Executive Summary As of this writing, the world is far off track for meeting the Paris climate goals of 1.5–2°C. Much of the carbon gap is because of the ‘difficult-to-decarbonize’ sectors such as shipping, aviation, and industry. Current projections still show fossil fuels making up the majority of world energy use by mid-century.
The Carbon Gap Climate Targets and Carbon Budgets In the 2015 Paris Agreement world leaders set a target for holding global heating well below 2°C and pursuing further efforts to limit warming to 1.5°C. According to the Intergovernmental Panel on Climate Change (IPCC), in order to meet a 1.5°C pathway with no overshoot, anthropogenic CO2 emissions must decline by half by 2030 and reach net zero carbon emissions—“Net Zero”—by 2050. For a 2°C pathway, Net Zero must be reached by 2070. Another way of visualizing the challenge is in terms of cumulative carbon budgets. For a 1.5°C outcome (with 66% probability) the IPCC estimates that the remaining carbon budget in 2017 stood at 420 GtCO2 (billion tonnes of carbon dioxide).1 With current global annual emissions of approximately 42 GtCO2, this means the entire 1.5°C budget will have been burned by the end of this decade even if emissions do not rise further. A recent paper in Nature found that committed lifetime emissions from existing infrastructure (coal and gas plants, industry, cars, aircraft, etc.) already exceed this 1.5°C budget, and that two-thirds of the 2°C budget is already committed.
Fossil Fuels Continue to Dominate Current world oil and gas consumption is equivalent to 100 million barrels per day (219 exajoules EJ per year), and this is projected to continue to grow through mid-century and beyond. The IEA’s “Stated Policies Scenario,” aggregating current government policies around the world on energy (and extrapolated by us to 2050), sees total oil and gas consumption growing to 350 EJ per year (see Figure 2). Although this scenario includes substantial growth in renewable generation for electricity, accompanied by a major electrification of surface transport, the IEA projects that fossil fuels will continue to supply 75% of primary energy by 2040. Figure 1 below shows the IEA’s projection of their “Stated Policies Scenario” for primary energy by source through 2040, with fossil fuel sources circled in pink.
Much of this remaining fossil fuel consumption comes in so-called ‘difficult to decarbonize’ economic sectors such as aviation, heavy industry, marine shipping, and non-electricity uses of gas such as for
domestic heating. While coal and natural gas for electricity generation are relatively easy to substitute
with clean energy replacements, liquid fuels are much more difficult to decarbonize. Indeed, liquid fuels
uses comprise the majority of remaining emissions by mid-century.
Hydrogen as the Missing Link Hydrogen has long been touted as the ideal replacement for fossil fuels, yet decades of hopes have so far not lived up to reality. Even so, hydrogen has some inherent advantages that are now coming into play more forcefully than ever before. Most importantly, hydrogen is a molecular fuel that burns without producing carbon dioxide, and thus does not contribute to climate breakdown. Hydrogen is also scalable: it is derived from water, and burns back into water, meaning the reservoir of hydrogen is essentially inexhaustible and can never be used up. It can be ‘burned’ either through combustion or in a fuel cell to produce electricity, and hydrogen-based fuels are energy dense, carrying much more energy per unit of mass than competing technologies like batteries. In this section we explain how hydrogen can substitute for fossil fuels, and what the economics need to be to drive this transition to a hydrogen economy.
Hydrogen Basics Hydrogen is not really a fuel—it is more properly described as an energy carrier since it does not occur in free form on Earth, and therefore unlike fossil fuels cannot be mined or drilled and burned directly. Hydrogen needs to be liberated from where it is bound to other molecules, such as methane (CH4 ) or water (H2 O) so that it can carry this energy in liquid or gaseous form for future combustion. Producing hydrogen from water is clean and easy. This is done via a process called electrolysis, where an electric current is passed through water, such that hydrogen and oxygen bubble off separately. However, electrolysis of water requires the input of large amounts of energy to break the strong molecular bonds of H2 O. The process is only 60–76% efficient, and further energy losses occur when hydrogen is stored, compressed, or converted to other fuels. Fuel cells and combustion also generate further losses, so the round-trip efficiency of hydrogen (from electricity in electrolysis back to electricity in a fuel cell or an engine) can be surprisingly low: at best 45% and at worst 16%.This is why direct electrification of sectors like transport (via electric cars) will always be more efficient than a hydrogen-centered approach which turns electricity into hydrogen and then back again.
Capacity Factor of Energy Supply Capacity factor (CF) is a metric that describes the ratio of actual electrical energy generated over time to the maximum possible generation over the same period. Table 1 below shows how capacity factor affects the total amount of energy that is produced with some example clean energy sources. The number of megawatt-hours (MWh) produced is calculated by multiplying the capacity factor—the average production in MW—with the number of hours in the year (8,760).
Our cost modeling shows that capacity factor is the single biggest driver of hydrogen production cost, as demonstrated by the shape of the curve in Figure 3 on the following page. This shows that with other factors held constant (see below for what these are), a move from 90% capacity factor (nuclear) to 20%
capacity factor (solar) can almost triple the cost of hydrogen. Moving from 90% capacity factor (nuclear) to 40% capacity factor (offshore wind) doubles the cost.
Figure 3 above demonstrates why using electricity from curtailed renewables (e.g., excess wind during windy days when turbines produce more than the grid can absorb) is not a viable option. Intermittent use of variable generation results in extremely low capacity factors and thereby very poor economics—the left-hand end of the curve in Figure 3. Hydrogen can never displace fossil fuels using this model.
Note that Figure 4 shows three different parameters: CapEx of energy, cost of hydrogen and capacity. Thus, for example, a high-cost source of energy—such as a US/EU new-build plant at a cost of $5,500/kW—operating at 90% CF has similar hydrogen production cost to a low-cost wind turbine ($1,500/kW) operating at a typical 45% offshore CF. Both plants produce hydrogen for roughly $4/kg.
Next-Generation Advanced Heat Sources for Hydrogen Production Low-Cost Hydrogen from Advanced Heat Sources Advanced modular reactors are hereafter referred to as advanced heat sources. In the longer term, this category of advanced heat sources could also include fusion and high-temperature geothermal, but for the purposes of this report advanced heat sources are referring to advanced modular reactors. Steep near-term cost reductions are only achievable by shifting from traditional ‘stick-built’ on-site construction projects to factory-style, modular, high productivity manufacturing environments. Next, we present two designs: (1) the Gigafactory, and (2) the shipyard-manufactured production platform, based on the floating production, storage, and offloading facilities (FPSOs) of today’s very large oil and gas industry vessels. Moving from traditional construction to highly productive shipyard manufacturing will dramatically lower the cost of clean hydrogen and synthetic fuels production. Existing shipyard production already has extensive capacity to deliver designed-for-purpose hydrogen production facilities and could be both upgraded and expanded to meet increased demand, as detailed below. Both designs offer potential pathways for delivering the necessary hardware at the required global scale. From the energy industry’s point of view, this represents a radical departure from today’s industrial, business, and technology model of ‘build-at-site, one-plant-at-a-time approach,’ with very little advanced manufacturing and design standardization. However, the business model proposed—large, centralized, efficiently delivered and managed, for global markets—is not new and has been widely demonstrated in other sectors. For example, this is precisely how the oil and gas industry currently operates.
The Gigafactory brings clean power plant project delivery into the 21st century. The entire facility is carefully designed for manufacturing and assembly, enabling a highly productive automated factorybased production system for the fabrication, assembly, and installation process. These simplified lean designs (with fewer components) minimize labor costs and enable the application of fast, high-quality modular construction techniques.
The Fuels Decarbonization Challenge Cumulatively, over the period from 2020 to 2050, at an average annual CO2 emission rate of 17 Gt/year these ‘difficult-to-decarbonize’ sectors will emit 510 Gt of CO2 over that 30 years—this emission figure is 100 Gt more than the total remaining carbon budget for the 1.5°C pathway. Given that hundreds more gigatonnes of fossil fuel emissions are still in the pipeline from the electricity sector, this scenario puts 2°C out of reach.
While relatively expensive hydrogen from renewables will gain some market share with strong policy support, as we showed earlier clean hydrogen will remain a niche product unless costs can come
down to our benchmark target of $0.90/kg. For renewables this is not expected to happen much before
mid-century if at all. This time lag is demonstrated in Figure 17 below, which shows the increasing market share of relatively expensive renewables-derived hydrogen as production costs fall by 2050. Our figures accord closely with Bloomberg New Energy Finance (BNEF); in its report, BNEF projected green hydrogen supplying 27 EJ of energy to the global economy by 2050 in a ‘weak policies’ scenario, and 99 EJ energy in a ‘strong policies’ scenario.41 Our projections in Figure 17 show a mid-point between the two BNEF scenarios, with green (renewables) hydrogen supplying 63 EJ of 2050 energy.
This displacement of carbon in the difficult-to-decarbonize sectors brings emissions down to zero by mid-century, keeping cumulative emissions under 150 Gt. Assuming this is accompanied by decarbonization of ‘easier’ sectors like electricity over the same timescale, this maps out a credible pathway to global net zero carbon emissions by 2050. Figure 21 on the next page displays this transition, which would put the world on the pathway not just to a 2°C outcome, but a 1.5°C outcome as required by the 2015 Paris Agreement, thanks to the avoidance of 400 Gt of cumulative CO2 emissions. The rate at which the world could achieve these emissions reductions will depend on the extent of the industrial mobilization to deliver these production platforms.
Total Investment Requirements How much would this transition cost? A useful benchmark is the investment that will be required to maintain supplies of fossil fuels over the same time period if hydrocarbons continue to be dominant. Global oil and gas exploration and production (E&P) investment was US$540 billion in 2019. Maintaining existing flows of oil and gas consumption equivalent to approximately 100 million barrels of oil per day is projected to require investments of $16.7 trillion over the period 2020–2040.42 By extrapolation, another $8.3 trillion can be expected 2040–50, taking the total oil and gas investments by mid-century to $25 trillion.
Figure 22 shows the investment required to transform the relevant fuels markets (assuming hydrogen and synthetic fuels produced from Gigafactories and production platforms) between 2025 and 2050.
This case supplies 350 EJ and includes the full capital cost of these synthetic fuels production facilities, resulting in an investment requirement of $8 trillion less than the projected investment to maintain the
equivalent flow of oil and gas. The implication is that these fossil fuel markets could be replaced
with clean substitutes within three decades for less investment than would be required to
Cost Reduction from Shipyard Manufacturing Why are costs for the shipyard manufactured production platforms so low? The cost reduction from manufacturing these facilities in leading shipyards is very substantial compared to the traditional approach to building plants. We group these sources of cost reduction into four categories and show how they explain the difference between observed costs of constructed nuclear plants in Europe and Asia, and the costs of the production platforms we use in this report. Broadly speaking, cost reduction comes from 1) costs that you don’t have in the shipyard model, 2) increases in productivity from the shipyard manufacturing environment, 3) fundamentally different technology choices, and 4) ongoing learning, process
improvement, and competition throughout the supply chain.
By comparing these few first of a kind plants to the larger number of plants being built as part of continuous build programs, (in Japan, Korea, China, and Abu Dhabi) we can see that the ‘program build’ plants are three-quarters of the cost of the expensive plants. There are well-understood reasons for
these high costs, but they are not relevant to a continuous production environment like an established
world class shipyard. Data from the most recently built 30 nuclear plants suggests that these first of a
kind and first in a generation extra costs are as much as $8,000/kWe—the difference between $12,000
Physical Space Constraints: A Reality Check To achieve the lowest cost renewable-hydrogen, it is possible to co-locate wind and solar projects, in the best combined wind and solar resources, to deliver high capacity factors and hydrogen at around $2/kg within the 2030 timeframe. However, most of these locations are remote from populations and markets. Adding distribution costs from remote locations, for example, Australia to Japan, increases costs from $2/kg to $3.3/kg. This raises the cost beyond the threshold of economic competitiveness ($0.90/kg), which this report describes as essential to achieve widescale substitution of fossil fuels. Irrespective of costs, it is not realistic to expect renewables to be able to produce hydrogen in large quantities at the same time as decarbonizing grid electricity in most advanced economies because of sheer physical space constraints.
Conclusions and Recommendations Given the scale and urgency of the required clean transition combined with growth of the global energy system, all zero-carbon hydrogen production options should be pursued. The potential of advanced heat sources to power the production of large-scale, very low-cost hydrogen and hydrogen-based fuels could transform global prospects for near-term decarbonization and prosperity. This report sets out a pathway to decarbonize a substantial portion of the global energy system, for which there is currently no viable alternative.
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