What the Hydrogen Economy Can Learn From LNG
In recent decades, the LNG industry has grown rapidly from a handful of point-to-point trades to a thriving global industry. Could the hydrogen industry follow its remarkable ascent?
Hydrogen is frequently characterized as the fuel of the future. However, for it to fulfill its potential, a hydrogen market must be created almost from scratch. The future of the hydrogen economy is full of uncertainties, but looking at the history of the LNG market – also based on a versatile fuel which is relatively easy to transport and store – could reveal a path forward.
Building markets
The first LNG shipment dates back to 1959. For many decades, the LNG market was limited to a point-to-point market (composed of direct shipments from supplier to customer) based on a handful of long-term contracts, with a global LNG market emerging only more recently. Similarly, the hydrogen economy could take decades to grow to a comparable scale: from a localized point-to-point market, to scattered bilateral trades, to larger contracted international deliveries and, eventually, a thriving global market.
At present, hydrogen is at an even earlier stage, being mostly consumed on the site of production. The next step is likely to be 'hubs' based around existing industrial clusters, such as the UK's upcoming 'hydrogen transport hub'. These clusters could give rise to hydrogen being sold through local and then regional transactions.
As has been the case for LNG, dedicated transport infrastructure (i.e. specialized tankers) will be critical for long-distance hydrogen trade. This is already being recognized and explored – for instance, in 2020 Saudi Aramco transported 40 tons of blue ammonia to Japan. Once this transport infrastructure has been established to support point-to-point shipments – in addition to storage facilities and other infrastructure – the hydrogen market could resemble the early LNG market.
The hydrogen rainbow
Hydrogen can be produced in different ways, with wildly varying costs and environmental impacts. This variation – as well as variation in the form hydrogen is transported – means that there is unlikely to be a 'unified' hydrogen market as there has been for LNG.
In not being derived from fossil fuels, low-carbon or 'green' hydrogen inherently has less in common with LNG. As the product is chemically identical, it can be transported and stored using the same infrastructure as other forms of hydrogen, but requires unique production infrastructure: electrolyzers located on sites with abundant renewable energy resources, geographically distant from existing gas or hydrogen infrastructure. Notably, its growth will also be paired very closely with the falling cost of renewables.
Supporting investment
The LNG industry has been built on the back of contractual frameworks that reduce risk and encourage investment – there is much that could be replicated in supporting the hydrogen industry. For example, a 'take-or-pay' clause was incorporated into many long-term LNG contracts (which requires a customer to pay a penalty if they do not purchase a contracted minimum quantity), guaranteeing certain returns for the seller.
It could also be useful to look to early renewables policy for inspiration, given that hydrogen today is in a similar position to renewables like offshore wind 10 to 15 years ago. In the late 2000s, government support in the form of tax credits and feed-in tariffs – which provide long-term stability for producers by guaranteeing an above-market price per unit – were critical to accelerating the pace of deployment and reducing costs. Similar policy interventions targeted towards lowering risk could play a valuable role in spurring the hydrogen economy.
Growing the hydrogen economy
Hydrogen is a young sector that has a long way to go to fulfill its potential in helping meet international decarbonization targets. If it is to grow rapidly to an international scale as LNG has in recent decades, it is important to provide support for reducing risk, overcoming barriers and supporting rollout of infrastructure.
Governments could consider securing demand through schemes like Germany's H2 Global, which helps projects gain financing through a government-based exchange to purchase hydrogen for a fixed price. Meanwhile, organizations must collaborate to agree on the best paths forward for hydrogen, such as mechanisms for measuring and pricing the carbon intensity of hydrogen based on transparent data.
Only by leveraging public and private finance and engaging all stakeholders to reduce risk can hydrogen follow LNG's remarkable and rapid rise.
