There has been a lot of buzz lately in public and financial circles regarding hydrogen as a transport fuel. In several countries, there are concerted efforts to roll out the fuel as quickly as possible for the transport sector. For example, China intends to have 1 million hydrogen fuel-cell powered vehicles on the road by 2030 – complete with the fueling infrastructure to support them.
In the USA, there is a similar push to roll out hydrogen infrastructure, though nowhere near the scale nor the resource allocation of the Chinese government. At latest count, the USA had only 42 hydrogen fueling stations versus ~130,000 gasoline and diesel fueling points. While this is a totally noble push, the timeframe to provide thousands of fueling locations for hydrogen given our environmental and civil permitting timeframes in the USA and the time to arrange capital funding makes our chances statistically remote that we will be operating 1 million hydrogen powered vehicles (much less 100,000) anytime this decade. To complicate measure, without the solid prospect of having a large vehicle fleet to fuel with hydrogen we fall into a textbook “chicken versus egg” paradox in trying to accelerate the domestic rollout of hydrogen vehicles.
As a result, changing a national fueling infrastructure from the grass roots level up is very unlikely to answer the call of carbon mitigation in the USA. This is obviously a place for government and/or major capital markets players to enter in order to prevent a market-failure due to investment paradox discussed above. Since energy discussions and policy in the USA have become highly politicized, I invite the reader to think of government helping from a Keynesian perspective (if one leans that way) or major independent capital managers like Blackstone, creating investment cases if you are devotee of Adam Smith… but the mission to decarbonize should still be shared goal of all sides of the political debate.
The next consideration is cost…and with cost comes the analysis on the bang-for-the-buck. If we were to develop 1 million vehicles using hydrogen by 2030, what would it cost and what would it give us in terms of carbon footprint reduction. According to our friends at Bureau of Transportation Statistics, Americans drove ~3.3 trillion vehicle miles in 2019 and the 15.5 million commercial vehicles in operation they accounted for roughly 25% of US on-road fuel consumption of 13.5 million bpd * 25% = 3.37 million bpd. In carbon footprint, the commercial fleet emitted a quarter of the 777.5 million mt of CO2 from the transport sector. This means that ~194 million mt of CO2 came from commercial vehicles. We believe that nearly all hydrogen fuel cell powered vehicles will be in the commercial fleet due to their high initial costs and the storage requirements for hydrogen being very bulky. Hence reducing the fleet by 1 million vehicles would result in a savings of 12.5 million mt per year. This roughly the output of 2 large (1000mw) coal fueled powerplants per year.
Back to cost, lets put some straw man numbers out there for what it would take to build out the network:
Single commercial vehicle tax incentive = $25,000 per truck (increase in cost over conventional truck)
1 million trucks = $25 billion in total incentives
2000 fueling stations (must be H2 pipe connected or nearby transport terminal) = $2.5 million subsidy each = $5 billion
Hence getting 1 million of the commercial fleet to flip to hydrogen would cost ~$30 billion for the reduction of ~2 million mt per year of CO2 (simple assumptions – green H2 supplied at same cost as alternative diesel blend). We should expect 8 years of life from each commercial vehicle. Hence, we are looking at 100 million mt of CO2 being abated for $30 billion of investment above and beyond conventional fuel. This gives us a value of $300 per mt for CO2, ignoring cost-of-capital, economic risks, etc. Not bad…but also not great.
This author is of the opinion we should be getting a bigger bang for the buck for our carbon abatement expenditures and that we should be seeking material reduction of our carbon footprint immediately. As an alternative to building a parallel fueling infrastructure for vehicles that will not exist in large number for at least several more years, we should be focusing on deploying hydrogen as a natural gas fuel replacement within industrial facilities and power plants. The biggest advantage is that the investment into the fueling infrastructure can be avoided, minimal retrofit will be required for most industrial boiler and fired heater equipment when blended into the fuel mix below 20%, and immediate results will be available.
Wind energy is a good litmus test for green economics. Would $30 billion be better spent in wind energy than in building a hydrogen fueling infrastructure. Wind costs ~$1.8 million per MW of installed capacity. According to the US federal power generation database, wind generates between 32% and 38% of its installed capacity. Hence $19 billion of wind installation = 16,700 MW of installed capacity = 5833 MW of active generation. Ignoring load shape and trading off coal generation one-to-one, this investment would avoid about 29.4 million mt per year of CO2.
For a contrast, let’s see what $30 billion would buy us in the blue hydrogen world. A greenfield 100,000 mt per year hydrogen plant with CCUS is about the standard size for a new technology Steam Methane Reformer (“SMR”). A going cost for a “design one and build many” rollout of SMRs is ~$400 million per unit. Hence $30 billion would allow the installation of 7.5 million mt per year of hydrogen capacity. We will assume these hydrogen plants will run near 100% utilization (a reasonably fair assumption from those of us who have run industrial hydrogen plants) and that hydrogen will carry a usable energy density 2.5 times that of mixed fuel gases and coal. Since large SMRs generally have enough waste steam to run solvent/sorbent regeneration for CO2 capture and still have power to run CO2 compression for their CCUS units, we will not penalize them further, but we will give them a CO2 rate of 75%. Hence backing out 50% coal and 50% natural gas as plant fuel (for a cross-section of industrial boiler fuel, fired heater fuel, and power generation) would yield a net benefit of 33 million mt per year of CO2 reduction.
Summing up the 3 routes on $ per mt basis of CO2 reduction:
- Subsidizing a rapid rollout H2 fleet ($30 billion to get 1 million vehicles) = $300 per mt
- Alternative 1: Investing that same $30 billion more into more wind generation = $102 per mt
- Alternative 2: Investing that same $30 billion into blue hydrogen and backing out natural gas and coal = $91 per mt
From a sustainable investment perspective, we owe it to our society and to our future to make economically rationale decisions. That is why I firmly believe in the blue hydrogen example being the best path. Wind is an excellent source of energy and will continue to develop rapidly throughout the world (I will provide some insights on this in the future with some rudimentary economics to show its important on the global carbon curve). However, blue hydrogen for industrial use provides us the infrastructure for the future (because we will have a large hydrogen powered vehicle fleet at some point in the future)– while reducing emissions today – at a cost that is 1/3rd of copying China. There is nothing that would be thrown away in developing a blue hydrogen infrastructure – even as green hydrogen becomes the favored technology, its molecules will travel down the same pipelines to the consumers.
Author: Jon Paul Ruggles is a partner at Inddevco and an energy expert