By Paul Homewood
Here is a story that got our old friend, Ambrose Evans-Pritchard, very excited recently.:
https://www.ft.com/content/0d14e8e9-63a1-400b-81af-e705d6eaaba9
According to the AEP:
“Look at the agreement just reached between Andy Fortescue and EON to transport green hydrogen (in the form of ammonia) from his 200 GW planned wind and solar area in Australia to Germany. Simply great. This is where the world is going.”
The first thing to point out is that there is no agreement to ship anything. It is simply a commitment to collaborative research and learning. In particular, Fortescue is under no obligation to spend a dime outside of 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 plants! FFI plans to use wind and solar power in Australia to produce hydrogen through electrolysis, a costly process that also wastes some of the energy input.
The hydrogen is then combined with nitrogen in another expensive process to produce ammonia, which has a higher energy density and therefore a cheaper transport cost. The ammonia must then be cracked in another costly process to separate the hydrogen again.
Therefore, it goes without saying that in terms of energy, hydrogen is much more expensive than the electricity used in the first place.
Of course, solar power will be relatively cheap in the deserts of Australia. The IEA did a detailed study of hydrogen a few years ago and calculated that green hydrogen there would cost around $2.20/kg:
https://www.iea.org/reports/the-future-of-hydrogen
That means $72.60/MWh, assuming £55/MWh. But on top of that we need to add up all the other costs.
The extremely high wholesale price of gas is currently around 270p/can, or £92/MWh. Even now, green hydrogen is unlikely to provide any significant savings, once all other costs are added up.
But there’s no reason why the cost of natural gas should be as high as it is now. Historically, the market price, which reflects the “real” cost of mining, has been around £14/MWh.
Allowed to operate freely, the market will quickly correct the current imbalance of supply and demand, and prices will fall accordingly. It clearly makes no sense to spend hundreds of millions developing a green hydrogen alternative.
Indeed, if we go down this path, we are keeping current gas prices sky-high for the long term.
So why are FFI and E.ON in bed in this case? The answer is simple – subsidy hunting.
There is no question from a technical point of view that green hydrogen can be produced and transported in large quantities in this way. But neither FFI nor E.ON, nor for that matter their bankers will invest large sums of money just in the hope that the Ukraine crisis will go on forever.
There is only one way this project will succeed. They will be completely dependent on subsidies from the EU or the German government. This is most likely in the form of Contracts for Difference, which has been promoted for hydrogen production in the UK.
Such a program would provide a guaranteed rate for 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 tons of hydrogen per year. That equates to 165 TWh. Meanwhile, the UK consumes 855 TWh a year. Europe as a whole uses almost 6000 TWh annually.
It is clear that this FFI project will not cause much harm to the gas market in general.
Finally, a final number. FT talk about 200 GW wind and solar zone in Australia to make this a reality.
Currently, solar capacity globally is only 707 GW, and in Australia it is 17 GW.
It looks like we will need a lot of solar panels, simply to replace a small amount of gas!
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