February 25, 2022
Reducing carbon emissions to combat climate change is a priority that can no longer be postponed, and it is a battle that must be won in several sectors. In this scenario, sustainable alternatives to fossil fuels will play a key role
A greener future for heavy transport is needed. The sector (trucks and lorries, aviation, shipping, and trains) is responsible for the annual emission of about 4.3 billion tons of CO2, representing 8.8% of annual global carbon dioxide emissions, according to 2016 data reported by climatewatchdata.org. Vehicle electrification promises more sustainable mobility and transportation, although the use of batteries in heavy transport may be unsuitable due to several factors. In particular, it can be challenging to implement if the vehicle needs to be very light, achieve a high degree of range, or need short refuelling times. For these reasons, sustainable solutions being explored for heavy transportation include hydrogen and e-fuels.
An alternative “colour” power source
Hydrogen is contained in water and hydrocarbons, and is one of the most abundant and available elements in the Earth’s crust (as well as the most abundant in the universe). There are four main ways to generate it, associated with various colours which depend on the production process and impact on the environment: grey, blue, green, and pink.
- Grey hydrogen. The most common – and polluting – process for hydrogen production is the one that uses natural gas or coal as a raw material, which, reacting with steam at high temperatures and generating pressure to produce synthesis gas, mainly produces hydrogen and carbon monoxide. The synthesis gas obtained is then reacted with additional water to produce pure hydrogen and CO2. This well-established process is already widely used in industry, but it generates significant carbon dioxide emissions. This is why the hydrogen created by this “unclean” process is called “grey.”
- Blue hydrogen. Blue hydrogen production relies on the same basic processes as grey hydrogen. Still, unlike the latter, it aims to trap up to 90 percent of GHG emissions through carbon capture technology and is, therefore, a cleaner technology than the former. In some cases, the carbon is stored underground, a process that requires significant capital osts. Alternatively, it is reused as feedstock for industrial applications, where, therefore, the CO2is still released into the atmosphere.
- Green hydrogen. The most promising process, green hydrogen, uses renewable energy to power electrolysis that splits water molecules into hydrogen and oxygen. This is the cleanest process since it uses energy from renewable sources, which is why the hydrogen produced in this way is called “green.”
- Pink hydrogen. Pink hydrogen is also produced by water electrolysis, but the process is not powered by energy produced from renewable sources but by nuclear energy. It is, therefore, a clean process but more controversial than that for the production of green hydrogen.
Experts bet on “green”
Total annual demand for green hydrogen could grow from 62 million tons in 2018 to 530 million tons in 2050 (compound annual growth rate between 2018 and 2050 of 6.9%), replacing about 10.4 billion barrels of oil equivalent (37% of global pre-pandemic oil production) in various sectors such as heating, transportation, power generation, chemicals, and primary steel production. The report “The dawn of green hydrogen” – published in 2020 by Strategy& (PwC) – states that the annual global export market for green hydrogen is expected to be worth about $300 billion annually by 2050.
Currently, green hydrogen costs much more than grey hydrogen (we are talking about a 73%-110% higher production price) and even more than blue hydrogen (27%-31% more). For comparison, green hydrogen costs between $2.1 and $3.8 per kilogram, compared to $1.6 to $3 per kilogram for blue and $1 to $2.2 for grey. However, by 2030, green hydrogen is expected to become 8%-13% cheaper than grey hydrogen and 27%-29% more affordable than blue hydrogen, again according to the previously cited report.
The main cost for on-site production of green hydrogen is the cost of the renewable electricity needed to power the electrolyser, which makes the production of green hydrogen more expensive than blue hydrogen, regardless of the cost of the electrolyser itself. A low cost of electricity is, therefore, a necessary condition to produce green hydrogen competitively. However, low electricity cost alone is not enough, and reductions in the price of electrolysis equipment are also needed.
Green Hydrogen cost
Source: “The dawn of green hydrogen”, Strategy&,PwC 2020
In this regard, it is worth dwelling on this process, pointing out that there are currently three leading technologies for electrolysis with different levels of maturity.
- Alkaline electrolysis (“AE”) is the most basic and mature technology and has a market share of about 70% of the green hydrogen market. It benefits from low cost and allows for a process that has a long operating life. However, alkaline electrolysis processes need to run continuously; otherwise, the production equipment is at risk of damage. Therefore, the intermittent nature of renewable energy rules it out as the sole source of energy for this type of electrolysis.
- Proton exchange membrane electrolysis (“PEM”) is another technology used in the green hydrogen production process, with a market share of about 30%, adopted by most major electrolyser manufacturers. PEM has many advantages over AE (speed, safety, etc.), but it also has a significant disadvantage: costly materials.
- Anion exchange membrane electrolysis (“AEM”) is, according to experts, the most promising technology to date. So far, research on AEM systems has been limited to laboratory tests, focusing on developing electrocatalysts, membranes and to understanding operational mechanisms with the overall goal of achieving high efficiency, low cost, and stable AEM devices.
The synthetic alternative to fuel: e-fuels
Green transport alternatives also include e-fuels: synthetic fuels resulting from the combination of green hydrogen and CO2 captured from a concentrated source (e.g., exhaust gases from an industrial site) or the air (via direct air capture, or “DAC”). Hydrogen can be used in the transport sector for electric fuel cell vehicles or can be brought to react with CO2 to form other gaseous fuels, such as methane or syngas. Syngas can then be converted into liquid e-fuels, such as diesel or gasoline using Fischer-Tropsch synthesis. E-fuels are also described as electro-fuels, Power-to-X (“PtX”), Power-to-Liquid (“PtL”), Power-to-Gas (“PtG”), and synthetic fuels. Compared to fossil fuels, these products achieve significant CO2 reduction, offering a compelling complementary alternative for low CO2 mobility. The potential emission reduction is about 85- 96% if calculated with basic well-to-tank methodology (which considers the energy costs associated with the processing of the primary source, i.e., extraction, processing, and transport), or 70% if calculated with LCA methodology (which quantifies the environmental impacts along the entire life cycle, and therefore from the phase of extraction of the raw materials needed to produce the materials and of the energy to produce the product, until their final disposal phase). Furthermore, most synthetic fuels, including synthetic methane, diesel, gasoline, kerosene, and others, can be immediately used in existing appliances and infrastructure.
Production costs for e-fuels are currently relatively high (up to €7 per litre) but are expected to decrease over time thanks to economies of scale, progress in technical knowledge, and an anticipated reduction in the price of renewable electricity; this should result in a cost of about €1-3 per litre (without taxes) by 2050, about 1-3 times the cost of fossil fuels, by 2050.
Because of conversion losses, the price of electricity is also the primary determinant of the variable costs of e-fuel production. Access to a sustainable and affordable renewable energy source is therefore essential to the economically viable operation of a synthetic fuel production facility.
A boost in demand for these alternatives to diesel and gasoline may come from regulations in some countries. For example, based on the European Commission’s Renewable Energy Directive II (“RED II”), in May 2021 Germany passed a law to increase emission reduction targets in its transport sector. To meet these ambitions, a roadmap was signed for an electricity-based, environmentally sustainable aviation fuel market. The German government has decided to prescribe a fixed quota for synthetic blended kerosene, expected to be 0.5% by 2026, with an increase to 2% by 2030. The binding, progressively increasing minimum percentage for electricity-based kerosene envisioned by the federal government will massively advance its production on an industrial scale. The government’s legal provisions create the investment certainty needed to further develop sustainable technologies and plant construction.
The Venture Capital interest in green hydrogen and e-fuels
Both green hydrogen and e-fuel are young sectors, whose technologies are in the research and development (green hydrogen) or validation (e-fuel) phase, so we are only just starting to see the first investments from venture capital funds.
As for green hydrogen, the main deal seen so far involves the $24 million round raised in June 2021 by U.S. company Electric Hydrogen, participated by Breakthrough Energy Ventures, Prelude Ventures, and Capricorn’s Technology Impact Fund.
As for e-fuels, the main deals involve two German companies: Sunfire, which raised over €54 million from January 2013 to November 2020, in several rounds participated by Inven Capital, Idinvest, and Total Carbon Neutrality Ventures, among others; and Ineratec, which closed a round in July 2021 (with an undisclosed amount) by Planet A Ventures and Extantia Capital.
What future for heavy transport?
Green hydrogen probably represents the long-term future for transport, as it is the only solution with zero impact in terms of CO2 emissions. The still-preliminary stage of the technology (especially AEM hydrolysis, which, as mentioned above, is the most promising), as well as the high costs and high investment needed to build the infrastructure, could make the wait for green hydrogen development a long one. Meanwhile, something is already moving; at the beginning of October 2021, the new joint venture between Ardian and FiveT Hydrogen, Hy24, was announced, aiming to raise €1.5 billion invested in green hydrogen infrastructure.
Although it represents a temporary solution, as it does not entirely zero CO2 emissions, e-fuel has the advantage of being easily storable, and could be used in existing infrastructures. Therefore, it is likely to assume a scenario in which e-fuels could represent the main sustainable alternative to fossil fuels for heavy transport in a first phase, to be then, in a second phase, flanked (and, in a third phase, replaced) by green hydrogen.
Accelerating the transition from fossil to renewable sources will require efforts on many fronts. On the one hand, governments will have to continue to incentivise the shift to renewable sources by imposing obligations (as Germany has done for air transport), by granting subsidies to lower a cost that is not yet competitive with fossil fuels, as well as by allocating resources to fund R&D projects focusing on e-fuel or green hydrogen, and finally by investing in infrastructure to promote the development of hydrogen. On the other hand, Venture Capital funds and large companies will have to be more daring in these two young verticals with high growth potential, investing more than they have done so far. It will also be necessary for the cost of renewable electricity to fall further to allow greater competitiveness for both e-fuel and green hydrogen.
Reducing CO2 emissions to combat climate change is a priority that can no longer be postponed, and it is a battle that must be won in several sectors. At a time when we are finally seeing an initial transition from fossil fuels to electricity for light transport, we cannot ignore the heavy transport sector, which accounts for 8.8% of global annual CO2 emissions and urgently needs to speed up the decarbonisation process. The technologies are known, but they still need to be improved. The road will be long and there is no more time to lose.