Hydrogen will overtake natural gas in APAC as governments chase net zero

With producing green hydrogen costs set to drop, APAC is ripe for a hydro revolution.

Low-carbon hydrogen is central to national net-zero targets globally, and the number of companies announcing hydrogen strategies has been growing. Hydrogen could play a much larger role in the energy mix than the 12% occupied by natural gas today (up to 400 million tons APAC hydrogen demand in the most aggressive scenario). 

UBS Evidence Lab expected China to develop a green hydrogen supply before other countries in the Asia Pacific region and to eventually build a 100% self-sufficient hydrogen economy. Japan and Korea are likely to rely on imports and may seek to lead global supply chain initiatives. Meanwhile, Australia and New Zealand could build surplus production and emerge as regional exporters. Markets in the EU and North America, on the other hand, will likely follow their own unique paths.

Hydrogen could reach an equivalent of as high as 15% of the current level of primary energy consumption in the long term. Using China as a test case, the estimated cost of producing green hydrogen will drop by around 75% by 2030 and by another 50% by 2050 and that the levelized cost of electricity (LCOE) will be the most critical element in the declining cost. 

According to UBS Analyst Peter Gastreich, green hydrogen could begin to look attractive for use in heavy land transport and a carbon tax of c.US$40/t could accelerate adoption in chemicals and steel—both large industries for low-carbon hydrogen in China—depending on transport distance.

Blue hydrogen will lose its cost competitiveness over green hydrogen by 2030, but that this may not be the case in other global markets, such as North America.

Finally, the cost of transporting liquid hydrogen could remain prohibitively high in China, meaning that distributed green hydrogen production within 300-400 kilometres of end-user markets will likely be required, leaving central mass production of green hydrogen likely off the table. 

APAC's addressable hydrogen market could reach 300 million tpa in the long-term, which is equal to around 15% of current primary energy consumption, and about 9-10 times the current demand for hydrogen in APAC. For perspective, UBS said that natural gas currently occupies around 13% of primary energy consumption in APAC and oil occupies around 27%.

The 300 million ton demand outcome corresponds to UBS’ “carbon abatement” scenario and is the most likely outcome in the long term for APAC. The “transformation” scenario would see demand reaching up to 400 million tons. Meanwhile, the ”low penetration” and ”slow boil” scenarios would see around 100 million tpa to 200 million tpa long-term hydrogen demand.

Today, the refining and chemicals industry accounts for nearly hydrogen demand in APAC. UBS anticipates that by 2050 to 2060, green and blue hydrogen consumed in transportation, power generation, and steel production in APAC will account for a respective 30%, 17%, and 20% of total APAC demand. 

UBS also expected China to account for more than half of the demand, and according to The China Hydrogen Alliance, hydrogen industry output value in China alone could hit US$2t by 2050, still well below the potential estimated by 2060. A drop to below US$2/kg in China would make green hydrogen competitive with diesel fuel for city buses, heavy-duty trucks, and off-road vehicles, like dump trucks for mining, particularly if the delivery point of hydrogen fuel is within 300 kilometres of the point of electrolyser production.

A decline in the LCOE—the average net present cost of electricity generation for a generating plant over its lifetime—of renewable power is the primary factor that is anticipated to contribute to a decline in the cost of production of hydrogen in China. This is driven by our expectation that wind turbine and solar photovoltaic costs will continue to drop as cumulative renewable energy installation capacity continues to rise.

By the period 2020-2025, alkaline-based electrolysers will be the mainstream solution for electrolysers used in China. This is primarily because Chinese-made alkaline electrolyser costs can be as low as one-third that of imported Proton Exchange Membrane (PEM)-based () electrolysers. However, PEM-based and western alkaline electrolyser costs are expected to decline sharply by 2025, narrowing the cost advantage of Chinese alkaline electrolysers.

The costs of compressed hydrogen transport, which will likely be the mainstream solution for small-scale hydrogen transmission over the next decade, are seen to decline 25-30%. This would be driven by improvements in tube pressure levels. On the other hand, for large-scale onshore hydrogen transmission, pipelines could be the most economical solution. For end-users where a high hydrogen purity is not required (heating and power users), blending hydrogen into natural gas pipelines to as much as 15% could provide a viable alternative.
                             
China aims to build a fully self-sufficient hydrogen economy—that is, not relying on imported raw material—and will be advantaged by capabilities in renewable energy for green hydrogen and geological carbon sinks for blue hydrogen. With China state-owned enterprises (SOEs) using their balance sheets to build out the supply chain, this could accelerate hydrogen development when compared to other markets. The China Hydrogen Alliance expected hydrogen to reach up to 20% of primary energy consumption in China by 2060. For perspective, this is close to what oil currently occupies as a percentage of China's primary energy consumption. 

Australia and New Zealand look to have advantages in domestic green and blue hydrogen supply, given the potential for deep penetration of renewable power generation to feed electrolysers and/or availability of geological carbon storage sinks. These could position both Australia and New Zealand as surplus producers or exporters.
                                         
The hydrogen economies in countries like Japan and Korea will likely be more import reliant, UBS believed. These countries will likely seek to build global supply chains to secure imports of hydrogen and ammonia (green and blue) in the long-term. This could eventually have positive implications for growth in ammonia industries and have positive implications for seaborne trade volumes. However, logistical challenges still exist.

The US national labs predict demand for hydrogen in the US at 1-14% of total energy demand by 2050 (equivalent to 22 million to 41 million metric tons annually), per the Department of Energy Hydrogen Program Plan. Currently, roughly 10 million metric tons of hydrogen are produced in the US, with over 90% from centralized reforming of natural gas (c.1% of total US energy consumption). 

The European Union regards hydrogen as a key priority in achieving the European Green Deal and its clean energy transition. It understands the role that hydrogen can play in both storages of renewable energy and substitution of fossil fuels in carbon-intensive processes as well as hard to eliminate parts of the transport system. The EU projects that hydrogen's share of Europe's energy mix will grow from <2% to 13-14% by 2050.

Generally, UBS believed that green hydrogen could be pushed at a faster rate in China than in the rest of the APAC region given that oil SOEs like Sinopec may be willing to accept lower returns for early adoption and in support of national net-zero strategies.

Our carbon abatement scenario in which hydrogen could represent around 15% of APAC energy consumption in current terms (300mn tpa), with China seeing the highest penetration rate and India potentially the lowest among the major economies. The China Hydrogen Alliance believed that the industry output value for China alone could reach around US$2t per annum by 2050 and that is based on hydrogen reaching just 10% of primary energy consumption by that year (the Alliance expects up to 20% of primary energy consumption by 2060).