Can Australian Green Hydrogen Replace Russian Gas?

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By Paul Homewood

This is a story that has got our old friend, Ambrose Evans-Pritchard, excited lately:

According to AEP:

“Look at the deal just reached between Andy Fortescue and EON to ship green hydrogen (as ammonia) from his 200 GW planned solar and wind zone in Australia to Germany. Simply amazing. This is where the world is going”

The first thing to point out is that there is no deal to ship anything. It is simply a commitment to a research and study partnership. In particular, there is no obligation at all for Fortescue to spend a penny beyond this research. [Fortescue Future Industries, FFI, is, by the way the company. Andy Forrest is its Chairman – “Andy Fortescue” does not exist!]

But is green hydrogen really the breakthrough AEP thinks?

The first thing to note is that hydrogen does not grow on trees! FFI plan to use wind and solar power in Australia to produce hydrogen via electrolysis, an expensive process which also wastes some of the energy input.

The hydrogen is then combined with nitrogen in another expensive process to produce ammonia, which is more energy dense, and thus cheaper to ship. The ammonia then has to be cracked in another expensive process to split the hydrogen out again.

It therefore goes without saying that in energy terms hydrogen is much more expensive than the electricity used in the first place.

Solar power, of course, will be relatively cheap in the deserts of Australia. The IEA carried out a detailed study on hydrogen a couple of years ago, and reckoned that green hydrogen there would cost around $2.20 per kg:

That translates to $72.60/MWh, say £55/MWh. But on top of that we need to add all of the other costs.

The current, extremely high wholesale price of gas is about 270p/therm, or £92/MWh. Even now,  green hydrogen is unlikely to offer any significant savings, once all of the other costs are added in.

But there is no reason why natural gas costs should stay as high as they are now. Historically, market prices, which have reflected the “real” costs of extraction, have been around £14/MWh.

Allowed to function freely, markets will quickly correct the current imbalance of supply and demand, and prices will fall accordingly. It clearly makes no sense at all to spend literally hundreds of millions developing a green hydrogen alternative.

Indeed if we go down this route, we are locking in the current unaffordably high prices of gas for the long term.

So why are FFI and E.ON getting into bed on this one? The answer is simple – subsidy hunting.

There is no question from a technical point of view that green hydrogen can be produced and shipped in bulk in this way. But neither FFI or E.ON, nor for that matter their bankers, are going to invest big money just in the hope that the Ukraine crisis goes on forever.

There is only one way this project will get off the ground. They will be wholly dependent on subsidies from the EU or German government. This is most likely to be in the form of Contracts for Difference, already being mooted for hydrogen production in the UK.

Such a scheme would offer a guaranteed price to FFI and E.ON, with the cost passed on to consumers.

Finally, let’s put the production numbers into perspective.

The deal talks about 5 million tonnes of hydrogen a year. That equates to 165 TWh. In comparison, the UK consumes 855 TWh a year. Europe as a whole uses close to 6000 TWh annually.

Clearly this FFI project will make no more than a dent in the overall gas market.

Finally, one last number. The FT talk of a 200 GW wind and solar zone in Australia to make this happen.

Currently the global capacity of solar power is only 707 GW, and in Australia it is a tiny 17 GW.

It seems like we will need an awful lot of solar panels, simply to replace a tiny amount of gas!


APRIL 5, 2022