure aspect, leading to what are essentially “negative production costs” for producers and consumers of hydrogen. Coupled with existing capability and infrastructure, this could position the U.S. as a worldwide leader in clean hydrogen production.
In addition, the Department of Energy has also provided $8 billion for the development of hydrogen hubs. Through this funding, the U.S. aims to reduce the discrepancy between the high costs associated with producing clean hydrogen and the competitive selling prices in the market.
Lessons the U.S. Can Learn from Europe
In recent years, the European hydrogen sector has taken the lead in advancing innovative technology for plants on a global scale. With many projects in this first wave now under construction, four key lessons can be learned from Europe’s expansion of its hydrogen-based economy.
The Role of Government as an Enabler/Moderator. Funding from multiple sources enables fast scaling. Acting as a middleman, the government can connect companies along the value chain and support cross-border initiatives. While some question this approach, the impact on the pace of change is hard to ignore.
Collaborative Partnerships Across the Value Chain in Hydrogen Hubs. To facilitate the transition to a hydrogen economy, local hubs with producers and consumers must be formed. These hubs allow for shared investments and risks, as well as joint commitment. This helps to lower the high barriers to entry and encourages participation in the emerging hydrogen economy.
Scaling Hydrogen Infrastructure Quickly to Connect Producers and Consumers. To overcome the common “chicken and egg” scenario of new technologies where demand outstrips capacity, it’s crucial to give the hydrogen infrastructure the ability to rapidly scale up. To maximize capacity, it will be necessary to repurpose existing import and export terminals, pipelines, and storage facilities near production sites, or to build new ones.
Long-Distance Hydrogen Transport Capabilities. To unlock the hydrogen economy’s potential nationally and globally, transportation capabilities are essential and should be addressed early on. In Europe, transport via pipelines over medium distances and conversion to derivatives for transport over long distances emerged as the most efficient methods.
The Time Is Now
The U.S. government’s new funding initiative has the potential to shift the momentum of the emerging hydrogen economy. With the right sources of value generation across the hydrogen value chain, this potential could become a reality. Companies will need to find a balance between integrating sustainable business models and contributing to a wider long-term decarbonization strategy.
Now is the time to explore, understand, and invest in hydrogen. Embracing the hydrogen hub concept allows for production and consumption in one location, and early entry into the hydrogen industry enables the pursuit of technological leadership and maximizes opportunities for funding.
—Tony Klimas is president of Horváth USA. Horváth is an international consultancy with more than 1,300 employees in seven countries in Europe, the Arabian region, and the U.S.