Global trade key to accelerating a more cost-effective transition to a hydrogen economy

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The 2023 update of Global Hydrogen Flows, co-authored by McKinsey & Company, highlights the vital role global hydrogen trade will play in spurring hydrogen adoption and accelerating a more cost-effective transition to a hydrogen economy.

 As we strive for a completely decarbonized world by 2050, the importance of hydrogen’s role in a transition to net zero has never been more evident. But in the face of a challenging economic landscape, and rising supply chain costs and constraints, the need to supply the world with the most competitive sources of clean hydrogen is paramount, a new Hydrogen Council summary report released today says.

The 2023 update of Global Hydrogen Flows, co-authored by McKinsey & Company, highlights the vital role global hydrogen trade will play in spurring hydrogen adoption and accelerating a more cost-effective transition to a hydrogen economy.

The summary report highlights how the hydrogen industry is adapting to an evolving regulatory framework, shifts in global policy, rising costs, and ongoing learning from project implementation. It revisits the 2022 Global Hydrogen Flows report to account for these and other changes, and assesses how global hydrogen trade flows could evolve.

The 2023 update of Global Hydrogen Flows finds that hydrogen trade will be even more important than thought before in supplying renewable constrained regions with access to clean molecules. The main hydrogen demand centers often do not align geographically with areas ideal for renewable hydrogen production. This creates potential trade opportunities between countries with surplus hydrogen production capacity at a low cost and those countries needing imports.

Since the 2022 report, new regulations and production incentives such as the Inflation Reduction Act (IRA) in the US and the Renewable Energy Directive (RED III) in Europe have been introduced. These changes result in even larger clean hydrogen production cost differentials between geographic regions than previously thought, creating trade opportunities between countries with surplus hydrogen production capacity at a low cost and those countries needing imports. By 2030, the evolving hydrogen production cost profiles could result in a 15x cost differential between the highest and lowest cost regions.

Acknowledging the critical role hydrogen has to play for the world to decarbonize by 2050, there is an urgent need to accelerate efforts and investments to unlock trade, connecting suppliers and offtakers of clean hydrogen.

The 2023 analysis considers demand and trade in a scenario called Further Acceleration (FA), in which the energy transition is accelerated compared to today’s pace but the world still fails to reach below the 1.5°C temperature target. Under this scenario, demand for clean hydrogen (both low-carbon and renewable) could reach over 40 million tons per annum (MTPA) by 2030.

International trade will be crucial: around half of the clean hydrogen (both low-carbon and renewable) produced by 2030 is expected to be transported across long distances, according to the summary report. That is 20 MTPA out of 40 MTPA of total clean hydrogen demand.  This transport will happen mostly via pipelines or shipments of clean ammonia replacing grey ammonia.

By 2050, clean hydrogen demand grows to 375 MTPA. Out of this, around 200 MTPA could be transported across long distances. By then, pipelines could account for around 40% of long-distance transportation, synthetic kerosene and ammonia another 20% each, shipped hydrogen (either via ammonia, LOHC, or LH2) 10%, with methanol and green steel accounting for 5% each.

Ensuring long-distance transportation of hydrogen and derivatives could result in significant cost savings and reduce carbon abatement costs. In a scenario where international hydrogen trade develops, total hydrogen investments could amount to approximately $8 trillion by 2050, representing $4 trillion in cost savings. To facilitate long-distance transport of hydrogen and derivatives, around $70 billion investments would be required per year by 2050 in transportation, conversion, and reconversion infrastructure.

Renewable hydrogen will play an important role, despite a higher cost outlook
The 2023 analysis includes a detailed bottom-up assessment of the development costs of large-scale
renewable hydrogen projects undergoing front-end engineering design (FEED) studies.2
 This approach
considers not just equipment costs but also includes a thorough review of the balance of plant (BoP), as
well as engineering, procurement, and construction (EPC) costs. The assessment found that the LCOH
for renewable hydrogen is between 30 and 65 percent higher in 2023 when compared to estimates
from 2022. The increase in LCOH is driven by higher capex, financing, and renewables costs, as well
as the broader inclusion of additional costs such as EPC. A large portion of the cost increase is from the
higher BoP and other developer costs, as found by McKinsey Capital Analytics and McKinsey Hydrogen
Insights when assessing electrolysis construction projects. To soften the impact of higher plant capex,
the electrolyzer size can be decreased or load factor increased by swapping lower-cost solar with lowload factors, with setups that yield higher load factors such as wind and hydropower.
Despite the higher cost outlook, the analysis points to renewable hydrogen largely maintaining its market
share compared to low-carbon hydrogen from gas—for reasons potentially ranging from a focus on
products derived from renewables to new incentives and direct support. By 2050, out of 375 MTPA of
total clean hydrogen demand, the forecast is 265 MTPA renewable and 110 MTPA low carbon reflecting a
70:30 split. (See sidebar, “Renewable hydrogen maintains its market share”).
Cost and technology uncertainties persist in low-carbon hydrogen production
Natural gas prices have seen sustained volatility since the initial report was released in 2022. At the
time of writing, natural gas futures in Asia and Europe remain elevated and have been used to guide the
updated view to 2030 as gas producers may favor expanding exports of natural gas. Beyond 2030, the
natural gas price outlook is based on the supply-demand balance expectations and is differentiated by
region. Under the FA scenario, gas demand and global gas prices decline over time, making low-carbon
hydrogen production more competitive. At the same time, the trajectory of the natural gas demand
decline is slower than under the net-zero scenario, increasing the price of both natural gas and lowcarbon hydrogen ($0.10 to 0.20 per kg) relative to the net-zero scenario projections.3 Capex has also risen for low-carbon hydrogen, but this has a far more limited impact on the cost of production, given
that costs are mostly operating expenditure (opex) driven. Higher electrolyzer capex favors low-carbon
hydrogen production and—assuming CCS can be scaled up fast enough—low-carbon hydrogen could
account for 45 percent of hydrogen production compared to the base case of 25 to 30 percent and reach
up to 65 percent of long-distance traded volumes.

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