In face of soaring gas prices, UK Government urged to reconsider support for blue hydrogen

With natural gas prices more than twice as high as they were when the Government drew up its Hydrogen Strategy last year, Ministers should re-assess whether supporting blue hydrogen production is a sound economic choice, analysts are warning.

In face of soaring gas prices, UK Government urged to reconsider support for blue hydrogen

Winners of three government competitions; the Red Diesel Replacement Competition, the Industrial Hydrogen Accelerator Competition and the Industrial Energy Transformation Fund, have been announced

A new analysis from the Institute for Energy Economics and Financial Analysis (IEEFA) think-tank, published today (24 May), concludes that producing a unit blue hydrogen in the UK at present would cost at least 36% more than the Government stated in its 2021 estimates. The estimates were drawn up ahead of the publication of the Hydrogen Strategy in August.

Blue hydrogen is produced by processing natural gas and then capturing the majority of process emissions using man-made carbon capture and storage (CCS) technologies. Given that more than 90% of global hydrogen production is ‘grey’ – fossil-fuelled with no CCS – proponents claim that blue hydrogen is a more environmentally sound alternative. This is hotly debated, given that CCS technologies at a commercial scale are in their relative infancy.

The UK Hydrogen Strategy’s headline target – for the UK to host 5GW of blue and green hydrogen production capacity by 2030 – was recently doubled to 10GW through the Energy Security Strategy. That Strategy also firmed up the Government’s commitment to a “twin-track” approach, in which at least half of the new generation capacity should be green and the remainder blue. By some calculations, 75% of the low-carbon hydrogen funding it has provided to date has gone to the blue hydrogen sector.

The IEEFA report states that the cost of blue hydrogen production is “highly sensitive to assumptions about the current and future price of gas” as well as being sensitive to the price of carbon and CCS. Green hydrogen, on the contrary, is only like to come down in cost over time as production scales. The cost of generating electricity from wind and solar has already fallen steeply and will likely continue to fall, the report emphasizes.

“Europe is facing three challenges, namely reducing gas prices, offering a secure supply of energy and continuing towards energy transition goals,” said report co-author Ana Maria Jaller-Makarewicz. “There is only one way to meet all of them – reducing gas demand. Investing in blue hydrogen production would do quite the opposite.”

Blue, green, and the role of fossil fuel giants

Several of the world’s biggest natural gas producers have been keen to explore blue hydrogen production, with some green campaign groups arguing that they are doing so as a means to keep gas demands high and water down plans for renewable energy investments. In the UK, interested developers include BP, which is planning a 500MW blue hydrogen plant for Teesside, and Shell and Uniper, which have partnered to add blue hydrogen production capacity at Uniper’s Killingholme power station. A consortium including Equinor is also planning blue hydrogen production at Hull’s Saltend Chemicals Park.

Proponents of blue hydrogen argue that it is easy to scale and, at present, global production prices are lower. The European Commission estimates that green hydrogen production costs currently vary between $3 per kilogram and $6.55 per kilogram, compared with $2.40 per kilogram for blue hydrogen.

However, opponents argue that blue hydrogen production could become a risky investment as the transition away from natural gas and efforts to reach net-zero emissions continue.

And, like the IEEFA, some other organisations are already questioning the long-term efficiencies and economics.

The International Renewable Energy Association (IRENA) has forecast that green hydrogen will reach cost parity with grey before 2035 and is recommending that national governments support green hydrogen as a means of moving away from fossil-fuel-based hostile international geopolitics. IRENA has also produced research outlining how using hydrogen to decarbonise hard-to-abate transport and industrial processes would be more efficient than using it to heat homes.

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