The US Department of Energy (DOE) is in an interesting spot in the transformation to a low-carbon economy. 55% of its budget is for nuclear energy, but most of the USA’s 100 or so reactors are aging out and all but a couple will be off the grid by 2035. There certainly aren’t any plans to build 100 new nuclear reactors in the States as the country doesn’t have the conditions for successful nuclear rollout any more, and the current hope of SMRs will probably fail to deliver.
While over half of the DOE budget is focused on nuclear, the USA is realistically going to replace the vast majority of nuclear generation with renewables, additional transmission — especially HVDC — and storage, just like almost every other country in the world. All of those technologies are in the DOE’s remit as well. So far so good, although the bureaucracy and internal fiefdoms will undoubtedly be slow to accept this.
But the DOE also deals with fossil fuels as a minority of its portfolio. It has a large portion of its budget and staff who deal with coal, oil, and gas. This is likely where part of the problem lies with its recently released draft hydrogen strategy.
Given that Biden’s Inflation Reduction Act (IRA) has already had a negative impact on European additionality rules for green hydrogen electrolysis on that continent, it’s interesting that the strategy for hydrogen still has wet ink. The American model is subsidies for manufacturing green hydrogen to bring its price down closer to black and gray hydrogen, and that money talked, with major European players making it clear that they would decamp to the USA. So, grid electricity for hydrogen in Europe, no requirement to set up PPAs for sufficient wind and solar to cover the demand. Pity.
So let’s talk about what a good strategy is. I’ve read the vast majority of strategy books out there — occupational hazard for a strategist — and certainly all the frequently cited ones or the ones considered important, with the exception of Clausewitz’ On War. There are really only two good broad books on strategy, Sun Tzu for military matters and for non-military concerns Rumelt’s Good Strategy Bad Strategy: The Difference and Why It Matters. Everything else is either heavily focused on the military technical capabilities and alliances of a specific time, or a fad business book that reads extremely poorly a few years later when the examples of amazing companies is now a list of mostly failed companies (Blue Ocean Strategy stands out for this). Then there are a few strategy-adjacent books that are strongly recommended, such as Wucker’s The Gray Rhino (vastly more useful than Black Swan), Christensen and Raynor’s Innovator’s Solution and Malhotra and Bazerman’s Negotiation Genius.
But this assessment is distinctly in the non-military strategy camp, and so I’ll use Rumelt’s kernel of good strategies to frame my thoughts on the DOE hydrogen strategy.
“Strategy is designing a way to deal with a challenge. A good strategy, therefore, must identify the challenge to be overcome, and design a way to overcome it. To do that, the kernel of a good strategy contains three elements: a diagnosis, a guiding policy, and coherent action.”
The diagnosis is the key thing here. What is going on must be clearly understood. Empirical reality is critical to good strategy.
This is my projection of hydrogen demand through 2100, iterated a few times. I use it to assist major institutional investors, VCs and renewable deployment organizations to get their strategy for the coming decade of investments, resourcing and action plans into the right place.
What’s the most obvious thing about this projection? Hydrogen demand is shrinking, not growing for much of the coming decades. Why? Because hydrogen isn’t a decarbonization solution, it’s a global warming problem.
Black and gray hydrogen is a CO2e problem in the range of all of global aviation. Job one is to stop digging holes, and hydrogen manufacturing today is a big shovel. It’s all from fossil fuels today, with CO2e emissions from upstream natural and coal bed methane leakages and CO2 from steam reformation or coal gasification from 12 to over 35 times the mass of CO2e as hydrogen manufactured.
And the largest chunk of it is used in fossil fuel refining, oil refineries to be specific, where it’s used mostly to desulphurize heavy crude like Alberta’s product and also for hydrotreating which is used to stabilize desirable aromatics, a much smaller volume but high value market. That’s about 50 million of the 120 million tons of pure and syngas blended hydrogen we consume today, or 42%. The second largest chunk is for ammonia-based fertilizers, about 33 million tons, or around 28%. Refinery use has to mostly go away if we want to deal seriously with global warming. Ammonia-based fertilizer use has to diminish radically as well, through the four trends or strategies of shifting subsistence farmers to urban employment, precision agriculture, low-tillage agriculture, and agrigenetics solutions such as Pivot Bio’s enhanced nitrogen fixing microbes.
Hydrogen is not used for energy today. It is used in industrial processes to refine energy carriers, and it’s used in industrial processes to manufacture fertilizer. The other uses include hydrogenation of vegetable oil for edible oil products and a bunch of other things.
But it’s not a carrier of energy right now. Which begs the question:
Why is the US Department of Energy being tasked with drafting the hydrogen strategy?
The placement of responsibility presupposes the answer, that hydrogen will be used in the future as a carrier of energy. And there’s little reason to believe that is true.
This makes the DOE a questionable place to position a hydrogen strategy. By definition, they can’t help but view it as an energy carrier. It’s their entire paradigm.
It makes more sense to position green hydrogen as an industrial strategy, something touted by the Biden Administration as being core to what they are trying to achieve with their five-pillar industrial policy. Those pillars are supply chain resilience, targeted public investment, public procurement, climate resilience, and equity. It’s not bad, with a more balanced perspective on China than most US governmental material these days.
Putting hydrogen into the DOE was the wrong choice. The strategy probably should have been in the hands of the Department of Commerce (DOC), not the Department of Energy, and the DOC should have asked for input from the DOE and Department of Transportation (DOT) where appropriate. That ship has sailed, however, and likely for the usual reasons when it comes to hydrogen, lobbying from the fossil fuel industry and starting from the wrong paradigm.
And so, there’s some good stuff in the draft and a lot of stuff that’s just off base, a bunch of which will seriously muddle success with decarbonizing hydrogen.
The DOE authors get some of this right. The first couple of things that they suggest in the demand section, “Strategy 1: Target Strategic, High-Impact Uses of Hydrogen,” make perfect sense. We use a lot of methanol and ammonia in industry and agriculture, it’s all made with black or gray hydrogen today, and we need to replace that with green hydrogen. And they point out the potential for the use of hydrogen in steel making to reduce iron ore instead of coal (without recognizing the efforts around using electricity directly for that purpose),
But then they fall off the rails rapidly. First, they make the common mistake that only burning gases or liquids can provide high quality heat over 300° Celsius. This is an odd mistake when the USA has made 70% of its steel from scrap in electric steel minimills for a couple of decades, and those use electric arc furnaces that provide 1,500-3,000° Celsius high-quality heat. Similarly, electrically-powered aluminum smelters run at 800° Celsius. Presumably people in the DOC know this, but the people in the DOE writing the strategy are oil, gas, and coal heads who assume that you have to burn gases or liquids for high-quality heat. This just isn’t true, and it’s a major failing in the diagnosis section of the kernel.
You can’t get strategy right if you don’t start with reality.
Heat is important across the economy, but industrial heat will virtually always be better supplied by electrically powered solutions in the future. There are a couple of industrial processes such as cement clinker kilns where I understand there’s a specific value in jets of flame, but those are the exception, not the rule. An industrial policy from the DOC would more likely start with the need for heat, and not start with the false assumption of a requirement for a liquid or gaseous fuel.
As chemical process engineer Paul Martin, who has been designing modular chemical processing plans for clients globally for three decades, has told me on a couple of occasions, everything he does uses electricity up until the point that cost-benefit analyses show that fossil fuels are cheaper when the atmosphere is allowed to be used as an open sewer.
Then there’s hydrogen for long-duration storage. One of the head-scratchers in my discussion with Jigar Shah, the DOE’s director of its Loans Program Office, was the $504 million loan for a hydrogen salt cavern storage and electricity generation facility on the site of an old coal plant in Utah. The assertion was that it reused the transmission to LA, so it was good. But they are putting gas generation on the site to replace the coal, that will require a bunch of new gas pipeline to supply the gas, there is no feeder transmission to the site to bring renewables to it to manufacture green hydrogen, and green hydrogen is deeply inefficient round trip. It’s what got approved as Utah didn’t want the coal town to disappear, but keeping a rural town with a couple of thousand people alive after its primary economic purpose is gone isn’t a strategically sound energy or decarbonization solution.
Like every other major country in the world, the USA has a lot of grid storage today in the form of pumped hydro. That technology is by far the biggest form of grid storage in the world, it’s by far the largest form of grid storage under construction, and single pumped hydro facilities commissioned in 2022 dwarf all battery storage on the grid globally. It’s the appropriate scale and technology for grid storage. Hydrogen is just a bad technology by comparison for this purpose.
Then there’s hydrogen and synthetic fuels for trucks and buses, also touted in the DOE strategy. This in a world where there are 500,000 battery-electric buses on the roads of China, where there are roughly the same number of battery electric trucks, where new battery-electric semis are being delivered from multiple manufacturers today, and where every hydrogen bus and truck test program has proven that they are not economic compared to battery-electric, with potential en route grid ties or inductive charging in places.
You have to be looking at the world through diesel-powered glasses to assume that burning gases or liquids in trucks and buses is an appropriate choice in a strategy when battery-electric is an option. Synthetic fuels are much higher CO2e and much higher cost. It’s mostly just economics, and fuel costs are about 21% of the costs of trucking. I assessed this end-to-end in 2018 and 2019 in looking at Carbon Engineering’s direct-air capture air-to-fuel plans, and the economics and technology have not budged since then.
There’s a different story in marine transportation, another target for hydrogen in the DOE strategy. Perhaps if the strategy originated in the Department of Transportation, which is responsible for marine shipping, there would be some reasonable material here. However, there are many, such as Maersk, who are trying to square the circle of synthetic fuels manufactured from green hydrogen, so perhaps not.
There are a few key points it’s possible that the DOE authors don’t know. The first is that 40% of all deepwater shipping is for bulk oil, gas, and coal shipments between continents. That’s all going away. Next is that 15% of all deepwater shipping is for raw iron ore, heading to the same ports as a lot of the coal to manufacture steel. That’s going to be significantly reduced. Other bulk goods such as grains are already containerizing. The target is container shipping and it’s smaller, in other words.
Next, the question as always is how much of shipping can electrify. The answer is that all inland shipping and about two-thirds of near shore shipping can run on batteries, either permanently installed in the boats and charged as Corvus Energy has been doing for over a decade, or by putting the batteries in standard shipping containers (TEU) and swapping them out in ports, a solution also suitable for trains which I’ll be coming to. TEUs with batteries installed are already being delivered globally for grid storage by Tesla and Wärtsilä, as I discussed with the latter company’s global VP for energy storage and optimization, Andy Tang, a few months ago.
That only leaves the declining deepwater shipping segment that requires a solution, and it is deeply unlikely to be hydrogen or synthetic fuels. In my assessment of alternative fuels for marine shipping, I settled on biofuels as the highest probability for the dominant solution. My projection of marine energy requirements for that space through 2100 makes it clear that global carrying capacity of stalk cellulosic biofuels is more than enough for the actually hard to refuel long haul segments of both aviation and shipping.
And so, to aviation, another area the DOE thinks is a target for green hydrogen demand. From the same Carbon Engineering assessment cited above, and in my assessments of refueling options for that segment of transportation, it’s clear that hydrogen is not fit for purpose directly, and synthetic fuels will be much more expensive than SAF biofuels.
What cannot be electrified with ever-improving batteries will use SAF biofuels. They’ve been around since 2011, most aerospace OEMs are certifying their aircraft on them, and they are flying blended or solely SAF biofuels in test routes with real cargo and passengers today. But as the table shows, as long as Jet A-1 and the like are cheaper, that’s what aviation will use. Thankfully that’s changing in multiple parts of the world as the weird untaxed condition of jet fuels ends, something I explored a few months ago.
And then there’s rail, another target the DOE strategy considers to be high value. China has built 25,000 miles of high-speed, grid-tied, electrified freight and passenger rail in the past 15 years, reaching 93% of domestic cities, and it’s connecting neighboring countries into the network. Germany just announced that it will not build any more hydrogen rail after the 50-mile test route, as economic studies show it’s 3 times as expensive as grid-tied/battery hybrid, and almost that much more expensive than just battery-electric. All freight train engines in the USA are already diesel-electric hybrid, and grid-tying them with overhead lines is a common practice globally.
Once again, those battery-filled TEUs are perfect components for a battery-electric train system, rechargeable at existing transshipment points, where the cranes are going all electric as well. Having had CN Rail as a client a decade ago, looked at global container shipping, and looked at container port management software, it’s relatively trivial to have TEUs filled with batteries charging in container transshipment facilities and dropped onto waiting train cars or into the holds of container vessels.
Finally, the strategy references residential and commercial heating as a target for hydrogen. I’ve explored this (see the heating quadrant chart above), as have dozens of others, and hydrogen would be both vastly more expensive than natural gas heating and much less safe. When air, ground, and water-sourced heat pumps are already refueling very large commercial and residential buildings, running with coefficients of performance of 3 to 5, being built in gigafactories in Texas, and no hydrogen furnaces or stoves for residential or commercial use are available for purchase or certified for use, you really have to want to burn something to consider hydrogen as an alternative.
I might return to this to address the wrong-headed assumptions regarding the need to transport hydrogen by pipeline, rail and ship, another set of paradigm errors the DOE strategy makes. Suffice it to say that virtually all hydrogen is manufactured at point of demand today because it’s so difficult and expensive to transport, and that its low energy density by volume and tiny molecular size means that it’s very expensive to transport more than a few hundred meters. I’ve assessed pipeline and shipping costs for hydrogen, and they make no sense compared to putting renewable electricity into HVDC lines, a common technology globally, with a third undersea HVDC interconnector going in in the UK, tens of thousands of kilometers of HVDC in China, Morocco to UK HVDC under construction, and Australia to Singapore HVDC proposed.
The future of energy transmission is electricity flowing down high voltage direct and alternating current lines, not moving molecules.
The reason that the DOE strategy, if it persists in this form, will be so problematic for the USA is that it first diffuses the attention of hydrogen as a decarbonization problem, so it won’t be addressed promptly. Second, it’s going to cause a lot of organizations to waste a lot of time and money building infrastructure to manufacture hydrogen in locations where there will be no demand. In some cases, the hydrogen will be able to be repurposed for high-value uses such as ammonia-based fertilizers. But in a lot of cases, it will simply be an expensive white elephant and moved at great expense to someplace more useful.
So why is the USA making this obviously poor choice? Why is hydrogen positioned in the DOE as opposed to the DOC? Why are all of these clearly dead-end use cases considered to be “Strategic, High-Impact Uses of Hydrogen,” as the DOE strategy asserts?
Well, the fossil fuel industry and governments with large tax and royalty revenues are lobbying hard to make hydrogen a ‘replacement’ for fossil fuels. They know that unless hydrogen does the heavy lifting, their fossil fuel reserves have zero economic value. As Michael Liebreich likes to point out, the fossil fuel industry can’t lose by pushing hydrogen. They’ll either delay real climate action, or they’ll get a lot of governmental money to make blue hydrogen out of their fossil fuel reserves.
Oh, did I mention the US DOE hydrogen strategy is also all over manufacturing hydrogen from fossil fuels with carbon capture and storage bolted on? Are you surprised?
The US hydrogen strategy was positioned in the wrong federal department due to the wrong framing. It was put in the hands of people who deal with fossil fuels all day long and have a paradigm of burning them for energy, not a paradigm of electricity for energy. It fails Rumelt’s test for the first thing that makes a good strategy, acceptance of empirical reality, and so its principles and actions will be failures as well.
The USA should go back to the drawing board, and quickly. I’d be happy to assist them.
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