The global energy sector is in the middle of what is likely to be its biggest crisis to date. Energy actors are facing unprecedented conditions with pressure coming from all angles. The oil price decline was the first symptom of what are set to be broader ramifications of the Covid-19 pandemic for the entire energy ecosystem.
The IEA this month did not hold back in its assessment of the impact of the virus noting “the oil world has seen many shocks over the years, but none has hit the industry with quite the ferocity we are witnessing today”.
In terms of what this could imply for the wider energy sector and clear energy in particular, the IEA foresees that:
Changes in oil markets ripple across all parts of the energy sector, with implications for a range of different fuels and technologies. A sustained period of low oil prices would affect the prospects for clean energy transitions…
So what does this mean for the global decarbonisation push? In a business environment that prioritises earnings for survival over environment, what priority will be given to new energy? And how do we quantify the impacts of rapidly changing market dynamics on emerging parts of the energy sector that are not yet economic, such as hydrogen?
The answer will be dependent on what happens next. While investment may decline in the short term, it is possible the crisis could lead to new thinking on the future of energy. This period for instance could spell the end of subsidisation of fossil fuels as budget savings are desperately sought by governments. The future outlook is impossible to predict, but it does give you an insight into the new paradigm in which we may find ourselves, one that could possibly transpire to be a good thing for a clean energy future.
What is known is that the pandemic arrived at a critical time for hydrogen. The most abundant element in the universe has been enjoying unprecedented momentum with clear signals beginning to emerge that it’s crossing the divide from demonstration to commercialisation. Driven by country decarbonisation targets, falling costs in technologies that make, move and use it and emerging export markets, hydrogen’s time appears to be arriving after many decades of incremental progress.
BloombergNEF in their recent report on the prospects of a hydrogen economy similarly confirmed the clean molecule’s potential noting that “the falling cost of making hydrogen from wind and solar power offers a promising route to cutting emissions in some of the most fossil fuel dependent sectors of the economy…”. They have some caveats however — “net-zero emission goals and policies” must be in place for hydrogen to play a significant role in global decarbonisation efforts.
In the face of so much uncertainty ahead, is it possible the hydrogen push could be stalled as the need to improve budget positions and minimise consumer and business costs trump the need to support the clean energy transition? Or could the circumstances be a blessing in disguise for the sector that, despite several attempts, has never passed the threshold to mainstream adoption.
In terms of the investment gap to reach this point, the Hydrogen Council has identified that around $70 billion in investment will be needed by 2030 to achieve hydrogen competitiveness. BloombergNEF have suggested that around $150 billion of government subsidies will be required over the same time period. Without this level of support, both agree that hydrogen’s role in the future of energy will be uncertain.
The two organisations note however that the level of support needed for the hydrogen scale-up is relatively small in comparison to the global spend on energy (less than 5%) and fossil fuel consumption subsidies (half the amount), but nevertheless in a fiscally challenging environment the appetite from governments to support the hydrogen sector must not waver. This support is critical to stimulate private actors to continue to invest as both sides of the coin are equally important for a competitive hydrogen sector to be realised.
What is certain is that the climate change challenge remains, and this current period could be the catalyst we need to work harder to create a more sustainable future. Some of the scenarios that we could see that move the needle on realising a hydrogen economy are outlined below.
Accelerated oil and gas divestment lead to a shift to green hydrogen
As the oil sector faces the double hit of a price war between two of the world’s largest producers of crude — Saudi Arabia and Russia and the virus pandemic, energy players that are highly exposed to the oil price may delay other projects, divest from existing projects or look to alternatives with long term potential. One of these alternatives is clean energy which all the major oil players are pursuing.
Shell for instance recently confirmed their giant offshore wind-to-hydrogen plan in the Dutch North Sea is set to survive the pandemic unscathed. While the project is in feasibility phase for the remainder of 2020, Shell wishes to be an early first mover in hydrogen and sees limited to no impact of the current crisis on this major project. It’s a potential sign that big oil is still committed to playing the long game on renewables, including hydrogen.
In parallel, with the prospect of declining gas and oil supplies in what could be a contracting sector, we could see an under supply of hydrogen produced from these feedstocks creating an opportunity for greater production of green hydrogen from electrolysis.
The unexpected effect on the environment due to the economic slowdown leads to greater focus on the clean energy transition
In the midst of the pandemic a wonderful thing has happened to our natural world. With planes grounded, factories closed and people locked indoors pollution has slowed, greenhouse gas emissions have fallen and we’re witnessing the impact of the human footprint in live time for the first time.
Whether it be the canals of Venice running clear, Los Angeles’ skies being smog free or even mountain goats overrunning a Welsh town, the lockdown has had almost immediate impacts on our environment.
The economic slowdown is also having real effects on people’s health with analysis completed by Stanford University scientist Marshall Burke finding the reduction in air pollution may have helped save the lives of 77,000 people in China under the age of five, and over 70.
We need economic activity to return, but now we can better quantify our impacts on the world, will there be an impetus to do it in a cleaner fashion? Cleaner cars, cleaner travel, cleaner industry for instance. Emissions free energy sources such as hydrogen can tackle all three. This period could lead to a more urgent response from governments and industry to the climate challenge and, in turn, accelerate the hydrogen economy.
Instability of global supply chains leads to greater focus on energy security, and in turn hydrogen is prioritised by governments
The fragility of global supply chains has become glaringly apparent during the pandemic. The breakdown has largely been seen in the movement of goods with governments and industry now grappling with the realities of the adverse aspects of globalisation. Inevitably we will also turn our thinking to the resilience and reliability of commodity-based trade.
Governments worldwide have been complacent on energy security. This could now change. As we look to localise parts of industry, a conversation about energy also needs to take place. While isolating isn’t the answer, limiting our exposure to supply chain disruption through energy diversification and local production where possible should be.
The crisis could therefore be the opportunity governments needs to usher in a new era of energy security and diversification that’s done in an environmentally sustainable way. Hydrogen’s ability to be made almost anywhere and its capacity to power some our most critical sectors such as defence and logistics means it should be part of this discussion on economic and energy resilience post the pandemic.
In each of the scenarios outlined above, government leadership will be critical. We already see excellent examples of governments stepping up for the clean energy transition, and while they are currently faced with more immediate public health challenges, the focus on this transition will return.
For hydrogen, there are likely to be short-term impacts that limit investment and slow the development of enabling regulation as governments focus on coronavirus responses, but the recognition of its importance in the climate battle is now undeniable and this battle will not abate any time soon. This period will inevitably prompt new approaches to the way we live and work in this world, and how we do this in a more sustainable way.
This grave moment in human history could be a turning point for a better, cleaner future. The momentum hydrogen has built pre-crisis means it’s now embedded in climate thinking and based on efforts from government and industry to date in making the hydrogen economy a reality we can expect it will be part of the solution.