MOSCOW, 05 Oct 2021, RUSSTRAT Institute.
The issue of complete displacement of all types of fossil fuels by hydrogen in the global energy sector (and, accordingly, in the economy) is currently acquiring a strategic character. If experts’ forecasts of significant successes of the new global trend in the next 15 years, and absolute ones by the turn of 2040-2050, are correct, this means a fundamental transformation of the entire world economy.
For example, according to OPEC’s data for 2018, the total world economy consumed 98.7 million barrels of oil per day for all purposes. Including 44.4 million barrels accounted for the needs of motor transport, 13.4 million – for petrochemicals, 12.8 million – went to industry, 6.5 million – to aviation, 4.9 million – to electric power, 4.1 million – to sea transport, 1.8 million – to railway and other modes of transport and 10.8 million barrels were spent on other needs.
According to the forecasts of the supporters of the “new energy transition”, all of these components, with the exception of petrochemicals and, probably, other needs, will be successfully replaced with hydrogen. This means a drop in global demand for “black gold” by 76%, which will result in the collapse of the oil industry and the collapse of the economies of all countries critically tied to oil revenues.
Similar are the prospects for coal, the volume of consumption of which is expected to be reduced to zero, and natural gas – 3.918 trillion cubic metres of global consumption of which (Rystad Energy data for 2020) also account for more than 65% of electricity generation (24% of the total global electricity generation) and providing the population with heat.
The rest is spent on the production of plastics and other chemical products, therefore it will remain even in the worst case. But this will also mean a multiple, several-fold, and landslide in temporal rates, drop in demand for “blue fuel”, entailing negative economic and geopolitical consequences, similar in meaning to the results of the “refusal of oil”.
On the other hand, in their plans and forecasts, the apologists of “total hydrogen energy” explicitly ignore the obvious facts and, in some places, even the laws of physics. The lion’s share of their calculations are expectations, based for the most part not on objective facts, but on considerations of a populist and political nature, often mixed to the point of complete indistinguishability.
Thus, there is a need for a comprehensive structural analysis of the issue of the real prospects of hydrogen energy and their impact on the long-term political and economic strategy of the Russian Federation.
Ideological prerequisites of the concept of “hydrogen energy”
The formal reason for the “desire of the world to switch to hydrogen” is officially named as the need to combat global warming. Although the scientific calculations cited in its justification have serious signs of bias, however, in general, the world scientific community believes that the average temperature on the planet is rising and this leads to large-scale global changes. From the increase in the actual average temperature, and the shift of climatic zones caused by this, to the melting of glaciers, leading to an increase in the level of the world ocean.
If its level rises by one meter, Venice may disappear from the face of the Earth, if by two meters, Amsterdam and 80% of the territory of the Netherlands will go under water. Growth of 2.5 meters will completely flood Hamburg and other German cities located in the floodplain of the Elbe at a distance of up to 100 km from the modern coastline.
A similar fate awaits S.Petersburg. An increase of 3 meters will “wash away” Los Angeles, San Francisco, New York, New Orleans and other US settlements in a strip up to 200 km inland. If the ocean rises by 5.5 meters, London and the vast majority of the territory of the British Isles will go under water. At 6.5 meters, Shanghai and 70% of Western Europe will “wash away”. The destructive consequences of this process will also affect the territory of the Russian Federation on a large scale.
It is quite logical to assume that as a result of all of the above, a significant part of the world’s population will suffer. According to forecasts, in the third quarter of this century, three quarters of the population of Europe and the vast majority of the inhabitants of Africa will have to look for a new place to live, since, in the event of an increase in the level of the world ocean by 7 meters or more, its entire central part will become the sea. The scale of economic and humanitarian damage does not lend itself to a clear assessment at all.
Although there is no complete consensus on this issue in the scientific community, nevertheless, it is officially considered that the reason for this is global industry, which emits about 33 gigatons of CO2 into the atmosphere and makes the main contribution to the formation of the “greenhouse effect”. Hence, it is concluded that there is a need to drastically reduce emissions, ideally to zero. Primarily in the energy sector, steel production and other energy-intensive industrial processes.
Political and economic prerequisites of the “hydrogen energy” concept
In addition to “environmental protection”, the concept of a mandatory transition “to hydrogen” has two other strong reasons. The first of which is economic.
So, in particular, the volume of total exports of goods and services of the European Union for 2020 amounted to $6.27 trillion. And imports – $6.21 trillion. Due to the exhaustion of markets free for economic expansion, the policy of economic sanctions and other factors, the European economy is losing profitability. Moreover, about a third of import costs are accounted for by energy carriers, in which foreign supplies already account for 75% of the total consumption of the EU and have a persistent tendency to further growth.
According to the political leadership of the European Union, such a development threatens to destabilise the European economy and an unacceptably high risk of becoming completely energy dependent on oil and gas exporting countries. This at any moment may result in the loss of the EU’s political independence.
In addition, an attempt to transfer European energy “to gas” in order to get away from “oil dependence”, which amounted to 86% in 2015, and then the implementation of the European Energy Charter, to transfer gas trade from long-term contracts with fixed obligations to “free market relations”, ended in failure. The current quotes on European gas hubs have reached $838.2 per thousand cubic meters, which is three times higher than the usual comfortable level, and is completely destructive for the European economy as a whole.
A similar, though somewhat different in some details, situation is observed in the United States.
Hence, the Western world is becoming convinced of the need for an early transition to some other source of energy, which Europe and the United States could produce in unlimited quantities independently. Thereby completely abandoning the import of any energy carriers.
In addition, the concept of “switching to clean energy for the sake of saving the environment” creates prerequisites for restoring the global dominance of the collective West over the rest of the world through the imposition of a “carbon tax” on other countries.
Its idea boils down to the introduction of additional import duties on any goods and services related to the use of “dirty” energy sources and/or raw materials. In particular, if Europe introduces such a thing, according to existing sources, it will mean an increase in duties on the export of Russian goods to the EU by another 16%. In value terms, they will result in a loss of profitability of Russian exports to Europe, according to various estimates, from 1.1 to 7 billion euros per year. In particular, we will lose €655 million of profit on the export of iron and steel, €398 million on the export of nitrogen fertilisers, and gas and oil supplies may stop completely.
However, it’s not quite right to reduce everything only to money. The carbon tax will allow the West to effectively strangle the economy of any competing country with it, automatically reducing its profitability, and therefore increasing the level of poverty there. Up to the point of undermining the ability of these states to continue fulfilling social obligations to the population.
In essence, the carbon tax becomes a kind of “poverty tax”, stimulating an increase in the gap between the standard of living of “clean Western countries” and all “dirty others”. And since poverty will force the “losers” to remain within the framework of “dirty”, but cheaper, energy, they will lose financial resources for technical modernisation and will be forced to turn into a financial colony of the Western world, since there will simply be no one else to sell goods and services to them. Economic backwardness will begin to preserve the technological one, which, in turn, will further strengthen the economic one, and the circle will be complete.
In fact, this will lead to the formation of technological imperialism. The countries of the first world have chosen such a political and technological instrument of putting pressure on the rest from the point of view of the global climate agenda. The tool has been tested and is working effectively, the importance of the “green” agenda will only increase.
Practical steps to implement the “hydrogen economy” concept in the EU
It should be emphasised, as was shown in the previous section, the concept of “hydrogen energy” consists of two interrelated aspects: geopolitical and political-economic.
Despite the declared unity of the collective West, the United States is doing little in the practical sense of its implementation. The main focus of their efforts is aimed at seizing leadership in establishing international “anti-carbon rules”, with the help of which Washington intends to restore and strengthen its shattered world hegemony.
Unlike the United States, the European Union mainly concentrates on practical steps to implement an “ecological energy transition” in order to form an innovative “hydrogen economy” in the EU. Therefore, next we will consider mainly European steps in this direction. Moreover, it is the European Union that is one of the leading buyers of Russian energy carriers, as well as goods and services produced in the Russian Federation.
The basis of European efforts to accelerate the transition of its economy to hydrogen is the HyDeal Ambition program, which involves increasing the production of so-called “green hydrogen” by electrolysis of water using renewable energy generation.
Currently, hydrogen of all kinds (green – from water through electrolysis using clean renewable energy, grey – from fossil fuels, including natural gas, without CO2 capture, brown – from brown coal, black – from coal, yellow – using “dirty” electricity, blue – using steam reforming of methane and CO2 burial, pink – electrolysis using atomic energy, turquoise – using thermal decomposition of methane and obtaining solid carbon instead of CO2, and white – a by-product of industrial processes) in Europe, about 800,000 tons are produced in total.
The implementation of the HyDeal Ambition program should increase the volume of production of (overwhelmingly “green”) hydrogen to 3.6 million tons by 2030 and 10 million tons by 2040. Within the framework of this plan, 95 GW of installed solar power and about 70 GW of wind power are expected to be launched on the Iberian Peninsula over the next ten years in order to power 67 GW of water electrolysis plants with the energy they generate, which are also expected to be built in Southern Europe, as well as in France, Germany, Belgium and the Netherlands. Within the framework of the HyDeal Ambition, 10 GW of installed capacity of new solar power plants should be commissioned in Spain alone and only by the end of 2021.
The implementation of the HyDeal Ambition program involves:
- Solar energy project developers: DH2 / Dhamma Energy (Spain), Falck Renewables (Italy), Qair (France);
- manufacturers of electrolyzers, engineering companies: McPhy Energy (France), VINCI Construction (France);
- Gas transportation companies: Enagás (Spain), OGE (Germany), SNAM (Italy), GRTgaz (France), Teréga (France);
- Energy and industrial groups: Gazel Energie, subsidiary of EPH (France), Naturgy (Spain), HDF Energie (France);
- Infrastructure funds: Cube, Marguerite, Meridiam;
- Consultants and advisors: European Investment Bank, Corporate Value Associates (CVA), Clifford Chance, Cranmore Partners, Finergreen, Envision Digital, Energy Web.
The “hydrogen strategy” of the European Commission suggests investing up to 2030 in the construction of electric cells should amount to €42 billion. It is planned to allocate another €220 to 340 billion to expand the scale and direct connection to 80-120 GW electrolyzers produced by solar and wind generation. Another €65 billion of investments will be required to organise the transportation, distribution and storage of hydrogen in the EU.
Experiments have also been launched in Europe to convert key sectors of the economy to hydrogen. Primarily in transport and heavy industry.
Germany is the leader in rail transport. Since September 2018, two Coradia iLint trains, operating entirely on hydrogen, have been carrying out regular passenger services on the route Bremerhaven, Cuxhaven, Buxtehude and Bremervörde, along which they have already covered more than 100,000 kilometres.
Their experience was recognised as successful and it was stated that on this route in the federal state of Lower Saxony they are going to completely abandon diesel locomotives, replacing them with 14 trains that generate electricity in fuel cells during a chemical reaction between hydrogen and oxygen by the end of 2021.
And the French concern Alstom, which produces them, has received an order of €500 million for 27 trains, which from 2022 are planned to be used for suburban communication with the Taunus mountain range northwest of Frankfurt am Main. Moreover, by 2030, it is planned to completely transfer all German railway traffic on all the non-electrified highways of the country to hydrogen-powered locomotives.
In turn, Sweden has focused on transferring its steel industry to the complete replacement of fossil fuels (coal and gas) with hydrogen in metal production technology. The Swedish consortium H2 Green Steel (H2GS) in the north of the country is building a steel plant completely tied to hydrogen. The $3 billion project is scheduled to be completed in 2024, and by 2030 it will have to produce 5 million tons of high-quality “carbon-neutral steel”.
And this is not a pure abstract experiment. Since the spring of this year, SSAB has started practical deliveries of “hydrogen steel” to Volvo automobile plants.
In the meantime, the EU is beginning to modernise the infrastructure for the transportation and storage of pure hydrogen, with an eye to fully transferring all heat production in Europe to it, the German company Avacon has launched a pilot project for mixing up to 20% hydrogen with natural gas. The experiment is designed to prove that not up to 10% of H2 can be added to the gas used for heating, as prescribed by current regulations, but twice as much. As a result, CO2 emissions will be reduced, since less hydrocarbon fuel will be burned.
The experiment is being conducted in one of the districts of the town of Genthin in the East German state of Saxony-Anhalt. They chose this place because the gas infrastructure available here is the most typical for the entire Avacon network in terms of its technical characteristics.
According to the management, the purpose of the experiment is also to re-equip the gas distribution network “so that it is adapted to receive as much hydrogen as possible”. In other words, Germany has begun to modernise the gas infrastructure for a complete transition to hydrogen as a fuel for generating energy and heat, with a further focus on the household sector of households.
Economic analysis of the prospects of the “hydrogen economy”
The above leads to two fundamental conclusions. Firstly, the process of the global conversion of the Western, primarily European, economy “to hydrogen” is irreversible. Secondly, although its implementation looks crazily large-scale, technically it is already quite feasible. This is clearly confirmed by the success of the EU.
Thus, the key question becomes the reality of the declared deadlines for reaching “totally carbon-free” by 2030-2040, since the answer to it forms an understanding of Russia’s future strategy in the field of the “hydrogen economy” as a whole and specifies the time frame for its practical implementation.
To understand when and to what extent Europe will or will not be able to implement its “hydrogen” plans, it is necessary to consider in more detail the specific directions of the use of fossil fuels in the European economy.
In the field of rail transport, progress looks achievable most simply and quickly enough. As was noted earlier, railway transportation consumes 1.8% of the consumed volume of oil and about 2.2% of natural gas (excluding the share in total electricity generation).
Based on the fact that the EU consumes an average of 3.82 billion barrels of oil and about 500 billion cubic meters of gas per year, it can be assumed that approximately 68.7 million barrels of oil and 11 billion cubic meters of gas will be displaced by hydrogen over the next 10 to 15 years. This, if we take as a basis the experience of operating Coradia iLint trains, Europe will need up to 400,000 tons or half of the current volume of its own hydrogen production at the moment.
Since the use of pure hydrogen for household needs has not been practically tested yet, it is not possible to evaluate this direction as a whole. However, according to indirect parameters, approximate figures can nevertheless be obtained. According to Eurostat, in 2019, European households consumed 32.1% of all gas consumed in the EU.
Taking into account the results of the experiments, Avacon has every reason to believe that it is achievable to bring the share of hydrogen in the volume of household gas consumption from the current 10% to at least 20%, and in the future up to 30-35% by 2030. Based on which calculations show that the consumption of household gas in Europe will be reduced by approximately 40 billion cubic meters per year, and 3.58 million tons of pure hydrogen will be needed to replace it.
According to the same methodology, switching to pure hydrogen power generation will mean a decrease in demand for fossil fuels in Europe. In particular, about 180 billion cubic meters of gas per year will be unclaimed, and the European Union will need from 8 to 16 million tons of hydrogen to replace them.
The metallurgical industry of Europe produces a total of over 168 million tons of steel per year, spending 25.4 billion cubic meters of natural gas on its production. The conversion of metallurgy to “carbon-free technology” requires the consumption of 14 tons of liquid hydrogen to produce one ton of steel. Consequently, in order to make a complete transition to it of the entire metallurgical industry, Europe will need another 2.352 billion tons of liquid hydrogen.
Even if we assume the full success of the implementation of the Brussels HyDeal Ambition plan, and agree that the European Commission will be able to find somewhere €400 billion of investments for its implementation in the period up to 2030 (i.e. €44.4 billion per year, which in itself raises very big questions about achievability), then in any case, the internal volume of hydrogen production in Europe will have to be 3.6 million tons by 2030 and 10 million tons by 2040. While the estimated need for it to achieve the declared “totally carbon-free economy” will amount to 2.371 billion tons or 237.19 times more.
This means that the ambitious goals declared today are absolutely unattainable in the real conditions of the economic and financial capabilities of the European Union. Europe will not be able to achieve complete carbonlessness either by 2030, or by 2040, or even by 2075. If, in order to reach the output level of 10 million tons per year, Brussels needs €400 billion of investment, then to increase its volume to 2.3 billion tons, it will be necessary to invest at least €94.8 trillion or at least seven (!) full annual GDP of the EU in modernisation, which is technically impossible.
However, other conclusions also follow from what has been said. Albeit at a much slower pace, the process of hydrogen displacing all types of fossil fuels in Europe will nevertheless continue, and its overall pace will increase. First of all, in the most simple and easily modernised areas, such as rail transport, household consumption and the replacement of fossil fuels in electricity generation.
This means that the EU’s gas consumption will not only continue to grow, it will gradually decrease at a rate of 3-3.5% per year. The total drop by 2030 could reach at least 51 to 100 billion cubic meters. So Merkel’s statement about Germany’s plans to completely abandon the purchase of Russian gas by 2045 has quite good grounds.
At the same time, the desire of both the central authorities of the EU and the leadership of the leading economies of the European Union, primarily Germany, to accelerate the pace of “hydrogen energy transition” in the long term will rest on limiting the volume of physical production of hydrogen. Given the desire of Brussels to immediately form the hydrogen market as “free”, this will mean the long-term high cost of hydrogen as a commodity to levels significantly exceeding the bar of €1.5 per kilogram (taking into account delivery and storage), as stated in the documents of the HyDeal Ambition program.
Even at these prices, a ton of “hydrogen steel” at cost is 2.9 times more expensive than its “dirty” version obtained using coal and natural gas. Consequently, further prices for steel and its derivatives will also inevitably go up.
For example, the basic model of the Volvo XC90 T5 SUV is sold in the United States at a price of just under $50,000, from which $4,125 (8.25%) accounts for the cost of used steel. Thus, when it is manufactured entirely from “hydrogen steel”, it will increase the cost price by $7,837, or, taking into account other expenses and profit margins, it will force the price of the car to be raised to $62,000-65,000 for the end user.
And this is only the most optimistic scenario. Calculations show that even when using the cheapest of the currently existing types of energy sources in electrolyzers, without capturing and disposing of CO2, the cost of a kilogram of hydrogen does not fall below €2. Transportation and storage add another €0.5 to €0.72 to this figure. And in the case of RES generation, the total cost of hydrogen does not fall below €9-11 per kilogram.
That is, instead of 2.9 times a ton of steel has every chance to eventually rise in price by 7.3 times, which means the price of the same Volvo XC90 T5 is able to approach the mark of $90,000, which is unlikely to have a positive impact on sales volumes. And in the same way, absolutely everything will react in Europe, from the prices of housing under construction, to the cost of elementary tin cans and household foil.
It is easy to assume that the European Union will try to compensate for the decline in sales of European goods and services caused by the rise in the cost of production, as well as the weakening of their competitive positions in export markets, by further increasing the rates of the “import carbon tax”.
And these processes will last a long time. More precisely, it’s possible to say that this is how constant and unchanging trends will look throughout the foreseeable future.
Summarising the above, it should be stated:
1. The “hydrogen economy” is unconditionally a “forever” process. As a result, Russia needs to prepare for radical changes in the existing energy markets and prepare for the struggle to occupy a worthy place in the upcoming “era of hydrogen”. In this regard, the adoption by the Government of the Russian Federation of the “Concept for the development of hydrogen energy in the Russian Federation” is a strategically correct step.
2. The formation of “hydrogen energy” in Europe and the United States will inevitably lead to an acceleration of the self-isolation of their domestic markets into a closed, isolated economic cluster, within which everything, from goods to services, will cost much more “than in backward countries”. The West can protect it from cheap imports from “backward countries” only by introducing a “carbon tax” and increasing its size to an almost prohibitive level.
On the one hand, this is bad, since, in particular, 35.7% of Russia’s total exports still focus on Europe. Moscow will have to look for other markets, since paying a “carbon tax” to the West is fraught with undermining Russia’s national economy, and therefore poses a threat to its national security as a whole.
But at the same time, the West will be forced to “defend itself against cheap imports” not only against the Russian Federation, but also in all other areas, including Southeast Asia and China. Moreover, it will be a hostage of the process even in relation to potential allies in the Indo-Pacific region, in particular, India. This will severely limit its negotiating position with Delhi.
For the same reason, the prerequisites for stimulating China to accelerate the registration of its own closed cluster (RCEP), as the primary market for its goods and services “without carbon tax”, will improve.
Similarly, the trend will affect the rest of the planet’s economic space that is not part of the “western” economic cluster. For Russia, this improves the opportunities for economic and political expansion, both in terms of forming its own cluster (which should certainly become one of the country’s main strategic goals for the next decade), and in the direction of expanding economic ties with the Asia-Pacific countries and the “Chinese cluster”.
In other words, Asia and Africa are becoming the main areas of sales of Russian goods and services. And we have no more than ten years left for their formation and expansion.
3. It should also be noted that the formation of the “western” cluster will cause an increase in significant internal stresses in it. The proceeds from the “carbon tax” will most likely go to the EU central authorities in Brussels, the leading economies of the European Union (Germany, France, Belgium, the Netherlands, Austria, and some other non-EU European countries) and the United States. But the Eastern European limitrophes will practically not receive it, which, against the background of a sharp and incessant rise in the cost of living, will inevitably begin to increase the lag in their material standard of living from the “average European” and even more so from the level of the leading EU economies.
This, in the end, will spur internal discontent there, including with the desire to get out of the “plundering union”. Most likely – in the form of joining the Polish “Three Seas Initiative”. Although the emergence of the “Three Seas” does not correspond to Russian interests, and Russia should actively hinder this process, however, the trend of the disintegration of the current configuration of the EU should be helped in every possible way.
4. The emerging trends in the closure of Western, primarily European, markets for Russian goods and services form a paradox. It will be unprofitable for Russia to supply its industrial goods and services obtained using traditional fossil energy carriers there. This will force us to reduce their exportation in this direction.
But at the same time, the implementation of the strategy of transition to a “hydrogen economy” there will create an acute shortage of hydrogen in Europe, which will result in a significant, if not explosive, increase in the market price for it there. When implementing the adopted “Concept for the development of hydrogen energy in the Russian Federation”, Russia should focus on expanding the production of the “green” version of hydrogen, the export of which to the EU will not be subject to the “carbon tax”. And its acute shortage in Europe will force the EU authorities to agree to the expansion of Russian supplies. Thereby providing us with a new source of export income, as well as stimulating the development of our own economy – both traditional financial and technological.
Moreover, in addition to profits, the expansion of exports of “green hydrogen” to the EU will stimulate the expansion of the scale of hydrogen introduction there as part of accelerating Europe’s full transition to a “hydrogen economy”, thereby accelerating and increasing the scale of the negative internal economic and political consequences for the “western cluster” noted in paragraphs 2 and 3.
5. Russia’s adaptation to the new realities of the “hydrogen economy” is a forced measure for Russia (and many other countries). Objectively, the current state of energy based on fossil resources for the period at least until the end of this century is quite comfortable for us. And the economic capacity of markets outside the “western cluster” will remain sufficient for a long time to sell goods and services that are “dirty” from the point of view of the “hydrogen economy”.
This creates a serious risk of stimulating the creation of two separate economies in Russia, one “based on fossil energy” and the other “hydrogen”. Moreover, they are likely to find themselves in competition with each other even in the domestic Russian market.
The problem is that creating an industry that is completely dependent on sales only to Europe (more broadly, only inside the Western cluster) is strategically fraught with becoming dependent on politically motivated steps made by the European and American authorities, as is the case today with regard to Russian gas projects. Only if Russia now has the opportunity to reorient sales to other markets, then the European hydrogen market will be the only one. This means that we will become vulnerable to potential sanctions pressure.
At the same time, the domestic Russian demand for hydrogen will not be large, since the “hydrogen economy” loses to the “fossil economy” in terms of production costs in the energy sector.
It is advisable to stop the problem by stimulating the advancing rate of increasing the overall energy efficiency of Russian industry and the planned targeted transfer “to hydrogen” of those industries where such a step will not lead to a noticeable increase in final prices. In this sense, Russia, for example, needs to adopt the German experience on the introduction of hydrogen in railway transport.
This will create prerequisites not only for the expansion of domestic demand for hydrogen, thereby reducing the dependence of “hydrogen production” on export markets, but also create the necessary conditions for scientific, technical and practical production progress in the field of technologies for the development and mass production of Russia’s own hydrogen transportation and storage equipment. Thereby further reducing the scale of our dependence in this area.
Separately, it should be noted the expediency of accelerating R&D in the field of improving the energy efficiency of hydrogen fuel cells, with the aim of both achieving technological superiority in this area and its patent protection, and establishing their mass production. Including for export.
And in general, an increase in the overall energy efficiency of Russian industry will definitely have a positive impact on the competitiveness of any domestic goods and services, both in domestic and foreign markets.
6. It should also be understood that the growth rates of renewable energy generation announced in the West, and partly in China, are guaranteed to also cause a sharp increase in demand for copper and rare earth elements, whose reserves are limited. That will cause not only an increase in prices for them, but will exacerbate the struggle for control over their deposits. It is necessary to prepare for it now. First and foremost, in the African direction, as their main natural storehouse at the moment and for the foreseeable future.