Why There'll Never Be A Hydrogen Economy | Ep232: Erik Rakhou

Michael Liebreich 

What doesn't get you in the wash, gets you in the rinse, because what you then need to do is have three times as much capex, because you've now got to make all your hydrogen during those eight hours. Or you can add batteries, or you can…

Andrew Critchlow

So what we're saying is that under normal economic conditions, under normal geopolitical conditions, actually, hydrogen economics are severely challenged.

Erik Rakhou

According to Michael, yes. So the question I put to him..

AC  

But even in your proposition, though, they're not necessarily.

ER

Yes, if you don't add energy resilience, and you assume current fossil prices, back to your original question as well — let's say relatively low fossil prices without carbon penalties — then yes, we should stay on gas.

ML

Hello, I'm Michael Liebreich, and this is Cleaning Up. It was almost exactly three years ago, in a keynote at the 2022 Hydrogen World Congress in Rotterdam, that I came out as an outspoken critic of everything to do with the hydrogen economy.

The chair of that day's proceedings was Erik Rakhou, gas expert, proponent of all things hydrogen and BCG consultant. At the end of my remarks, he bounded up onto the stage, shook my hand and gave me a copy of his book, Touching Hydrogen Future, full of stories about the hydrogen economy. Erik and I have stayed in touch since then and sparred occasionally on social media. Last year, I was delighted to invite him onto Cleaning Up, and we had a fantastic, wide ranging, very interesting conversation, which sadly, was so long and meandering that we decided we couldn't put anybody else through it. So I was delighted when Erik suggested that instead, we have a debate hosted by Andrew Critchlow, head of news at S&P Global Commodity Insights, and that took place last week as an S&P webinar. Now, under the terms of Erik’s and my deal, I'm publishing it as an episode of Cleaning Up at exactly the same time as Erik is publishing it as an episode of Global Tales of Carbon Transition. Erik is every bit as passionate about the low carbon transition as I am, but as you'll see, he's got very different views about how we should go about it. Please welcome Erik Rakhou to Cleaning Up.

AC  

Welcome, everyone. Thank you for joining us today to discuss the subject of hydrogen, touted as a miracle fuel. Not so long ago, hydrogen was expected to be a major factor in decarbonizing the global energy system and the journey towards energy transition, but that journey has been a bit more complex than many experts would have foreseen even just a few years ago. To discuss this fantastic subject, controversial subject, I'm joined by two experts in the field and investors and thought leaders. Erik Rakhou, thank you for joining us. Author as well of recently published book Touching Hydrogen Futures: A Tour Around The Globe. And Michael Liebreich, founder of Bloomberg New Energy Finance, also thought leader, analyst and investor, interested in all things hydrogen and energy transition. You both have different views on this subject, right? I think probably, Erik, you're more bullish.

ER

Well, let's determine it. So will there be a hydrogen economy? I will argue no. But will there be a renewables plus hydrogen economy? I will argue yes. I think we need optionality in this world. I also agree with Michael's climate reset, except for the section on hydrogen. I do think we need to start now, and if we look to where we were some years ago, it was millions and millions and billions of investments that were going to happen. This is not happening. But now, in the last five years, there have been increasing investments. And we have increased — and let me look at the IEA numbers — nine to 16 times depending on how you count, investments in low-carbon hydrogen in the last five years. We're going to increase five fold, according to IEA, by 2030, in terms of volume from now in low-carbon hydrogen. So the famous ladder of hydrogen, and this is the last I will say, and pass to Michael for opening, the famous ladder of hydrogen is actually a really useful tool. You just need to focus on the top two layers. And if you do that and continue doing that, by 2050 we will have a climate reset. I will stop here.

AC  

You've got a different view on that. Why? Michael, a bit more pessimistic?

ML

Yes, I think that's probably fair, although Erik has already started putting some caveats and hedges around his normal ebullience. First of all, we use hydrogen. We use hydrogen today, around the world, 100 million tons per year. And it produces I think it's 2.3-2.5% of global emissions. So it's not a nothing problem to solve the emissions from our existing hydrogen use. And hopefully, because climate change is real, and we want to see that addressed as quickly as possible, those emissions, hopefully we will have clean hydrogen solutions, because that's not going away. That's fertilizers and that's petrochemicals. There's been a number of waves of excitement about hydrogen in the past. And you can go back, actually, we're probably in sort of wave number four. And there's been this concept that we'll go to a hydrogen economy, which I interpret as being that we'll use hydrogen for multiple uses, because there are so many use cases. Hydrogen as the Swiss Army knife, it can do everything. And therefore the only problem is how to produce it, and to produce it in large volumes and produce it cheaply enough. And so for quite a few years, I've been digging in, and I would say, based on, gosh, if I actually think about what am I using as my tools to try and figure out what's happening. It's 50 years physics, 40 years engineering. It's 30 years finance, 20 years policy, and 10 years of pretty deep dives into hydrogen. And the problem is it's got a fundamental physics-driven cost problem, which means that it's a horrible fuel and difficult to handle outside of big chemical plant type environments. And so there'll never be a pervasive use of hydrogen in the economy. There will never be.

AC  

But just come back to this sort of fundamental human flaw that we want our cake and we want to eat it. You can either have decarbonisation, avoid climate change, restrict global warming. That comes at a cost. We may have to change the way that we live. The idea of going to the fueling station, filling up your car cheaply, lower inflation, all of this, it's la-la land. The reality is, if you want all of these things, and you want hydrogen used in transport, used in power generation, used in industry, it's going to cost.

ML  

Well, hang on a second. I agree, we want all those things. What we don't have to do is find the next thing to burn. We've been burning things for an awfully long time, from caveman, you know, millions of years, all of the pre-humans were burning things, right? We don't need to burn things. What we need is the things that you're talking about, which is essentially what we call energy services. So you need warm homes and cold beers and MRI scanners around the world, those sorts of things, the electric economy. Nothing about that says we have to be burning. And there's a lot of things. There's an astonishing time we're at. We may end up at the end of this conversation, maybe we'll have persuaded you, maybe we won't, but it's an amazing time, because we have in front of us such a range of options to decarbonize at low cost without burning stuff. And it feels very odd, therefore, to be continuing to have this conversation about hydrogen, as though we have to just find the next fuel to burn, which I don't do

ER

But when we do burn hydrogen, isn't water the byproduct?

ML

Well, burn it or use it in a fuel cell. Just to be quite clear, for me, it's use hydrogen, but it's essentially as a fuel.

AC  

This is where I'll come to you, Erik, on this. Because, you know, when we were off air, we were talking about, in 2005 I remember going to Qatar. I think that was about the time they opened a big GTL (gas to liquids) plant there. GTL at the time it was: this is going to change the world, it's going to change transport fuels. We're going to decarbonize everything. There's going to be GTL plants all over the world. I had energy ministers giving me glasses of GTL and saying ‘drink it, it's so clean, it's just like water.’ I haven't seen any GTL plants built recently. So why is hydrogen different from GTL?

ER

Why is it not just a hype that's kind of gone from hype to PowerPoint and then just slowly disappears together with the billions? I think actually, first a compliment to Michael. I think we had the honor of opening together a huge, a few thousand people session, and I was a day chair for World Hydrogen Congress. And then I said, ‘welcome Michael, force of nature.’ And then Michael did a speech, and you gave a very realistic call saying that a lot of use cases basically were not a good idea. So I think you actually helped, Michael, to deflate the hydrogen hype. Let's say it's going to solve everything. So basically, the GTL thing ended somewhere in 2022 when Michael gave his successful punch on the nose. But what is now left is actually, I think, a very good and strong continued use case. I put the word where my mouth is, or what is it? Maybe I'm mispronouncing that expression, but I have a stock portfolio of 50 stocks in hydrogen, and since this year, they've increased year to date, 13%. So at least, if you know where to look, or another number S&P Global actually, very helpfully, keeps the numbers. 

AC

We’re good at that.

ER

There were two interesting numbers. There were four times as many cancelations, but in parallel, there were two times as many very advanced projects. So if you and I think that's because people both listen to good advice of Michael that you need to focus on things that matter, so the top two layers of the hydrogen ladder. And in parallel, you have to actually develop your projects to bring down the economics. And I think there is a very good piece of work, we should put it in show notes when we go to also to podcast versions of this, the European Union published an observatory with costs and with also product break even prices per use cases. And if you match, they actually forgot to add a section where they match the cost and the break even price, because then you would see that if you take the Nordics  and Iberian hydrogen projects, and you match that, for example, to use cases of trucks and steel that they've identified are available in Europe, it's in the money. And not surprisingly, some of this is happening. Stegra is an example. I'll stop here.

AC  

Do you think, though, that one of the challenges that hydrogen has faced, and as well, probably you could put some of the other energy transition fuels into that bucket, is that actually fossil fuels are being kept affordable because that's how you sustain demand growth. You buy demand growth, and so, you know the historic peak for crude oil was $147 a barrel, I think in 2007. We're now, you know, about $60-65 a barrel of Brent. Below fiscal break even for most of the major producers. A skeptic would say, ‘well, they're just buying market share.’ They're buying future demand. They're trying to stretch out the long term, this peak demand narrative, but it makes things like hydrogen less competitive from an investor's point of view? Is that fair?

ER

Thank you for giving me the floor again. I almost get the feeling that I'm still allowed to fight. I think, first of all, one very quick story. I got invited by Aramco to a workshop — and I didn't sign an NDA, so I can say it — where there was also, at the time, I worked for BCG, then there was McKinsey, then there were a lot of other experts. And the topic of the workshop was, you know, ‘will hydrogen happen?’ And I thought it was so good of Aramco to organize this. And I was wondering why, if you're 1/10 of global oil, you're so interested in what's going to happen to hydrogen? And interestingly, I think we are living in the age of peak oil. And if you look at the kind of where oil still has a future petrochemical industry, perhaps, or aviation, that is also once you start looking on the ground, that's where we see some very promising stuff happening. So it's totally under the radar. Let's take aviation and e-SAF. There are 94 projects currently globally, only one of them, from Infinium, reached FID, and the number that it's sold, and it's written in, again, in another helpful European Union document published by European Union Aviation Association, I will put that link also in the note. They sold basically 23,000 megaton a year as a first project from Texas to European and UK buyers. But once you start thinking through and you see the targets of Europe coming, and you basically start realizing how the 30 million ton a year type of market can be displaced by this e-SAF, which is three times the price of oil, you realize, well, if I was Aramco and other energy majors, I would also worry and kind of watch how the economics of hydrogen is developing. It's providing both decarbonization, which I think Michael and I agree on, is a good thing. We want a livable planet. That's at least one thing I think we're agreeing on, without emigrating to other planets. And in parallel, we want economics to work and to get to economics, and that's maybe we're going to disagree. I do think we need a period of 10-15 years where policy is sustained and supported, but with carbon pricing, not with subsidies. I hate subsidies.

AC  

You're a bit more short term about it, though, right, with the investment? Investors don't wait 15 years.

ML

If I might, let me take on a few of those, because Erik has some sort of, you know, he's laid out his stall quite extensively there. So first of all, ER figures for e-SAF are not three times the cost. I'm not familiar with Infinium and how they've done their numbers, and whether they're selling at a loss or using their investors’ money, whatever, I don't know. But the EU figures are that e-SAF and by e-SAF, just to sort of make sure the audience is with us, that is taking CO2 out of the air, carbon capture and then using green hydrogen, putting them together, and that is 12 times more expensive than jet fuel/ 12. So what that means is…

AC  

No one's flying business class on that/

ML  

So, of course, no one would fly if you did that. So what they do is, they say, ‘Ah, you only have to blend 1% by 2030.’ That's EU rules. But what that means is, if 1% of your fuel costs 12 times the fossil then that drives 12% inflation and fuel costs. That's just arithmetic.

AC  

So all European airlines then will be uncompetitive?

ML

Well, because they all have to do the same, so they're going to be competitive with each other, but you're increasing the flight costs in Europe by 4%. Every holiday flight, every business flight, by 2030. Now that is a drag on the European economy, and it'll be sort of hidden in the technical details, right? This will be news to most of your audience, that this is what's coming down the track, but that's what's coming down the track. So the numbers are not trivial. And then to the question about, you know, going back to the economics of hydrogen… You raised the question, is this the only reason this hasn't happened because the fossil fuel industry has sort of dropped the oil price? This is not out of the money by a small amount. This is out of the money by absolutely gargantuan amounts. So for instance, if you look at the European gas price at the peak of the following the Russian invasion of Ukraine, putting it into kind of hydrogen cost equivalents, right? So there's the TTF (Title Transfer Facility), which is the European gas price. If you put it into the equivalent of hydrogen prices, at the peak it didn't even reach €10 per kilo, right? So European hydrogen costs €6-13 to make. When you go out and you try to build projects in Europe, they cost  €6-13, that's based on real data, not spreadsheet exercises, but real data coming back from real projects. So even at the peak of Russia's invasion of Ukraine, driving up the prices of hydrogen, you couldn't make a kilo of hydrogen cheap enough to be competitive. And so this is how uncompetitive it is. 

ER

I disagree.

ML

Well, we can disagree, but it's data. So we can put that into the show notes.

ER

Well I’ll come back with my data, and I think that's data versus data?

ML

Well, yeah, data versus data. But you know, this is the TTF, and this is just turning the TTF into a hydrogen. 

ER

No, no, that number I agree with. I disagree with the other number. 

ML

So let's come back to that. Well, so let's be as optimistic as you want about the cost of hydrogen in Europe. You can say, oh, you know, the €6 could become €4, and so on

ER

They are.

ML 

Fine. Be optimistic. It's your job to be optimistic, right? We already know from your book and so on. But what you're looking at is, you know, we should get some numbers out there which people can rely on. So what happens is, Europe uses about 7 million tons of hydrogen every year. And if you're switching to a more expensive source of hydrogen, let's say you're going to switch to something that's €1 more expensive. So instead of hydrogen that costs €1, which is fossil, you're going to move to €4, or €5, which is, I mean, to be honest, €5 euros is still optimistic. So you've got a €4 problem. Let's do it per euro, then we can multiply. 7 million tons is 7 billion kilos, right? So that's 7 billion euros per year, that cost delta. And then you need 15 years. So that's going to be 7 billion times 15 that you need to raise in project finance to get that built. But then you multiply it by another four because you've got a €4 problem, okay, so we're talking about hundreds of billions that you need to spend, and that's just for the existing hydrogen use. That's not steel, and you mentioned Stegra, and Stegra is in trouble having to raise extra equity, you know that. That doesn't include steel, that doesn't include aviation fuel, that doesn't include long duration storage, that doesn't include trucks, that doesn't include anything else. It's just the existing use of hydrogen is hundreds and hundreds of billions. And so this is why the reset, the hydrogen reset, whether Erik agrees, he's very nice, he referred to a piece that I wrote called The Pragmatic Climate Reset. There were eight sections, one was ‘we need a hydrogen reset’. And he disagreed with that section. But it turns out that the European Court of Auditors agrees that we need a reset. The French Cour des Comptes agrees that we need a reset. The German Bundesrechnungshof agrees we need a reset. So Erik is just fighting a losing battle here. This is just quixotic stuff. 

AC 

Listening to you and listening to the numbers. It sounds like the problem is that, it's broadly uneconomic in the current system. No one's going to finance this.

ML

By a large margin.

AC 

By a large margin. But actually, if governments want to make it work, and I'm looking at Europe, India talks a lot about hydrogen. China, huge advantage if they could develop it. It needs a Marshall Plan level of state intervention. But before we get to that, you've got some issue with some of these things.

ER

Yeah. Well, first of all, let me say that I just always enjoy listening to Michael, you have such a beautiful English language. So perhaps I can learn from that. And now on data, that's where I do disagree. So on the TTF, your number €10 per kilogram, absolutely spot on. That was August 2022, Russian tanks were rushing to Kiev. Gas markets were totally in disarray. I have to disclose that I've written another book. It's called a Handbook on the European Gas Market, and I wrote it in 2014 or so. It's on Amazon, but so yes, I do know a few things about TTF as well. And I think it's a great comparison. If you basically look at what we can make hydrogen for in Europe today, and that's in European reports. In Iberia and Nordics, we can make it for €4 per kilogram. And if you basically want energy security, and you start blending in, for example, in gas grids, hydrogen, when those prices are as high as you mentioned, it's frankly, immediately in the money. So at least if gas prices went again in that direction, then it's in the money. If we look at the grey, dirty hydrogen produced numbers over the last five years, they actually, at a certain point, reach €5.9 and that's a hydrogen Europe figure one can also find. So again, if you don't have to be a big mathematician to see Iberian-Nordics hydrogen versus SMR (steam methane reforming) made hydrogen, it actually would have been in the money. So I agree that there are also projects... And that's why, I'm not saying you're not telling the truth, Michael, just to avoid any doubt. You're basically giving the upper band. I'm giving the other band, yeah. And if you look at some of the projects, there are projects which are €8 and €10, I agree, let's not do those. Let's zoom out for one moment. As preparation for this interview, I actually interviewed people from China, India, Brazil, United States, and a few others in Australia. And I checked the current project prices in China. The Hydrogen Fuel Association, they actually provided me, even by email, when I said I’m gonna talk to Michael. Currently, we have a $4 per kilogram figure we can provide. We are working by 2030, to $2.5 per kilogram, right? If we look to Australia, there are currently projects which are around $5 per kilogram. They're working towards $3-4. If you're looking to Brazil, similar situation. If you're looking to India, $4 per kilogram. If we then compare with some of the projects that basically do have a demand for $5-6 per kilogram — some of this is driven by policy, I agree, — then it's in the money. I totally support your calculation. If we have to bring in billions of subsidies. And I’m actually going to give a compliment to the American government, they were going to burn a lot of money by giving $3 per kilogram on the Inflation Reduction Act and they abolished that. I think that's actually a gift to the hydrogen industry. Thank you.

AC

Why, why is that gift?

ER

Because now the industry is learning — also, thanks to Michael — that you need to look at projects that are sustainable without subsidies, where possible.

AC  

Michael, I can tell that you're boiling to respond.

ML

Yeah, well, because the thing is… there's sort of quite a lot to keep up with. So let's do hydrogen for resilience on this TTF question. There was one month — one month — when the Russians invaded Ukraine that the TTF price went above €5 per kilo equivalent, which means that just using the number  €5 per kilo, it won't be very different if you do four kilos, because it was such a kind of spiky spike. That means that you would need that spike to continue for 14 years, not one month, 14 years, to be worth buying €5 hydrogen as a hedge. And the problem you've got is, supposing it spikes upwards, and you now suddenly want some €5 hydrogen to put in, because it's like, ‘oh, it's gone up to eight and now it makes sense.’ The gas trader, you know, Erik's trading team would love to do that. The problem is you haven't built the capacity. You can't build the capacity without those 14 or 15 years to get project finance. So what you need to do if you want to be in a position to use hydrogen to hedge gas for that one month when it is, by the way, let's be absolutely clear, that is the most dramatic short term impact on the energy markets, more dramatic than the 1973 oil crisis, right.

AC  

Why don't, why don't you create a state hydrogen plan?

ML

Well, because what you're gonna have to do…

AC  

We’re going to have a state energy company in the UK, why not state hydrogen? 

ML

Because you'd have to be buying for 15 years at those €5 euros in order to have it there for one month. You'd be much better off just buying the gas for the equivalent of the €5 euros for the month and just saying, ‘ouch.’

AC  

But you're dependent on Qatar, you're dependent on the United States, or something else.

ML

Let's put it this way, Europe is going to be dependent on imports, whatever it does, right? 

ER

Nope. Also going to disagree on that. 

ML

There's no way that Europe is going to produce enough energy for its extremely energy intensive economy without importing whether it's, in Erik's dream world, they'll be importing ammonia, or they'll be importing hydrogen via gas pipelines. He's not going to talk about liquid hydrogen on ships, although, of course, his book is full of that sort of thing. But everybody knows that that's just not going to happen. I want to come, if I might, because there were two things. One was hydrogen as a resilience hedge, absolutely ridiculous on the numbers. And the other is this point about China and India, because it's so important to understand. For instance, India has just had an ammonia auction, right? Interesting, the ammonia-ness, why ammonia? Well, because ammonia you can put on a ship. And so when they talk about ammonia, rather than all of this stuff about blending hydrogen, because it's so… 

AC

But it has it’s problems though

ML

As a shipping fuel. I'm talking about the 20 million tons of ammonia that is already shipped around the world. So you can put it on a ship. And the reason India wants to do ammonia is clearly because they think that the Europeans are going to buy it. Because you can ship it, because what they've got is $600 ammonia. So that's already more expensive than the ammonia that's used in India for fertilizer. So no Indian is buying $600 ammonia, but they think they can sell it to Europe. But the important thing is that $600 is after the waiver of transmission fees. So that's another couple of $100 put on top of it. It's after a 30% capital allowance in a few of the states, like Odisha, where you can get subsidies. So basically, the real cost of that ammonia in India is not $600. The market price is $400, the green stuff that they're auctioning is $600. But the real cost is nearer to $1000. China..

AC  

With all the transport, insurance, everything…

ML

Well no, that's on top. If you strip away the subsidies… Because at the end of the day, the numbers are so colossal. I was trying to do the Europe numbers on 7 million tons of hydrogen, and you multiply it through and you would need, essentially just multiply the €4 problem by the 15 years by the 7 million tons. The number actually comes to over €400 billion of money…

ER

Of immediate subsidies.

ML

Well… that the treasuries need to put on the table. They can put it on as a carbon price of €500, or whatever they want to do. But the fact is, that's real money that costs. That's a real drag on the economy. So it's only going to work if you can really shrink that number and and the problem is you can’t. You just can’t

ER

But Michael in the climate reset you do argue for carbon price. $125 per tonne right?

ML

Well. But these numbers… hydrogen to make these things work. And of course, the hydrogen community never wants to say, ‘well, actually.’ Look, in this country, in the UK, our government is spending 240 — sorry, £2.4 billion. 

AC 

You were going to say £240 billion. 

ML

I was gonna say £240 billion. Rachel Reeves, if you're listening… But no, £2.4 billion. But what's completely non-transparent is what is the carbon price? If you look at the projects, the things it's going to be spent on, what is the equivalent carbon price? Because we have a carbon price in this country. Don't know what it is today. You may know. £40-50, something like that, right? And then they're spending £2.4 billion on things that are well into the hundreds, right? And that's the problem, ammonia shipping fuel requires a $250 carbon price, even at these fantasy ammonia prices in China. What you've got with ammonia, market prices are sort of around $400 a ton. Every $100 above that, you need a carbon price of about $70 something dollars to justify it. So if you've got $800 ammonia, which is essentially what you can get out of Australia, or out of the Gulf, you've got a $400 per ton problem. You multiply it by the $70 per you know of the carbon price that you need. That’s a $280 carbon price

ER

You assume a certain gas price…

ML

Sorry?

ER

You assume a certain gas price for $400 ammonia. What gas price do you assume?

ML 

Yes. So look, I'm doing it on… I'm not a brilliant gas strategist. So I'm going to take today's gas price, which is giving today's ammonia a price of $340-400 in places where there's lots of gas. Now you could say, well, what happens if the gas price doubles. You still don't get to $800 a ton ammonia? Not by a long way, right? And by the way, those friends of mine who are brilliant gas strategists and Andy, you may be one of those, they're looking down the barrel of a glut of gas, of LNG, coming onto the market, right? So we had the Ukraine-Russia…

AC  

Well I was writing in The Telegraph about 10 years ago, warning about a glut of LNG coming down. 

ML

And what did we see? And what did we see? 

AC

I was widely criticized for it at the time.

ML

We saw the $14 per MMBtu in Europe drop to $6 and $5 and $7, right? And then it stayed there.

ER

And then we had the Russia-Ukraine crisis.

ML

For one month. 

ER

Well it’s a sustained level of €60 euro per megawatt, that’s been kept there for two years.

ML

Which justifies a hydrogen price of, I'm going to guess something like €2.5. Not €5, not €4, not €7, not €13 — European hydrogen prices. That's your problem.

ER

That's not my problem. So the solar price in Spain, if you do PPAs today, is €35 euro per megawatt hour, without the, let's say, capex. That equals roughly, actually €2 per kilogram of hydrogen.

ML

Sorry, it doesn't. Of electricity cost, right?

ER  

Yes and then you have to start adding other costs, so you get to the four that I mentioned before.

ML  

And that's the problem, that's also really important for people to understand. There's a sort of Neapolitan cup and ball game going on here, right? Which is where people say, ‘Ah, but you know, solar is $15 per megawatt hour in the best places in the world,’ But solar only drives your electrolyzers for eight hours a day. So then what doesn't get you in the wash, gets you in the rinse, because what you then need to do is have three times as much capex, because you've now got to make all your hydrogen during those eight hours, or you can add batteries, or you can…

AC  

So what we're saying is that under normal economic conditions, under normal geopolitical conditions, actually, hydrogen economics are severely challenged.

ER

According to Michael, yes.

AC  

In your proposition, though they are? 

ER

If you don't add the energy yes. If you don't add energy resilience, and you assume current fossil prices. Back to your original question as well. Let's say relatively low fossil prices without carbon penalties, then yes, we should stay on gas. I think actually, climate reset, interestingly, also has a section where, Michael, you say, ‘Okay, I've thought about it, and we probably need to keep gas for the last 10%.’

AC  

But technology will have a say in this?

ER

Absolutely, and frankly, there's only one thing, Michael, that troubled me about your kind of climate reset. Because people really listen to you, you've caused a bit of a stop of people investing in developing and further driving down opex and capex of the high green hydrogen costs. And that is, I think, a mistake, if you want to get there by 2050. And that's also what I've been getting when I was interviewing as preparation for today from other investors in hydrogen. If we want to lower those costs from €4 to €5 per kilogram, which we are today, towards the level as for example, my China interviewee told me, to the $2.5 dollar per kilogram level, we need to continue investing and building the capability. There is a very interesting article which Michael co-wrote in nature, which has a graph I love. There are many graphs there, but one of them shows basically how the cost of technology was going down as we invested in solar and wind, and it also shows that we so far invested very little in hydrogen, and there is a lot to learn. The same article also contains learning curves and numbers, which basically, again, very helpfully show that there are learning curves.

ML 

So all my career, and I started by boasting about my 50 Years of physics, my 40 years of engineering, my 30 years of finance. Very early in that career, I had the great luck, and it was nothing more than luck, to calculate learning curves. I'm a learning curve dude, that's what I do. And I've done them for bizarre industries like rock quarrying and printed circuit boards, very early in my career, because they were a big thing you might remember. And the problem that you've got with hydrogen is that most of it is actually most of hydrogen production. Green hydrogen production is not the mass manufactured electrolyzer stack. What it is actually, is a chemical plant. It's a chemical plant with a substation with lots of civil engineering. Things like blast walls, and you've got lots of tanks and compressors and heat exchangers and stuff like that, which is heavy engineering. And that's about 40% of the cost. The electrolyzer stack is 10%, and it will go exactly like solar and batteries. It will go to quasi zero. Forget it, it's irrelevant. But the chemical plant bit won't. And then 40% is the electricity. And by the way, all of your listeners will know that green electricity already went down that experience curve. So if you've got a 5x cost problem, you've got a €6 hydrogen, and you need to get to €1.5 hydrogen, or 4x whatever, multiples, multiples. Do you think our electricity costs are going to go down by three or five. And by the way, there are plenty of projects in Europe that are 10x. The UK hydrogen auction clears at about £9. And if you use offshore wind and particularly, your book is full of people talking about energy islands in Denmark and Scandinavia, and then they're going to do all this stuff in offshore wind. You're not going to get to €4. You're going to be starting at, right now, probably at €8 euros. So now what you're looking for is the electricity to go down by 3-5-7-10x, you're looking for your chemical engineering, your civil engineering, your substation, all the grid connections also to go down by that amount. And it's not even all.

AC  

Yeah, but isn’t the issue though — and here I see Erik's point — is that you've got to build the market? And what I see that isn't happening…

ML

But you need a pathway. Sorry to interrupt, but that only makes sense to spend €400 billion just to decarbonize the existing European hydrogen pathway if you think there's a path to competitiveness.

ER

That’s your figure Michael, I think the figure is wrong.  

ML

Sorry, but if you say you've got to do this by 2050, there is not one serious analyst that thinks we're going to get to $1 per kilo hydrogen by 2050, not anymore. At the time you wrote the book, there were some. There are none now.

ER 

I agree. My former firm, BCG, also had a figure — €3 — and they just published a report — compliments to them — correcting that now, in Central Europe, that's what it said in the graph, it’s more like €5 per kilogram. So definitely strategy firms are correcting their…

AC  

But isn't it the case, though, you're talking about the pathway. And I think this is the perspective that Erik is coming from, that not enough investment is actually going into creating that pathway. And you compare it to say, you look at, and we started the conversation, talking about GTL. The Qataris were huge investors in GTL, but at the same time they were investing in the pathway. And what did that look like? Well, they invested in, you know, auto manufacturers, and they invested in lots of off takers, potentially for the because they wanted to create the market. And it's interesting the people that you were talking to to prepare for the interview... You know, China, India, there's the market. We don't actually have the market in Europe.

ER

And to be honest, that's where, if you look to IEA figures, if I had to agree, in Europe and in the UK, definitely it's a very small part of new investments that's happening. If you look where the hydrogen market globally is now happening also, kind of like regional breakdowns, India and China. That's where you need to be. Where scale is actually delivering. So we can also just wait five years. That's not my preference. We can wait five years, and I think we'll have some very interesting data to see how China and India developed this market. And for me, maybe the key, I really actually like the term you just coined earlier, Andy you said hydrogen is a resilience fuel. I think actually it's also an energy security fuel. So I don't argue we should replace 100%. But if you have hydrogen there, and people know you can credibly produce it, that caps your gas price, and already that's worth billions. 

ML  

When you say we're already seeing the scale driving it, there will be cost reductions. The question is, and partly because these projects are first of a kind, and even the electrolyzers are expensive. But this is the problem. Even with the cost reductions you're looking at, Erik used the numbers $4 per kilo in China. That is compared to $1 per kilo of fossil-based hydrogen. And even if you imported that somehow to Europe, let's say you turn it into ammonia and you import it into Europe, you would need a €250 carbon price. Why not just buy fossil ammonia from China, bring it to Europe and pay the carbon price and save yourself hundreds and hundreds of euros per ton? See when people say, ‘Oh, we can't sign an offtake agreement, right? The problem is demand. The problem is confidence. The problem is offtake.’ The reason there's that problem is because these are commodities. And you know commodity traders, they'll figure out the cheapest way to do whatever it is they're trying to do. And if they can bring in grey hydrogen, grey ammonia, and then pay a carbon price. That's what they'll do, and it'll be hundreds of dollars per ton cheaper. So that's what they're going to do.

ML

Cleaning Up is supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP of Portugal, Eurelectric, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you've enjoyed this episode, please hit like, leave a comment, and also recommend it to friends, family, colleagues and absolutely everyone. To browse the archive of over 200 past episodes, and also to subscribe to our free newsletter, visit cleaningup.live.

AC  

Where I'm going with the question, and it's around technologies: if you look at what sustains the fossil fuel industry, yes petrochemicals, and we can talk all about that, but actually it is the three key things for human existence: transportation, heating and cooking. Ultimately, you've got to feed yourself, you've got to keep yourself warm, and you've got to get from A to B. And actually, fossil fuels are very good at that. And actually, the big disruption in fossil fuels has come from the electrification of transport. And if you were to think actually, in all our lifetimes, actually what we're seeing now in transportation, especially passenger transportation, is quite unprecedented. Because for the first time in 100 years, the automobile is being seriously challenged, or the internal combustion engine is being seriously challenged by battery electric vehicles. And they are better, pretty much on every measure. They don't need servicing, running costs are lower. Yes, they're a bit more expensive to buy. But even that's coming back. The technology is better. They park themselves. They're just good. But that doesn't exist for hydrogen. Where's the end use case for it?

ML 

Can I suggest that you've got your finger right over the key difference between Erik and me right, which is, I've got a business, PragmaCharge, which is delivering electric HGVs cheaper than diesel today without subsidies? Can we do it in every country in Europe? No. Can we do it on every route? No. But what we know is that the trucks are going to get cheaper, the batteries are going to get better, etc, etc. So we can do that today. So that's what I'm doing. Erik talked about his portfolio, which actually I want to come back to, because that's pretty funny

ER 

Would you then also tell if you have invested in hydrogen as well? 

ML

I do have hydrogen holdings too, which we can dive into. I'm not sure why that's relevant, but anyway. But the difference is that Erik in 2023 — it's only two years ago — he writes this thing, which is Jules Verne style stories. And you can read this, and I do encourage people. It's very, very good. You can get it on Amazon. and you can download it for free. 

ER

Yes, europeangasmarket.eu. 

ML

And it is full of stories about the hydrogen car, the Toyota Mirai, and it's full of people, you know, it's different chapters written by different people. They're all about to jump in a Mirai as a taxi, right? Because of the tremendous success of the Hype. It's called the Hype taxi in Paris. Hype no longer uses hydrogen taxis, right? So the flagship of Mirai use has stopped using hydrogen taxis. Hydrogen trucks, as I say, what am I doing? Electric trucks. So you can go through use case after use case. What do we use hydrogen for? Fertilizers, petrochemicals, and given the horrendous cost problem and the fact, I'm afraid, that the learning curves are not as steep as solar and batteries. There are learning curves associated with chemical engineering, civil engineering, electrical engineering…

AC

So you just don’t see a future where it’s used for transportation?

ML

No, not at all. 

AC

Even though there’s people building engines for it? 

ML

We can have bubble after bubble.

ER

I would disagree on massive, only if policy is sustained. And I do know that there are, I cannot mention the names here, but I do know there are companies that — based on policies — do invest in fuel-cell based physical but it's not going to be massive. I absolutely agree. I think what is very interesting is that e-diesel, for example, is something luxury car brands are exploring, right? Is this the mass used for transportation? No, I agree with Michael on transportation. I agree that's not the best use case. But there are two layers of Michael’s hydrogen ladder that are useful.

ML

Let me deal with this. As a joke, on my hydrogen ladder I put muscle cars. Because, yes, if you want to drive from Abu Dhabi to Dubai in your Ferrari and you want to make the right noise, approximately, you probably need an e-fuel, you know. If you want to do it low-carbon. But that is a very small niche

AC

This happened in 1980 by the way. You know, people converted their cars to run on gas. My father converted his Land Rover to run on gas, it blew up. I’m wearing his watch today, but he’s still with us.

ML

By e-fuel, what Erik and I mean is a petrol equivalent, you know, equivalent to the exact same fuel, but made using hydrogen, right? So that's tiny muscle cars and old timers. But you know, off road vehicles, and obviously we're sitting here in the UK, there is a major manufacturer of diggers, and to fuel them, you’d have to bring the hydrogen from somewhere, right? And I wonder how many of the audience know that? You know, we've all seen diesel tankers, right? We've all gone on the motorway and you see a diesel tanker. It's a great big thing full of diesel. Do they know that if you want to transport the same amount of energy, same amount of fuel as hydrogen, there would be 16 of those tankers going along the motorway to the same building site, right? So we've got the Lower Thames Crossing, and apparently they want to use hydrogen for their non-road mobile machinery.

ER

Michael, we have 1,500km of pipelines in Europe, where hydrogen is transported daily.

ML

Let me finish. You're not going to transport hydrogen by pipeline to the Lower Thames crossing for a few years of building. Let's be real.

ER

No no no, in Europe, in northwest Europe there is already an existing network, 1500 kilometers of hydrogen transportation that works perfectly.

ML

If I might just finish rather than do the Gish gallop about pipelines, sorry. So what you're not going to have is 16 tankers delivering hydrogen at 700 bar, which is what you need to do to construction sites or into the middle of the forest to chop down some trees, or to build a road and so on. It's just fanciful. It's fanciful. And I think that it's time that we said — like the European Court of Auditors, and the Cour de Comptes and the German auditor — we just said, ‘Look, it's been great. It's been fun. You know, it's wonderful to have Jules Verne-style stories and entertain the children. But that is not energy policy.’

AC  

But there are some serious people looking at this. As we discussed, you know, I met a former leader of a major political party in United Kingdom, former member of the ex-coalition government a few years ago, who is seeking to find the solution.

ML

I applaud him for seeking. I applaud him for seeking. But I would respectfully suggest that he is seeking in the wrong place. He is seeking in the wrong place.

AC  

So the pipelines that you're talking about, Erik, in Europe,

ER

They are being laid as we speak. There is already an existing network of 1,500 kilometers run by incumbents running grey hydrogen. And it’s basically shown that it's economic to have a network and to share the risks of disruption of production and do storage and manage flexibility at a cost. And now we have the European gas operators who started in Germany, with help of the German government insurance scheme, constructing pipeline systems. Once those systems are out there, and there are people globally planning to import ammonia, crack it to hydrogen. So the global trade ecosystem in the 2030s, if you look well enough outside this room, a bit to the future, you can see that there will be a global trade in hydrogen through ammonia. There will be a pipeline system in Europe connecting the petrochemicals, the chemical industry, probably a few steel plants to a hydrogen ecosystem. Will there be millions of hydrogen cars? I have to agree with that part you have to read in the book, I'm not seeing it in the next 10 years.

AC  

And let's face it, LNG is an industrial process that is far from — well, I'm not going to say it's far from safe, because someone will take issue from that, but there have been accidents. And no one really wants to know what happens if something bad goes wrong on an LNG vessel. You had a huge explosion in Algeria. I think 25 years ago now.

ER

I think now the LNG industry is a lot safer.

AC  

But when it started out, it wasn't. And the technology improved, and they got there.

ER

And we have a lot of experience, like I say, because hydrogen is not in itself, a new molecule. In fact it's all around us. The incumbent companies have a lot of know-how in working with hydrogen, we have existing hydrogen systems. Safety is not the reason. I do think Michael has a point, we have to look at use cases that are economic, and we should not spend billions like Michael rightly suggests — 400 billion, whatever. We should look though at the fossil fuel bill, for example, of Europe, between €300-400 billion a year we spend on fossil fuels. If we can keep managing that through hydrogen as a resilience tool, just for part of that volume, everybody who sells us fossil fuels in Europe knows that if the price goes again, like in the Russia-Ukraine crisis, to €10 euro per kilogram of equivalent…

AC  

Well it bails out most European governments. When you've got France in the UK on the verge of then can do..

ER

Then we can do an alternative.

ML

As always, unfortunately, we've got sort of three or four hares that Erik has started running here. Coming back to resilience, right? You can only blend in your €10 hydrogen or your €5 euro hydrogen if you have built it. But to build it, you have to pay that day in, day out for 15 years. Okay, so please, let's not have this resilience discussion. The second thing is, Erik's mixing whether there'll be a global trade in ammonia with pipelines, right? You notice he moved off pipelines very quickly. So Germany is trying to build €18 billion worth of pipelines. There's a lovely project, my favorite project, actually, is where RWE is making hydrogen, and TotalEnergies is going to use the hydrogen. Right now the cost of the project is such that 80% of the cost of that would have to come from subsidies or regulatory support. So RWE gets a subsidy, and TotalEnergies is doing it to avoid a penalty under some EU regulation, which is called RefuelEU or Red III or something, it doesn't matter what it's called.

AC  

Predictably random name.

ML  

But the great beauty of this is that they're 600 kilometers apart. So even though 80% is paid for by the public, they can't actually do it unless the public also supports the construction of the pipeline. The mechanism Germany has put in place — because if you build a pipeline and then you charge its costs to the first users, obviously that would be ridiculously expensive, and you kill everything — so the German state has created actually, a very clever mechanism whereby they subsidize the cost of the pipeline up to a point, at which point the pipeline has to pay for itself or it goes bankrupt. You heard it here first. There is no way that pipeline is not going to go bankrupt if it goes ahead. Those €18 billion. Because there isn't demand. There isn't the demand that isn't the supply.

ER

Shared infrastructure and public support in all industries. 

ML

Well no, you do shared infrastructure, if at some point there's enough volume to cover its cost. If there is never enough volume, don't do it. But I want to talk about two things. One is this global trade in ammonia. There will be a global trade in ammonia, right? But ammonia trades in the global markets at $350-400 a ton, $500 a tonne. It does not trade at $800 plus a tonne, right? Not cracking it back to hydrogen, to use a hydrogen infrastructure that, as I say, won't exist.

AC  

And it's not without its problems.

ML

Well as a shipping fuel, in other words, what you put in the engine, it's not nice stuff. We do actually ship 20 million tons, as I said. I do want to bring one other thing into play, which is green hydrogen for green ammonia. There's one other thing which is not in the public debate nearly enough, which is that every green hydrogen project has to have green electricity, right? And green electricity is the stuff we should be using right. Green electricity, you can use it in China, in India, in exactly the countries which are going to be the cheapest to make whatever hydrogen…

AC 

And that's what they're very keen to talk about in India at the moment. 

ML

But what they should be doing is pushing coal off the grid, because if you just look at ammonia — so take your electricity and use it to push coal off the grid, or take the same electricity and use it to make ammonia. First of all, the ammonia route would have 1/3 of the impact on emissions that getting rid of coal would have. So you're doing 1/3 of the good by making that choice. You're also dramatically increasing the capex required. You're spending huge amounts of money to do 1/3 of the climate good. And I have not heard a single person give a good reason why that's a good idea.

ER

Electricity grids. 10 to 15 years waiting lines, I think in the UK.

ML  

Stop spending money on hydrogen and fix that problem. Fix grid problems. Because it's cheaper than hydrogen, faster than hydrogen, and has a bigger impact on climate than hydrogen.

ER

We are trying to fix it. We cannot yet fix it. I think if you were

ML

Sorry we’re not, we’re being distracted by hydrogen and not fixing it.

ER

Michael, if you're living in a world where there are renewables, one line, and then the option to electrify hydrogen, you are absolutely right. There are multiple factors: geopolitical resilience, grid problems, economics of starting now and building up the sector capability. When you add that up in that world, I think we need optionality to have a livable planet. Perhaps we will have to agree to disagree. I think we need optionality, including hydrogen. What I'm hearing is Michael wants to pick winners.

ML

No, I want to not pick losers, right? Let's be clear about this.

AC  

Actually because we are getting close to the wrap up, this is actually where we wanted to go with this. So I think picking winners is a good way to end here. And you know, for our listeners, everyone wants to pick a winner. No one wants to pick a loser in this game. So, Michael, your winners here are really ammonia, hydrogen generated from clean electricity, but fix the grid first and lots of other good things can happen from that.

ML

And I think, just to be complete, I think, and by the way, this is not my starting point for preference, but having really, really dived into the economics to fix that 100 million tons a year of currently grey fossil, dirty hydrogen that we produce. The cheapest way to do it is going to be what they call blue hydrogen. So it's going to be fossil, but with some form of carbon removal. And there are lots of people running around going, ‘Oh, that's impossible, and it couldn't possibly work.’ But what they really say is they hate oil and gas companies so much that they want to spend trillions of dollars more on a fantasy route to solve that problem. So yes, my solutions are blue to fix, decarbonize, and it's done by these companies that have got fantastic engineers, they've got pipelines, they know how to do this. Force them to do it and to do it properly. Properly means dealing with fugitive emissions, leaks and really capturing the carbon and so on. And then electrify, electrify, electrify.

AC  

And Erik, your perspective seems to be more of everything, actually. That it still does have a use at an industrial scale, at a domestic scale, it's more of everything, including all three main…

ER

Yeah, but without hydrogen overspending on subsidies. I think we need a carbon price. I do believe in an energy dominant world where every country, including Europe, would like not to be importing, and we see that in China and India. So I do believe also in the top two layers of Michael's hydrogen ladder, we should focus on that. So in fact, I invite you to fold the ladder into stairs, along with a willingness to pay and focus on the top two with a carbon price. But blue and green, because we need the time to build the technology and knowledge. And I know Michael, we talked about it, you don't like hydrogen museums, so actually launching a different project, because I think you were right. We don't need a hydrogen museum. I do think we need a children's book for five, six year olds on hydrogen. 

AC  

Well, it's a serious topic and I know building hydrogen writing into raising energy education, I think this is a deficit in how we need to…

ER

We need the creativity of our children to resolve differences of two smart people

AC  

Last point or I’m going to be in trouble with the producer.

ML

Telling another generation of children that hydrogen is the solution, I think is pretty much at this point, with our current knowledge of thermodynamics, current knowledge of the economics of this stuff, current knowledge of 50 years of failure to do this stuff… misleading another generation of children into believing that they can break the laws of physics, which is what drives this, is almost tantamount to child abuse.

AC

And on that note… 

ER

I disagree. 

AC

Thank you both. Delighted to be joined by Michael Liebreich and Erik Rakhou. This has been a great conversation. I would be delighted if you both come in and do it again. Let's make this a regular thing. Maybe once a quarter, but a fascinating subject. And I've learned a lot.

ER

Can we applaud our moderator?

ML

That we can agree 100%, you've done a fabulous job. 

AC

Thank you so much.

ML

So that was my debate with Erik Rakhou, hydrogen fan, founder and managing director of Rakhou Associates, recorded at the S&P Global offices in London. As always, we'll put links in the show notes to resources that we mentioned in our conversation. So that's my remarks at the 2022 Hydrogen World Congress in Rotterdam and Erik's book, the 2023 edition of Touching Hydrogen Future. With that, I'd like to thank S&P Global for hosting our debate, Andrew Critchlow for moderating it so patiently. Oscar Boyd, our producer, Jamie Oliver, our video editor, the team behind Cleaning Up and the Leadership Circle without whom, of course, none of this would be possible. And you, the audience, for spending some time with us here today. Please join us at this time next week for another episode of Cleaning Up. 

ML

Cleaning Up is supported by its Leadership Circle. The members are Actis, Alcazar Energy, Arup, Cygnum Capital, Davidson Kempner, EcoPragma Capital, EDP of Portugal, Eurelectric, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live. If you've enjoyed this episode, please hit like, leave a comment, and also recommend it to friends, family, colleagues and absolutely everyone. To browse the archive of over 200 past episodes, and also to subscribe to our free newsletter, visit cleaningup.live.