Toward Deep Decarbonization

Transformational technologies essential to the clean energy transition

An FP Analytics Special Report

“In my view, we do not have the luxury to exclude any clean energy technologies if we are serious about addressing climate change.”

—Fatih Birol, Executive Director IEA, April 27, 2021, at the FP Inaugural Climate Summit

In the run-up to the 2021 UN Climate Change Conference (COP-26) in November, this Insider series explores the status of advanced technologies for deep decarbonization and remaining barriers to scale. The reports pinpoint areas for policy action and investment that could facilitate tech development and deployment and materially reduce emissions in some of the hardest-to-abate sectors.

The Deep Decarbonization Challenge

On April 29, Germany’s Federal Constitutional Court ruled the country’s climate law unconstitutional because it placed too great an onus on future generations through post-2030 emissions reductions. Indeed, achieving net-zero carbon dioxide (CO2) emissions by 2050 has been deemed essential to limiting the increase in global average temperatures to 1.5°C or less by 2100, but governments and other decisionmakers are not on track to reach that target. Some 70 percent of today’s CO2 emissions belong to countries with net-zero commitments, but tangible policy action to those ends continues to fall short. Even if all current commitments were implemented and met on schedule, the world would still be on a trajectory to see global temperatures rise by 2.1°C by 2100—an unacceptable and costly outcome.

The ruling by the German court, largely hailed by climate activists and younger generations, gives the government until the end of 2022 to specify binding targets beyond 2030. It gives teeth to the Paris Agreement and sends a strong signal to other governments to get serious. However, the scale and scope of the challenge of fully decarbonizing the global economy is daunting, particularly in the face of growing energy needs for developing countries.

Progress in reducing costs and scaling up deployment of wind and solar power technologies over the past decade offers hope; in 2020, over 80 percent of all new electricity capacity installed worldwide was renewable, surpassing 2019’s record-breaking additions by 50 percent. However, these intermittent generation resources are not sufficient on their own to provide 24/7 zero-emission electricity - and the electricity sector itself accounts for just a quarter of global emissions, leaving major emitting sectors such as transportation and industry (a combined 35 percent of emissions) still in need of solutions.

Batteries and hydrogen have emerged as two promising technologies for enabling this next level of economy-wide deep decarbonization, as they both allow low-cost renewable electricity to be stored and used to reduce or eliminate emissions in applications ranging from cars and trucks to steel and cement production. Realizing this potential at sufficient speed to reach ambitious emissions goals calls for a holistic approach that simultaneously encompasses the development and deployment of technologies on the supply side as well as the scaling up of demand pull from key end-use sectors. For both batteries and hydrogen, this will require not only whole-of-government policy coordination but also increased levels of international cooperation and public-private collaboration.

Batteries: A Family of Do-It-All Solutions for Electrification of (Almost) Everything

Batteries are a core, do-it-all building block at the heart of the energy transition. By providing grid-balancing services and storage for low-cost intermittent energy sources such as wind and solar generation, batteries are enabling the decarbonization and increased flexibility of the electricity system. The promise of achieving a zero-carbon electricity system in the coming decades has led many climate action advocates to embrace a mantra of “Electrify everything,” leveraging cheap wind and solar energy to decarbonize transportation through electric vehicles (EVs) and potentially building heating through heat pumps.

Encouragingly, batteries are taking the same precipitous leap down the cost curve as solar power. Lithium-ion battery prices have fallen by nearly 90 percent from their 2010 average of $1,100 per kWh to $137 per kWh in 2020. This rapid decline in costs has made battery EVs formidable competitors to internal combustion engine (ICE) vehicles much sooner than anticipated. They are already cheaper on the basis of lifetime operating costs for many applications, and BloombergNEF estimates that they will reach up-front cost parity with gasoline vehicles when battery prices hit $100 per kWh in 2023.

Battery Cost Declines Drive Market Penetration

Volume-weighted average pack and cell battery prices in real 2020 U.S. dollars per kilowatt hour.

Source: BNEF

China’s purposeful approach to developing this industry has yielded a substantial head start in dominating the production of this critical technology, following a similar trajectory to its successful development of the solar industry. According to BloombergNEF’s lithium-ion battery supply chain ranking in 2020, China has built up its industry in just a decade, vaulting ahead of long-time leaders Japan and Korea and winning control of 80 percent of the world’s battery raw material refining, 77 percent of the world’s battery cell manufacturing capacity, and 60 percent of the world’s component manufacturing. This success is due in large part to China’s 2009 New Electric Vehicle policy, an ongoing, comprehensive national effort to promote EV adoption through domestic manufacturing quotas.

The industry is still young, however, and the 30-year-old chemistry of today’s lithium-ion batteries is likely to see significant improvements over the next decade. Analysts project rapid uptake of EVs in countries outside of China; S&P Global Market Intelligence projects annual global sales of EVs to more than triple over the next four years to 9.5 million units in 2025, with more than half of this growth coming from Europe and the United States. This global boom and diversification of markets will drive massive growth in the scale and geographic spread of battery-production facilities, which could cut costs in half over the next decade.

The Race is on to Challenge China's Battery Dominance

Global lithium-ion battery capacity by region in gigawatt hours

Other Countries to Lag in Battery Capacity Growth in 2025

Projected global lithium-ion battery capacity in gigawatt hours in 2025. China is projected to have more than five times the capacity of Germany, the next nearest country.

Source: S&P Global Market Intelligence

Following China’s example, EV market development will be the chief driver of this diversification in lithium-ion battery manufacturing, as automakers launch collaborations with locally proximate, integrated cell-to-pack suppliers to minimize transportation costs (which are vastly higher than for solar cells) as well as maximizing reliability of supply and customization for specific vehicle models. For example, LG Chem and General Motors recently announced plans for their second U.S. battery-manufacturing plant, and Northvolt has expanded its partnership with Volkswagen in Germany.

Overall, S&P Global Market Intelligence projects lithium-ion battery production to similarly triple through 2025, led by a tenfold increase in European manufacturing capacity. Its global market share is expected to increase from 6 percent to 25 percent, thanks to long-established conglomerates such as Saft and emerging giants such as Northvolt. This success will be boosted by billions in investments already announced by the European Commission to support construction of battery plants, incentivize EV uptake, tighten emissions regulations, and mandate phasing out of internal combustion engine (ICE) vehicles. The cumulative impact of these policies could enable the European Union to overtake China as the world’s largest EV market in the next five years, according to S&P, and drive similarly rapid gains in battery manufacturing.

The United States, however, looms as a potential wild card in this equation, with ample potential to support the development of its own EV markets, domestic battery-manufacturing capacity, and even domestic mining of select raw materials such as lithium, graphite, and nickel. BNEF currently places the U.S. sixth in its battery supply chain rankings, and the country is already projected to ascend to third place, behind China and Japan, by 2025 (EU countries are disaggregated), thanks to manufacturers such as Tesla, LG Chem, and Panasonic. Moreover, BNEF analysts believe that the United States has a chance to take the top position by 2025 with aggressive policy and market alignment under the Biden administration.

On the raw materials side, potential supply bottlenecks, China’s increasing consolidation of control over critical minerals and metals, and increasing scrutiny over human rights and environmental issues are growing concerns for lithium-ion battery supply chains. Seventy percent of cobalt, a critical material in the cathode of today’s lithium-ion batteries, is mined in the Democratic Republic of Congo (DRC), with as much as 30 percent coming from artisanal mines fraught with child labor and violence. Similarly, the water consumption of lithium production, particularly in underground brine-based South American producers such as Chile and Argentina, is raising questions about the long-term sustainability of today’s mining practices and supply chains.

Assurance and verification of sustainability practices will be essential to garner and retain future leadership in the industry. Environmental concerns are leading to demands from consumers, automakers, and, increasingly, inter-governmental and non-governmental coalitions for innovations to reduce or eliminate these issues. For example, the automakers BMW, Daimler AG, and Ford have recently joined the Initiative for Responsible Mining Assurance (IRMA) with pledges to source only lithium and cobalt mined according to IRMA’s social and environmental performance standards for their EVs. Cathodes that minimize or eliminate cobalt in favor of iron and other elements are also a growing focus for battery producers. For example, Tesla is increasingly using iron phosphate batteries in its vehicles, and Panasonic has announced plans to produce higher-density, cobalt-free batteries for Tesla vehicles within the next three years.

In addition to increased production in Australia, deep-sea mining will help provide access to cobalt in seabeds, estimated to amount to six times terrestrial reserves, and will also generate new supplies of lithium and nickel. Japan has already successfully excavated cobalt from the deep ocean and off its coastal waters, and greater deposits of deep-sea minerals in international waters could be developed at a lower cost than conventional mining while also avoiding human rights issues. This prospect has drawn significant interest from companies, including DeepGreen Metals, recently valued at $2.9 billion, as well as alarm from some environmentalists concerned about impacts on deep-sea ecosystems. The debate is picking up steam as the International Seabed Authority drafts rules for seabed mining for release this year.

Lithium suppliers are also seeking more sustainable modes of production as the industry continues to scale. For example, Chilean lithium giant Sociedad Quimica y Minera (SQM) is seeking IRMA certification and targeting reductions of 50 percent in brine use by 2030 and 65 percent in water use by 2040. A variety of direct lithium extraction (DLE) techniques that replace conventional brine evaporation ponds with chemical processes to separate lithium from other elements are also a source of growing interest, promising to reduce both environmental impacts and production time. Investments are growing in new “green” lithium production from above-ground (and much less water-intensive) geothermal brine resources in the United Kingdom, Germany, and the United States using DLE techniques, potentially yielding major new domestic sources of lithium supply for these rapidly growing EV markets.

Perhaps the most important alternative source of new-battery raw materials is recycling, though it may not materialize at scale until the first wave of mass-market EVs reaches end of life. IHS Markit projects that as much as 48 percent of lithium, 47 percent of nickel, and 60 percent of cobalt needed for global battery markets through 2050 could be met by a threefold increase in recycling. Recycling offers the potential for battery-manufacturing companies to secure a domestic source of raw materials regardless of mining resources or supply chains; it also reduces environmental impacts and potentially lowers costs, depending on transportation and processing expenses. Reuse of batteries also holds significant potential, as EV batteries at their end of life for transport applications typically retain sufficient charging capacity for less demanding grid storage and services applications.

Global Investments in Battery Inputs Ramping Up

Recent announcements of alternative cobalt and lithium supply investments

Jan 2021

United Kingdom

Investment: $5.4 million

In Cornwall, Cornish Lithium announced direct lithium extraction trials in UK coastal waters.

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Mar 2021

Western Australia

Investment: $66 million

In Darwin, Core Lithium began production at the first Australian lithium mine outside Western Australia.

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Mar 2021

Australia

Investment: $304 million

In Adelaide, Cobalt Blue Holdings is de-risking a major cobalt project by securing groundwater allocation to comply with water management regulations.

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May 2020

United States

Investment: California awarded $7.46 million, EnergySource raising $350 million

The California Energy Commission awarded grants to Berkshire Hathaway Energy and Controlled Thermal Resources' (CTR) Hell's Kitchen Geothermal LLC for geothermal lithium projects in the Salton Sea.

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Sep 2020

United States

Investment: Unknown

Tesla announced acquisition of land to pursue lithium mining in Nevada.

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Feb 2021

Germany

Investment: $2.1 billion

Joint Vulcan Energy/DuPont pilot plant announced for geothermal direct lithium extraction in Germany's Upper Rhine Valley.

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Feb 2021

Chile

Investment: $400 million

Pilot direct lithium extraction project developed in San Pedro de Atacama, Chile.

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Apr 2021

Canada

Investment: $2.9 billion

DeepGreen Metals went public, raising capital in order to pursue deep-sea cobalt mining.

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Aug 2020

Japan

Investment: $330 million

Japan's Jogmec successfully excavated cobalt from Japan's coastal waters.

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A truck crosses the flooded Uyuni Salt Flat in Bolivia, site of a future lithium mine, on July 10, 2019. PABLO COZZAGLIO/AFP VIA GETTY IMAGES

Competition and diversification in battery chemistries may also increase alongside a growing diversity in end uses. In contrast to the unassailable dominance of crystalline silicon-based solar panels for power generation, many experts believe there will be room for chemistries and architectures other than lithium-ion in the market, owing to the varied demand for energy storage. For example, electrifying heavy-duty vehicles and other more demanding transportation end uses will require higher levels of energy density, while grid services will require maximizing storage duration.

According to the think tank RMI, “Markets for advanced battery technology will not be a winner-take-all opportunity for Li-ion batteries.” Solid-state battery chemistries such as lithium metal, lithium sulfur, and rechargeable zinc alkaline could reach commercialization between 2025 and 2030, delivering the dramatically higher energy densities required to enable the electrification of long-distance freight trucking and medium-range passenger planes. On a similar timeframe, the commercialization of zinc-, flow-, and sulfur-based batteries is expected to provide alternatives to lithium-ion that could be better suited to stationary storage and grid services applications.

It is still possible that the sheer scale and cost advantage of incumbent lithium-ion manufacturers and supply chains could overwhelm any new battery architectures; even in this case, a steady stream of incremental innovations in advanced lithium-ion battery chemistries and production processes offer ample opportunities to continue reducing costs and improving performance on key metrics for a variety of end-use cases. Similarly, even if non-cobalt and lithium alternatives remain small portions of the market, efforts to reduce the use of these materials and diversify sources of supply can improve the environmental, social, and governance (ESG) performance of today’s supply chains.

The battery industry is once again entering a new stage of its development, and there are ample opportunities for countries with determined and holistic strategies to innovate, collaborate, and compete in the market for this foundational technology essential to the twenty-first-century energy economy. Key elements of such a strategy include:

Research, Development, Demonstration, and Deployment

New and improved battery chemistries: Research, development, and demonstration funding for advanced lithium-ion batteries as well as new battery technologies can help open new markets for storage and establish new competitive advantages. Support for battery R&D has been a growing focus of government support, including the European Union’s EuBatin program, which recently announced $3.5 billion in grants for R&D projects to improve lithium-ion EV batteries with participants including BMW and Tesla, the United Kingdom’s Faraday Battery Challenge, and public-private partnerships supporting solid-state R&D in Japan with Panasonic, Toyota, and Honda and in South Korea with LG Chem and Hyundai. Funding for emerging grid battery technologies is also an area of increasing government support, such as Australia’s recent funding of a demonstration utility-scale flow battery installation.

Manufacturing grants and domestic content requirements: Grants and financing for the construction of new manufacturing facilities, particularly for first-of-their-kind commercial-scale facilities for advanced battery chemistries, can be at any stage of market development. South Korea, home to battery giants LG Chem and SK Innovation, recently announced over $100 million in funding support for a wide variety of EV supply chain innovations, including battery localization. Requirements for domestic battery content in EVs, either as a condition for subsidies or participation in public purchasing programs, can also help spur the development of battery manufacturing and component supply chains, as China has demonstrated with quotas necessitating 80 percent domestically manufactured EV components, including batteries. However, these must be implemented in light of local resource realities and with realistic quotas and timelines to avoid unnecessarily constraining market development, which could be an issue for President Biden’s executive order for federal fleets to procure EVs that meet the 50 percent domestic-content “Buy America” threshold.

Emerging battery recycling and mineral extraction applications: A number of emerging approaches to improving battery mineral supply chain security can benefit from policy support and public-private collaborations. Such efforts include recycling-focused initiatives such as EuBatin’s battery recycling R&D grants and the U.S. Department of Energy’s ReCell Center as well as demonstration of innovative lithium-extraction techniques such as DLE, as supported by the EuBatin program and the U.S. Department of Energy’s newly created Geothermal Lithium Extraction Prize.

Securing Raw Materials Supply Chains

Develop new sources of supply: New sources of battery minerals, including lithium, nickel, and cobalt, are increasingly recognized as critical for national security as well as economic development, fueling mining initiatives such as Australia’s recently formed Critical Minerals Facilitation Office, California’s grants to support lithium mining in the Salton Sea, and the U.S. Department of Energy’s grants to support lithium mining. Countries’ governments and other stakeholders can also engage in the World Economic Forum’s Deep-Sea Minerals Dialogue and the International Seabed Authority’s (ISA) standards-setting process to determine potential environmental risks and potentially set up a viable commercial framework for the deep-sea mining of these minerals.

Ensure supply chain sustainability: National and international bodies must continue working to establish standards for responsible mining of battery minerals, including supply chain traceability and monitoring, as in the European Union’s proposed “Battery Passport” legislation and the Energy Resource Governance Initiative founded by the United States, Australia, Canada, Botswana, and Peru. These and other policy initiatives can leverage work that has already been done by private-sector certification programs such as IRMA and the Responsible Sourcing Blockchain Network, which uses a blockchain-based platform to trace the provenance of mineral supplies and counts Ford, Volkswagen, LG Chem, Huayou Cobalt, and other companies as members.

Maximize reuse and recycling: While battery reuse and recycling may currently be limited, given the early stage of EV adoption, it is important to establish frameworks for the industry so that it can scale up in anticipation of steadily increasing volumes of end-of-life batteries, such as China’s guidelines for battery design and extended producer responsibility (EPR) and the EU’s Circular Economy Action Plan. Key elements include regulations for the transport and recycling of used batteries, the permitting of recycling facilities, requirements for end-of-life battery collection, and EPR policies to direct manufacturers to design batteries for ease of recycling. As recycled materials begin to enter the supply chain, minimum standards for incorporating them in new battery manufacturing will also be needed.

Fostering EV Market Development

Incentives and procurement: Financial incentives for EV purchasers are proven means of bolstering demand, such as the United States’ EV tax credits of up to $7,500, China’s NEV rebates of roughly $1,350 per vehicle plus a 10 percent sales tax exemption, and the variety of purchase incentives found across 20 EU countries. Beyond light-duty passenger cars, electric two- and three-wheel vehicles such as e-scooters and e-rickshaws can be key early-market segments especially in developing countries, making it important to extend incentives to these vehicles, as in India’s FAME scheme, and refine programs as necessary. Procurement support and mandates for electric fleet vehicles, including mandates such as California’s Innovative Clean Transit Regulation and South Korea’s recently announced leasing partnership collaboration with Hyundai for taxis and trucks, can help scale EV production while also reducing fleet operating budgets. Private-sector initiatives such as the Corporate Electric Vehicle Alliance (CEVA) from Ceres can similarly play an important role in the private sector to provide a strong base of fleet demand to achieve scale in light-, medium-, and heavy-duty EV markets.

Regulations: Alongside incentives to spur the purchasing of EVs, regulations can be essential for ensuring their availability in the market. These can include steadily tightening regulations on fleet-wide CO2 emissions, such as the EU requirement for cars to reduce emissions by 37.5 percent by 2030, and increasing requirements for zero-emission vehicles sales, such as the 22 percent EV sales by 2025 target set by California’s long-running Zero Emission Vehicle program, as well as China’s NEV target of 20 percent EV sales by 2025. The most aggressive jurisdictions have established deadlines for phasing out ICE sales, including a target of 2025 in Norway and 2030 in the United Kingdom and India. While most EV regulations target the light-duty vehicle market, putting in place longer-term rules for heavy-duty vehicles, as in California’s Advanced Clean Trucks program, can help drive investments in emerging, higher-density storage technologies such as solid-state batteries and can help accelerate emissions reduction in heavy-duty transport.

Charging infrastructure: While the majority of EV charging can take place overnight at homes and fleet depots, public charging infrastructure is critical for mass-market adoption. Development of charging facilities can be supported in a variety of ways, including local and national incentives to reduce up-front costs, as in China’s NEV program, U.S. federal tax credits and state rebates, and the United Kingdom’s Electric Vehicle Homecharge Scheme and Workplace Charging Scheme, as well as electricity rates specifically designed for fast charging infrastructure. Public-private collaboration to designate charging corridors and streamline permitting can also accelerate deployment, and utility participation in network planning can be essential in many jurisdictions. Again, the focus on fleets will be critical to achieving impact at scale.

Grid Storage Market Development

Deployment incentives and mandates: Financial incentives can accelerate deployment of battery storage alongside wind and solar farms, as in the “innovation auctions” under Germany’s Renewable Energy Act and the U.S. Investment Tax Credit for renewable energy, which storage advocates are pushing to be expanded for standalone battery applications. Mandates for grid storage, such as those in California, New York, and Massachusetts, can also be effective in spurring utility-scale deployment. Incentives for customer-sited storage, as in Brandenburg and Bavaria in Germany, can drive distributed storage markets and serve equity and resilience goals if targeted toward homeowners in low-income areas or regions where grid connectivity is either unreliable or threatened by extreme weather events (e.g., wildfires), as in California’s Self-Generation Incentive Program.

Permitting and planning regulations: Allowing or even requiring utilities to evaluate the full potential of battery-storage technologies to provide energy storage and ancillary services in their grid-planning processes can help steer them away from investing in traditional—and increasingly uncompetitive—fossil fuel generators that are at risk of becoming stranded assets. The United Kingdom recently opened up its energy storage permitting process to battery facilities above 50 MW in size, a step expected to facilitate development of many more large-scale projects. Voluntary or required actions to incorporate storage in utilities’ integrated resource plans are found in a growing number of U.S. states, including Arizona, Hawaii, and Washington.

Market participation rules: Batteries can provide a wide range of services to the grid, including energy as well as ancillary services, but they typically need specific rules to allow and encourage them to participate fully in competitive markets. These may include frameworks for participation by aggregations of distributed energy resources that include batteries, which can function as virtual power plants. South Korea has used favorable rate structures (including renewable energy credit (REC) bonuses under the Renewable Portfolio Standard (RPS) program) to boost grid storage, and regulations enabling aggregators to participate in energy markets have stimulated the growth of these applications in Australia, the United Kingdom, Denmark, and the Netherlands. Recent steps by the U.S. Federal Energy Regulatory Commission (FERC), including Order 841 and Order 2222, will require regional electricity operators to open markets to individual storage projects as well as aggregations, respectively.

Hydrogen: A (High-Cost) Do-It-All Solution for Hard-to-Electrify Sectors

Hydrogen can play a role similar to batteries in the energy transition, providing a medium for converting wind, solar, and other zero-carbon resources into stored energy useful for a wide range of end uses. In contrast to batteries that store energy in the form of chemical reactions, hydrogen stores it in a stable molecular form similar to existing fossil fuels, yielding far higher energy density and practically infinite storage duration. As such, it has long inspired visions of a “hydrogen economy,” with hydrogen fueling virtually all energy needs, from power to heat to transportation.

Despite this promise, the topic of hydrogen often draws a weary skepticism from energy industry observers, given its seemingly endless development horizon. It was a decade away from revolutionizing the energy industry according to President Bush’s 2003 Hydrogen Fuel Initiative. Further back, the idea of a “hydrogen economy” was coined a half-century ago, and hydrogen, not gasoline, powered the first internal combustion engine in 1886, more than a century ago. However, there are good reasons to believe that hydrogen’s time has finally arrived, even if that is in a supporting role and with some caveats.

First, the incredible success of renewable electricity and batteries over the past decade has paradoxically clarified that there are huge sectors of the economy that these tools are unlikely to be able to decarbonize by 2050. These end uses, such as heavy industry and long-distance shipping and aviation, typically require very high levels of energy density, very high heat, and specific chemical properties, and they have exceptionally long asset lives. These “hard to abate” sectors account for about one-third of global emissions today and will account for a larger share of total emissions as less challenging sectors decarbonize.

However, the unique characteristics of hydrogen make it the most likely pathway for decarbonizing many of these sectors. For green steel production, hydrogen can provide the high temperatures needed to operate blast furnaces and replace coke in the iron-reduction process. (Recycled steel is made with electric arc furnaces, but virgin steel made with blast furnaces is required for high-end applications such as automobile manufacturing.) Similarly, green cement can use hydrogen to fuel kilns, enabling net-zero production if emissions from the calcination process are captured. These sectors are well suited as early hydrogen end-use markets to develop, since steel and cement typically make up only a few percentage points of the final cost of a building, enabling the steel industry and construction sector to adjust more easily to price premiums for green materials.

Long-haul shipping is a particularly hard-to-abate transportation sector, and hydrogen is expected to be a core decarbonization strategy for meeting the International Maritime Organization’s recent pledge to reduce industry greenhouse gas emissions by 50 percent by 2050. This use will most likely be in the form of hydrogen-derived ammonia, which is emerging as the zero-carbon fuel of choice in joint ventures to produce green and blue hydrogen by shipping giants such as Maersk and Hyundai. Ammonia has greater energy density and ambient storage temperature than hydrogen, and ammonia storage infrastructure already exists at most ports. It could also supplant the use of natural gas in fertilizer production, one of the highest-emitting chemical industries and the largest consumer of ammonia today. As with building materials, shipping costs account for a very small portion of costs to the end consumer, creating greater space for financial innovation upstream to help minimize impacts on industry.

Hydrogen also has the energy density to fuel aviation, providing a lower-carbon and potentially more widely available—if more costly—alternative to drop-in biofuels for this sector. In a joint venture with startup ZeroAviva, Airbus and British Airways are pursuing hydrogen as the most likely zero-carbon fuel for long-distance flights, whether as liquefied hydrogen or as synthetic fuels produced from hydrogen and captured carbon dioxide. However, compared to shipping, passenger aviation is highly price-sensitive, making transitioning this sector to higher fuel costs a challenge. Moreover, battery advances could make short-range electric aviation a reality, offering an alternate pathway for significant emission reductions if introduced alongside point-to-point passenger routes. The EU Fuel Cells and Hydrogen Joint Undertaking believes that hydrogen’s most likely role in long-distance flight may be as a drop-in fuel feedstock.

Similarly, while hydrogen is no longer considered to have major prospects for light-duty passenger cars, it could potentially have a role fueling long-distance trucking, particularly for vehicles and equipment providing logistics and transportation at ports, which will be well suited to becoming hydrogen hubs as shipping begins adopting ammonia for its own decarbonization strategies. Hydrogen has also found a potentially important niche in heavy-duty non-road transportation applications such as mining operations, where several major operators have formed the Green Hydrogen Consortium to develop the fuel as part of their decarbonization strategies. However, as in aviation, progress in high-density battery technologies and EVs could present competition for many heavy-duty vehicle applications.

Hydrogen an Increasing Focus for Heavy-Duty Applications

Recent announcements for hydrogen use in the steel and shipping sectors

May 2021

United States

Investment: Unknown

Port of Corpus Christi signed an MOU with Ares Management for green hydrogen production for use in industry and shipping.

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Feb 2021

Sweden

Investment: $3.04 billion

An H2GreenSteel project was launched in Sweden, co-founded by Northvolt co-founder.

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Mar 2021

Japan

Investment: $92 million

Course50 green steel project is advancing, backed by Nippon Steel and Japanese government.

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Mar 2021

China

Investment: $15 million

HBIS, JFE Steel, and China Baowu signed MOUs with BHP to explore hydrogen-based steel in China.

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Feb 2021

Denmark

Investment: Unknown

In Esbjerg, Denmark, Maersk, Copenhagen Infrastructure Partners, consortium announce plans for Danish green ammonia facility.

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May 2021

The Netherlands

Investment: $1.2 billion

The Port of Rotterdam, Thyssenkrupp, and HKM announced a partnership to study green steel.

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May 2021

Australia

Investment: $78 million

Austral funded green hydrogen projects, including ammonia production at fertilizer facility.

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Mar 2021

Saudi Arabia/South Korea

Investment: $720 million

Hyundai Heavy Industries signed deal with Saudi Aramco for blue hydrogen and ammonia projects.

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Feb 2021

Chile

Investment: Unknown

Austria Energy Group, Oekowind, and Trama signed an MOU for a green ammonia project in Chile.

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Salzgitter AG, a steel manufacturer in Germany seen in July 2020, is slowly replacing coal used in its production process with hydrogen and electricity from renewable sources. HILAL ÖZCAN/PICTURE ALLIANCE VIA GETTY IMAGES

At the same time that hydrogen's role in decarbonizing hard-to-abate sectors is becoming clearer, costs of producing clean hydrogen via low-emission or zero-emission pathways are falling.

There are two production pathways for hydrogen of greatest interest in the energy transition, one using electricity as a feedstock and one using natural gas. Along the electricity pathway, “green” hydrogen is produced via electrolysis (splitting water with electricity) powered by renewable electricity, while hydrogen produced with nuclear power is variously called “yellow,” “purple,” or “pink.” In the natural gas pathway, “blue” hydrogen is produced by steam methane reforming (SMR) of natural gas (or renewable gas), with the carbon dioxide emissions from the process captured and sequestered; the less-developed “turquoise” hydrogen pathway is an intriguing variation, producing hydrogen from natural gas via pyrolysis and thus generating no carbon dioxide emissions to sequester (only solid carbon).

Each production pathway has its own advantages and disadvantages, and a given country or region’s hydrogen strategy will be determined significantly by its resource base. Those making the largest push for investments in green hydrogen production include China, Europe (particularly Germany, the Netherlands, and Portugal), Australia, Chile, and Morocco, with India expected to unveil a green hydrogen strategy soon. By contrast, the greatest interest in blue and turquoise hydrogen will be in countries with low-cost gas supplies, such as the United States and countries in the Middle East, including Saudi Arabia and the United Arab Emirates, that are increasingly recognizing the potential of blue hydrogen to become a lucrative export market to replace oil exports in a decarbonized world.

Green hydrogen is currently two to three times more expensive than blue hydrogen, although it can be cost-competitive in countries with extremely low electricity prices. Renewable electricity costs are expected to continue falling over the next decade, however, and electrolyzer costs could come down by 40 percent through 2030 with aggressive scaling up of the industry, making green hydrogen cheaper than blue in a growing number of regions by the end of the decade. Similarly, BNEF projects that blue hydrogen will have an edge until 2030, after which green will have a cost advantage in most markets based on steadily falling prices for power and electrolyzers as they scale. Each pathway will see costs from $1.5–$2.5/kg, less than a third of today’s costs and within the $2/kg range targeted for unsubsidized competitiveness with “grey” hydrogen (hydrogen produced from SMR of natural gas without carbon capture).

Countries Will Compete on Cost to Capture Future Hydrogen Market Share

2050 forecast for “green” versus “blue” hydrogen costs in real 2020 U.S. dollars per kilogram

Despite its near-term cost advantage, blue hydrogen suffers from a major disadvantage, compared to its green cousin: it is not a true zero-emission solution. First of all, existing carbon capture and sequestration (CCS) technologies only capture about 85 to 95 percent of carbon dioxide from a plant, which places a fundamental limit on the role of CCS and blue hydrogen in a net-zero economy. Perhaps equally problematic is the issue of leakage of methane, the main component of natural gas and itself a greenhouse gas, from the natural gas supply chain. This persistent issue plagues natural gas infrastructure from wellhead to end uses, undercutting the credibility of natural gas as a “bridge fuel” and threatening support for blue hydrogen.

Methane Stands to Dog Long-Term Prospects for Blue Hydrogen

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An oil field over the Monterey Shale formation near Lost Hills, California, on March 24, 2014

Another, often-overlooked resource for reducing methane emissions from the natural gas system, and therefore the blue hydrogen supply chain, is the production of renewable natural gas (RNG), also known as “biogas” or “biomethane,” from sources such as landfills, wastewater plants, and livestock operations. By capturing methane produced by these waste resources that would otherwise escape into the atmosphere, RNG can have negative lifecycle carbon emissions when used to replace fossil natural gas. While this resource is limited by feedstock availability—the American Gas Foundation estimates that it could replace a maximum of roughly 10 percent of current U.S. gas consumption—blue hydrogen facilities with access to RNG could potentially achieve near-zero or even carbon-negative emissions for their products.

Addressing the methane emissions of the existing natural gas system could be particularly important as private-sector buyers and policymakers seeking sustainable solutions aim to differentiate green and blue hydrogen supplies (as well as products made from them) based on emissions. The MiQ partnership of RMI and SystemIQ has already created a system for certifying and differentiating natural gas supplies based on their upstream methane emissions, demonstrating the possibility of such a voluntary or regulated system of emissions certification for blue hydrogen as well. The risk to the industry is not hypothetical; in November, the French government delayed a $7 billion contract to import liquid natural gas (LNG) from Texas due to concerns over the methane emissions of the region’s shale production.

Regardless of how these clean hydrogen supplies are produced, and whether they are zero-, low-, or negative-emissions fuels, one thing is certain: they will be significantly more expensive than today’s extremely cheap and dirty incumbents (e.g., coal in industrial uses, bunker fuel in shipping) and will almost certainly continue to be so even after costs decline enough by 2030 to compete with grey hydrogen. Hydrogen thus faces a much trickier transition path than the combination of renewables and batteries in electricity and transportation, which can offer lower costs and superior performance, compared to fossil fuels. Given the potential for advances in breakthrough battery technologies over the next decade, some observers believe that this latest wave of hydrogen enthusiasm may simply be the latest iteration of a mirage that is diverting capital and attention from “electrify everything” solutions.

However, unlike energy costs directly experienced by consumers in electricity and vehicle fuel prices, industries such as steel and freight have minimal direct impact on consumer prices. This means that there is more room for investing in and financing green technologies upstream without substantial, adverse impacts on consumers. Marginal supply chain cost differences can be decisive under current market dynamics, but it may be possible to shift these dynamics with a combination of policy direction, industry coordination, market pull from corporate sustainability initiatives, and innovative financing.

This pathway does not promise an easy solution, but these sectors are regarded as hard to abate for good reason—and unlike electric solutions, hydrogen-based technology solutions have the virtue of existing today. Creating the necessary market alignment around hydrogen in these sectors is a complex problem that neither policy nor voluntary action alone can solve, underscoring the importance of holistic approaches that work with industry and address the full value chain even more than in the case of batteries. Elements of such a strategy may include:

Research, Development, and Demonstration

Production technologies: While electrolyzers and steam methane reformers are established technologies, they can each still benefit from R&D support; the former has yet to be deployed at a large scale or with intermittent electricity sources, and the latter is limited by the state of carbon capture technology. Government R&D programs to reduce costs along each of these pathways include the European Union’s Horizon 2020 research and innovation program targets for improved electrolyzer performance and the U.S. Office of Fossil Energy’s Carbon Capture R&D Program, which works on carbon capture and storage processes that can capture a higher proportion of emissions as well as applications for industrial facilities (e.g., cement production). Turquoise hydrogen production is another, less-developed but potentially important pathway for R&D investment, as exemplified by Australia’s funding for Hazer Group’s biogas pyrolysis demonstration project.

Demonstration of key end uses: Public-private collaborations on hydrogen production tied to promising end-use applications serve to simultaneously scale up electrolyzer and carbon capture technologies while also demonstrating their potential for transforming these industries. Recent examples include the Japanese government’s work with Nippon Steel and JFE Steel to demonstrate the use of hydrogen for iron reduction as well as fuel for blast furnaces in the steelmaking process, and the Australian government’s investments in an Engie-developed green hydrogen production facility located at an existing fertilizer plant, which will produce ammonia. The European Union’s H2FUTURE project previously funded a green hydrogen and steel production demonstration project by Voestalpine and Siemens in Austria, and the European Union’s Horizon 2020 research and innovation program is seeking new projects to fund “that demonstrate real-life use cases in an industrial or port environment.”

Use of hydrogen in the gas system: Existing natural gas transportation and storage systems have potential to be repurposed for hydrogen, but more detailed understanding of this potential and its limits are required before these applications can be carried out safely at scale. Public-private initiatives such as the HyBlend Project headed by the U.S. National Renewable Energy Laboratory and H21 in the United Kingdom led by Northern Gas Networks provide examples of public-private research programs currently underway. These efforts can also leverage testing by natural gas utilities in the United Kingdom and southern California that see hydrogen blending as an important strategy for preventing their assets from becoming stranded in a zero-carbon future.

Scaling Up Hydrogen Production

Support for large-scale green and blue hydrogen production: Green and blue hydrogen production must be built out rapidly over the next five years to achieve targeted 2030 cost reductions for competing with grey hydrogen, and a growing number of countries are funding development of commercial-scale facilities to accelerate the process. Examples already underway include the U.S. Department of Energy’s H2@Scale program, Chilean government grants for green hydrogen production, and Australia’s investments in green hydrogen production, but these pale in ambition compared to the European Union’s Green Deal target of deploying 40 GW of green electrolyzers by 2030—up from less than 1 GW today—including $10 billion already committed by the German government. Perhaps as ambitiously, a recently announced $5 billion joint venture between Air Products and Saudi Arabia’s ACWA Power would build the world’s largest green hydrogen and ammonia production facility at Neom, the country’s sustainable city project.

Standards, certification, and regulation: Standards for hydrogen transportation, storage, trade, and emissions reporting are all important underdeveloped frameworks required for the industry to scale. The leading intergovernmental initiative addressing these issues is the International Partnership for Hydrogen and Fuel Cells in the Economy, with 22 nations (including the United States, United Kingdom, European Union, Chile, Australia, Japan, and China) working to develop regulations, codes, and standards as well as lifecycle emissions certifications. The European Union’s hydrogen roadmap similarly recognizes the need for common quality standards for hydrogen transportation across the gas network as well as certification of renewable and low-carbon hydrogen. Chile is developing its own regulations for hydrogen production, transportation, and storage as part of its National Green Hydrogen Strategy, and Australia’s Smart Energy Council has launched a national Zero Carbon Certification Scheme for renewable hydrogen, ammonia, steel, and other derivatives.

Regional hubs: Because hydrogen’s likeliest end uses are tied to heavy industry and shipping, public-private partnerships to support the creation of regional hydrogen hubs around existing industrial facilities and ports offer potential to catalyze development by co-locating hydrogen production, end uses, and transportation/pipeline infrastructure. Current initiatives include Australia’s plans to invest over $200 million to develop four regional hydrogen hubs and New South Wales’ support for hubs at two port cities, and the United Kingdom’s Tees Valley multimodal transport hub, which includes shipping and aviation.

End-Use Market Development

Infrastructure support: Beyond funding for hydrogen production and coordination of end-use collaborations, hydrogen development requires storage and pipeline infrastructure to connect production and use, as well as fuel-dispensing facilities for transportation applications. In the Netherlands, the Port of Rotterdam is developing hydrogen transport and storage infrastructure as part of its hydrogen hub plans and is jointly investigating potential for hydrogen pipeline connections to steelmaking facilities with Thyssenkrupp and HKM. Japan is similarly planning to provide funding for hydrogen transportation infrastructure for trucking, aviation, and shipping as part of its $20 billion Green Growth Strategy.

Government procurement: Governments at every level are major purchasers of steel and cement used in public buildings and roads projects, as well as indirectly through fleet vehicles and other products using steel. Establishing procurement guidelines for green building materials could provide a market for hydrogen-based steel production and should be based on performance measurements and standards developed in partnership with the industry, including product-specific standards for different types of products (e.g., rebar vs. structural steel), as well as lifecycle analyses that take lifespan and recycling potential into account. These types of market-building public procurement measures for low-carbon building materials are included in the German government’s Steel Action Concept and the Climate Crisis Action Plan of the U.S. House Select Committee on the Climate Crisis and are being studied for cement and steel as part of California’s Buy Clean program.

Sector coordination: Several industry groups have emerged across key end-use sectors to align demand toward decarbonized pathways including hydrogen, such as the SteelZero initiative, whose steelworks and construction industry members aim to procure 100 percent net-zero steel by 2050; the Getting to Zero Partnership, which brings together maritime industry stakeholders to put “commercially viable” deep-sea zero-emission vessels into operation by 2030; and the Poseidon Principles and Mission Possible initiatives founded by RMI, under which finance providers in these and other hard-to-abate sectors pledge to align their portfolios with roadmaps to net-zero emissions by 2050. Coordination with such groups is essential for policymakers to understand the ecosystem of hydrogen end uses, the opportunities and challenges each sector faces, and where the greatest impact can be had.

Industrial emission regulations: Beyond market-building activities to provide demand pull, governments can accelerate investments in industrial hydrogen through binding emissions targets or regulations. Currently, steel and cement users are included in cap-and-trade programs in the European Union, California, and soon China, but they are all providing the industry with ample free allowances to ease their transition—and carbon prices under the last two regimes remain extremely low. In the EU Emissions Trading Scheme, where carbon prices are highest, steel producers claim that carbon prices are increasing their production costs by nearly 10 percent despite getting free allowances covering 80 percent of their emissions. More targeted, demand-side measures are potentially a more politically viable and effective alternative; for example, embodied carbon regulations on the automotive or building industries would require lowering the lifecycle emissions associated with structural materials including steel.

Transportation emission regulations: Regulating the shipping and aviation industries represents a policy challenge given their crossing of international borders. The International Maritime Organization has formulated a target of reducing total shipping emissions by 50 percent by 2050 but currently lacks details for implementation under its MARPOL pollution regulations. Similarly, the International Air Transport Association (IATA) has set targets of carbon neutral growth from 2020 and a 50 percent reduction in net emissions by 2050, but it relies significantly on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) mechanism established by the United Nations instead of directly reducing fuel emissions. While intra-European flights are currently covered by the EU Emissions Trading System (ETS), their typical compliance costs net of free emissions are a mere fraction of the value of their fuel tax exemptions; the European Union is considering taxes on conventional jet-fueled aviation as part of its Green Deal, but without ample industry protections such as border adjustments, this will undoubtedly draw opposition from airlines and member countries.

Carbon Border Adjustments: Border adjustment policies are a critical cost-containment mechanism in countries where aggressive decarbonization policies are pursued, as they can help level the playing field for domestic industry by imposing costs on imports from high-carbon-intensity countries. This is of particular concern to producers of internationally traded goods such as steel, and the European steel industry is calling for a carbon border adjustment mechanism to offset rising compliance costs under the EU ETS. These initiatives face difficulties owing to the complexity of emissions attribution in supply chains as well as the policy challenge of crafting a regime that meets World Trade Organization rules. The European Union is studying frameworks for a border adjustment tax as part of its Green Deal strategy, and the Biden administration is evaluating options for one as well.

Different Technologies on Similar Paths, with Similar Lessons for the Clean Energy Transition

Batteries and hydrogen are very different technologies, with varying trajectories for development over the next decade. Batteries are entering a new stage of mass-market deployment and technological development, while hydrogen has relatively high costs that create basic questions about its commercial viability, and it still requires many billions of dollars in capital to begin to scale. At the same time, they are similar, complementary technologies—together, they have the potential to use the rapidly decarbonizing electricity grid (and lower-carbon or carbon-captured natural gas supplies) to decarbonize significant shares of the economy.

While they may compete in some industries and use cases, such as aviation and long-range trucking, the market and many policymakers are increasingly recognizing the distinctions among the sectors these technologies will deploy in: hydrogen for heavy industry and some long-range transportation, and batteries for everything else.

There may be complementary interactions among these industries as well. Hydrogen is very unlikely to be a major source of zero-carbon electricity, but bringing down its cost to serve industrial markets could provide a valuable source of fuel for dispatchable peaking or backup plants (e.g., gas turbines or fuel cells). Similarly, by reducing the costs of keeping the grid reliable and accelerating progress toward a zero-carbon grid, batteries will help green electrolyzers run more consistently and efficiently than intermittent wind and solar alone.

Similar lessons can be drawn for policymakers about how best to support the growth of these industries and partner with key private-sector stakeholders:

  • It is essential to accelerate zero-carbon electricity on the grid and lower costs. Access to cheap renewable power is fundamental to the economics of both battery- and hydrogen-enabled end uses. Without continued rapid progress on the grid, none of these decarbonization futures is possible.
  • Targeting sector-specific regulations is challenging. Regulations to achieve decarbonization can benefit from targeting specific sectors, but they must be crafted to consider technology availability (e.g., heavy-duty trucking) and implementation costs in internationally traded goods (e.g., hydrogen), which may require border adjustments.
  • Public procurement is a powerful tool for market development. While government budgets are not sufficient to scale up these industries by themselves, well-designed programs can provide an important spark, particularly when paired with achievable domestic battery manufacturing or hydrogen production content goals.
  • Private-sector partnerships are essential collaborations. Private-sector consortia are emerging to decarbonize end-use industries and improve the sustainability of supply chains among automakers, steel manufacturers, shipping companies, and natural gas producers, offering resources to improve policy, guide government procurement, and foster public-private partnerships.
  • Certifications of sustainability and emissions are growing in importance. As these technologies scale, public- and private-sector initiatives to certify the provenance of raw materials and supply chain emissions in areas such as lithium and cobalt mining as well as life-cycle hydrogen emissions (particularly for blue hydrogen) will grow in importance to maintain political support and ensure that these technologies achieve climate change goals.

Finally, while increased international competition is healthy and should be expected, given the stakes of these sectors, it will also be imperative to collaborate across borders to establish frameworks for trade (particularly in hydrogen), emissions certification, and technical assistance and best practices sharing in implementing new technologies. The drive to achieve the goals of the Paris Agreement must ultimately be the largest global collaboration in history, and a race to the top can accelerate the cross-sector response the climate crisis demands.

By FP Analytics. Written by John Atkinson. Edited by Allison Carlson and Phillip Meylan. Copyedited by David Johnstone. Development by Andrew Baughman and Ash White. Art direction by Lori Kelley. Illustration by Nicolás Ortega for Foreign Policy.

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