Hydrogen — The law of large numbers

There have been several developments and discussions recently, I’ve been a part of few, around the growth of the hydrogen economy. It’s great to see these, as hydrogen will be one of the tools in the toolkit for achieving decarbonization.

Many of these discussions draw parallels to growth of other renewable technologies, particularly solar and wind, that will also drive the growth of hydrogen. While true, it’s also important to understand the scale of these changes and corresponding opportunities.

Worldwide consumption of hydrogen today is ~70 million tons per year, of which ~96% if used for ammonia production and refining applications. Almost 96% of the hydrogen today is produced from fossil fuels via the steam methane reforming process. Theoretically, if we’re to say all of the hydrogen has to be green, what will be the implications on two key cost drivers — energy and electrolyzers?

In the best case scenario of electrolyzer efficiency of ~70%, about 50 kWh of electricity is needed to produce a single kilogram of hydrogen. To produce all of the hydrogen that the world consumes annually via electrolysis, we’ll need 3,500 TWh of energy. To put that in perspective, annual electricity consumption in the US is ~4,200 TWh, of which total renewables generation is ~750 TWh. Based on the DOE’s technical goals, electricity cost is 70% of the total production cost of hydrogen production. Assuming 3.7 cents / kWh of electricity cost, as in the DOE report, it’s the annual electricity cost of ~$130B — a development of 4x the total renewable generation capacity in the country!

The other aspect is needed electrolyzer capacity. With some of the recently announced projects by leading electrolyzer manufacturers, each MW of electrolyzer produces almost 450 kg of hydrogen per day. To produce all of the hydrogen via electrolysis, it will

need an installed capacity of ~30TW! To put that in perspective, nel, one of the leading electrolyzer manufacturers is expanding the capacity from 40MW to 360MW, and then subsequently more than a GW. As the industry scales, it’s expected that learning rate will result in regular cost declines, as seen in solar, batteries, and other technologies. Even with a conservation capex assumption of $100/kW, a 10x reduction vs. current costs, it means the capex investment of $3T!

While these investments will happen over years and decades, this back of the envelope analysis highlights the importance of scale and infrastructure financing to enable growth of the sector. One of the key drivers for the growth of solar has been innovations in business models, particularly with PPA and lease. While it’s still early for hydrogen, it will be an important theme as the industry scales. Also like solar, where strong and stable policies were a key driver, we’re starting to see that in the hydrogen sector as well. Couple of recent examples are tens of billions of dollars that are earmarked for hydrogen in the recent European economic package and the announcement of national hydrogen strategy in Germany, which also was instrumental for the growth of the solar industry. Lastly, like solar, as the industry matures, we’ll see more technical innovations, whether it’s at the stack level to lower platinum requirement or increase density; or in storage for example with technologies that lower pressure requirements or lower costs. As the solar industry scaled, it led to growth of key technologies — e.g. DC-DC optimizers, microinverters, and the formation of category leading companies.

In many respects, hydrogen appears to be in a similar stage where solar was almost a decade back. While the economics in applications like forklift pencils out today, heavy duty trucks in the very near future, many others will be over the coming years and decades. In addition to key technology development, it will need financing solutions and policy support at scale. All of these, in the end, will be important as we decarbonize various sectors.