Five key challenges for large-scale deployment of hydrogen

Hydrogen fills an important gap in energy and chemical systems and can support global decarbonisation efforts. Australia is well placed to participate in such a ‘hydrogen economy’. As a nation with a large land area and favourable renewable resources, the most likely role for Australia will as a large-scale producer of green hydrogen and its derivatives. This includes the potential for embedding green hydrogen in bulk commodities, such as fertilisers and steel.

The utility value of hydrogen stems from its versatility as an energy carrier, storage medium, and chemical feedstock. However, the energy efficiency of hydrogen pathways is generally lower, and the cost higher, than for direct electrification. Decarbonization should be seen as a dual electricity-hydrogen strategy – electricity is more efficient but less versatile; hydrogen is less efficient but much more versatile and portable. Taken together, a dual electric-hydrogen strategy, underpinned by low-emission primary energy, promises to transform fossil fuel-based energy systems into a low-carbon ‘hydrogen economy’

However, production and use of hydrogen is not without its challenges. The major challenge at this stage is lowering the cost of hydrogen production and uses, initially to enable niche deployment, and evolving towards broader applications and large-scale deployment.

Much of the effort in the last four years has been directed towards research and pilot-scale projects. Although hydrogen technologies continue to evolve, there is collective view that there is a need to move beyond pilot projects. The next stage of deployment needs to be commercial scale projects that can capture economies of scale and the associated learnings of large-scale deployment.

Several lessons have emerged so far.

• Securing offtake agreements is essential for securing project funding. There is a plethora of hydrogen supply projects in the pipeline, but most without a matching set of offtake projects. First-mover projects seem to be those that have secured offtake as part of an integrated system. One example is Project Yuri, which is an integrated renewable energy, hydrogen electrolysis, and ammonia facility.
• Secondly, without sufficiently high carbon price and decarbonisation incentives, hydrogen solutions are currently uneconomic. This will likely necessitate more complex and diverse funding arrangements, including a mix of equity, debt, concessional debt, and grant funding. Companies seeking first-mover advantage need to focus on building a revenue stream ahead of profit.
• Thirdly, many companies operating in the hydrogen space are focused on one or more elements of the overall hydrogen supply chain. Such a strategy is viable in mature industries for which success relies on competitive advantages in one or more product niches. At this early stage of hydrogen commercialisation, the weakness of such a strategy is the immaturity of a merchant hydrogen ecosystem. At this early stage, commercial success is likely to accrue to those providers that can deliver integrated solutions rather than piecemeal solutions.
• Fourthly, it is important to differentiate between a top-down perspective via government policy, and a bottom-up perspective via commercial firms. From a national and international perspective, hydrogen features strongly in future decarbonisation pathways. The role of government and institutions is to enable such pathways via policy, legislation, and funding. From a birds-eye view, there is a role for analysis, long term planning and optimisation. But the sheer scale of the decarbonisation challenge via hydrogen is daunting. On the other hand, firms need to develop business cases that will enable viable hydrogen use-cases, which will hopefully develop into a portfolio of products in the hydrogen space. From a business perspective, the sheer scale is an opportunity.
• Fifthly, as a higher cost energy carrier, niche deployment as a premium solution is likely to be more successful initially than large scale export. The nature of hydrogen as an energy carrier vis-à-vis fossil fuels means that it is likely to remain higher cost than comparable fossil fuel-based solutions.

Finally, we need to collectively develop and implement strategies that can bridge the gap between where we are now, and where we need to be in a future decarbonised world. An associated challenge is developing, and being responsive to, the many ways in which a hydrogen economy might develop. Much uncertainty remains.

Graham Palmer is a Research Fellow at Monash University. He is one of the authors of “Optimising Renewable Generation Configurations of Off-Grid Green Ammonia Production Systems considering Haber-Bosch Flexibility,” published October 2022.