The recent Memorandum of Understanding with Germany on clean hydrogen cooperation underlines Saudi Arabia’s ambition in becoming a global powerhouse producer in this field. Governments and industry players are currently considering clean hydrogen as an energy vector with key energy transition roles in an increasingly carbon-constrained world. Hydrogen has the potential to grow into a trillion-dollar commodity market, with enormous opportunities for Saudi Arabia. Jan Frederik Braun takes a deep dive into Saudi Arabia’s hydrogen ‘ecosystem’ potential in terms of resources, industrial clusters, and infrastructure. He also looks at hydrogen opportunities and challenges within and beyond the Kingdom like carbon pricing, scaling up renewables, the need for a standardised certification system and stringent and comprehensive climate policies, which are required for making the potential demand for the clean molecule a reality.
Memorandum of Understanding
On March 11 2021, HRH Abdulaziz bin Salman Al Saud, Minister of Energy of Saudi Arabia and German Economic Affairs Minister Peter Altmaier signed a Memorandum of Understanding (MoU) establishing cooperation on hydrogen.
This bilateral agreement underscores three things.
First, the MoU formalises the commitment of both countries’ governments and industries to cooperate closely on the production, processing, use and transport of “clean” hydrogen, i.e., ‘green’, renewables-based and ‘blue’ hydrogen, i.e., natural gas and oil-based hydrogen with carbon capture, utilisation and storage (CCUS) of emissions.
More concrete, within the framework of the MoU, Saudi Arabia and Germany will seek to implement specific hydrogen projects like NEOM (‘new future’) and establish a road map for the mutual sharing of expertise, technological know-how and a “bilateral innovation fund for the promotion of clean hydrogen”.
Second, the MoU underlines that Saudi-German hydrogen cooperation’s objective is to promote “sustainable development and achieve the greenhouse gas emission reduction targets of the Paris Agreement, taking into account the specific capabilities and development needs of each [country]”.
Third, the MoU underlines Saudi Arabia’s ambition in becoming a global export powerhouse in the clean hydrogen market, replacing possible future declining oil revenue with revenue from the production and sales of hydrogen.
In an increasingly carbon-constrained world characterised by net-zero emission targets, a global commodity market for clean hydrogen is predicted to develop, driven by regions and countries with an immense potential for clean hydrogen. Saudi Arabia is a prime example of a country with such a prospect.
Clean hydrogen in a carbon-constrained world
Clean hydrogen is currently being considered by governments and industry players around the world as an energy vector with three key roles:
- Decarbonising hard-to-abate segments of the energy supply chain that cannot be easily electrified (e.g., high-temperature industrial processes, long-haul transport, aviation and shipping).
- Enabling sector coupling via power-2-additional applications (P2X) between electricity, natural gas, heating/cooling, transport and industry.
- Complementing electricity in the energy transition in general.
In these capacities, and away from the current yearly hydrogen production of around 70 Mt produced mainly from natural gas and coal, global clean hydrogen demand is forecasted to reach 696 million tons per year or 24% of the world’s energy needs. This potential share of energy demand can only be realised if a solid and comprehensive climate policy occurs, whereby global warming is limited to 1.5 degrees (Figure 1).
Carbon pricing matters too
In the context of accelerating international climate action to decarbonise the world economy in line with the Paris Agreement, hydrogen is the number one contender for the clean molecule title. However, the clean hydrogen options mentioned here are currently undervalued for their zero or low GHG emissions characteristics.
In short to medium-term, this is predicted to change as countries and regions are set to ramp up a range of decarbonisation measures for the post-COVID-19 world. Although best used as part of a policy suite to drive the types of innovation required to reach a net-zero world, carbon pricing initiatives are a prominent tool in a policy-makers toolkit to deter the use of carbon-intensive fuels and incentivise cleaner technologies.
There are currently 64 carbon pricing initiatives in place or scheduled for implementation worldwide, consisting of 31 emission trading systems (ETS) and 33 carbon taxes on the city, state, national, and regional levels (Figure 2). This includes substantial efforts in two of Saudi Arabia’s export markets, i.e., Asia and the European Union (EU). Simultaneously, the EU is planning a carbon border adjustment mechanism (CBAM) as either: 1) a carbon tax-adjusted at the border; 2) the inclusion of importers under the EU ETS; or 3) import tariffs on products from third countries that do not pursue climate policies in line with the Paris Agreement.
Regarding another important export market for the Kingdom, and in the context of President Xi Jinping’s recent ‘carbon-neutral-by-2060-pledge’, it is important to point out that China officially launched the first phase of its national ETS in February 2021. The scheme lets provincial governments set pollution caps for 2,267 coal-fired and gas-fired power plants for the first time, allowing them to buy the right to pollute from others with a lower carbon footprint. The China ETS is expected to cover one-third of China’s emissions when fully operational, eclipsing the EU as the world’s biggest ETS.
16% of total global GHG emissions were taxed in 2020. And despite increasing initiatives in many jurisdictions, the average international carbon price in 2020 was around US$3/tCO2. Carbon prices of at least US$50-100/tCO2 around the world by 2030 are estimated to cost-effectively reduce CO2 emissions in line with the goals of the Paris Agreement.
Carbon prices under the EU ETS have soared passed 40 EUR (US$48) /tCO2 in early 2021, with a prominent London hedge fund expecting that this will hit 100 EUR (US$121) /tCO2, possibly as soon as later this year.
Saudi Arabia is getting ready for Hydrogen
As a low-intensity hydrocarbon producer with 6 TCM of proven natural gas resources (the eight largest in the world), about 25Gt of CO2 storage capacity in multiple giant storage formations, and very high direct normal irradiance and wind speeds, Saudi Arabia has the resources, infrastructure, and skills for producing cost-competitive clean hydrogen.
This argument is exemplified by the Kingdom’s decade-long experience in industrial-scale hydrogen and chemicals production. Aramco’s CO2 capture plant in Hawiyah, which injects compressed CO2 into flooded oil reservoirs as a mechanism for CO2 storage while simultaneously enhancing oil recovery, has a sequestering capacity of 800.000 tCO2 per year. Together with the Al Reyadah plant in Abu Dhabi, Hawiyah is the largest CCS project in the Middle East. Several other factors make industrial clusters in cities like Jubail and Yanbu along the Red Sea coast favoured spots as clean hydrogen hubs:
- They are valuable for testing a variety of business models and applications. Waste from one application – like CO2 captured from H2 production with CCS or excess heat from steel production – can be used as an input to another.
- They provide infrastructure synergies where heavy industry, particularly chemicals, fertiliser, and refineries, come together with shipping, freight transport, pipelines, and renewables.
The futuristic city NEOM is scheduled to be part of any future Saudi hydrogen ‘ecosystem.’ The first planning phase makes clear that NEOM aims to be a hydrogen hub in terms of providing the basis for clean feedstock used in the production of fertilisers, chemicals, and oil derivatives; this in collaboration with mega-players like the Saudi Basic Industries Cooperation (SABIC) and Aramco.
NEOM Helios, the world’s largest renewable hydrogen-to-ammonia facility, a joint venture between Air Products, ACWA Power, and NEOM, marks this ambition’s beginning. Scheduled to go onstream in 2025, the facility will take advantage of the very high direct normal irradiance and wind speeds along the Red Sea. Equipped with 4GW of renewables and solar powering the plant during the day and wind during the night, these weather conditions will allow the electrolysers at Helios to run at a high load factor, with an output of ammonia estimated at 1.2 Mt/year. Air Products will be the exclusive off-taker of this ammonia. The company intends to transport it worldwide to be dissociated and produce green hydrogen for the transportation market.
Beyond the Kingdom’s borders, carbon pricing initiatives in Europe and Asian markets are a further opportunity for its clean H2 ambitions. Increasing carbon prices further incentivise energy importers to seek clean fuels. In the short term, Saudi Arabia could have a competitive edge in delivering low-cost decarbonised materials made with blue hydrogen, such as ammonia, steel, glass, and fertilisers.
The cost of blue hydrogen is estimated to remain cheaper than green hydrogen until at least 2030. In the medium to long run, however, costs of renewable energy and electrolysers are expected to witness further declines. If and when an effective carbon price is established, it can make green hydrogen production more competitive than blue, pushing out gas as a feedstock in favour of green electricity. In this context, and regarding the Chinese ETS, for example, the shipping of green-hydrogen-based ammonia from the Kingdom to this vast demand market could become a profitable export opportunity as soon as the Chinese government establishes a price that effectively ‘penalises’ the negative externalities of coal-based hydrogen production(1). Looking towards this possibility in the future, Aramco’s CEO Armin H. Nasser recognised “China’s cleaner economic growth” as offering “opportunities to collaborate in the development and use of clean future fuels such as hydrogen”.
Standardised ‘certificates’ and ‘guarantees of origin’
Saudi Arabia was one of the first countries worldwide that signalled its plan to produce and export more clean hydrogen than it consumes. The Kingdom, therefore, stands to benefit from participating in ongoing efforts to set up demand-side incentives like a standardised ‘certificates’ or ‘guarantees of origin’ (GO) system for clean hydrogen.
A mutually recognised, international GO framework that is robust is needed. This avoids mislabelling or double-counting of environmental impacts and covers CO2 equivalent inputs to hydrogen-based fuels and feedstocks. A GO scheme should also be based on life cycle GHG emissions from upstream activities such as electricity generation to transport, ensuring consistency and compatibility with GHG certification schemes for other commodities such as electricity or fossil fuels.
A GO system not only provides a clear label for the hydrogen product that increases consumer awareness and accurately describes the value of the commodity, but it can also help facilitate market valuation and international trade in clean hydrogen. The latter is of crucial importance to countries with high hydrogen export ambitions like Saudi Arabia.
The Hydrogen Production Analysis Task Force (H2PA TF) from the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE) is currently developing a technical and analytical methodology that can be used for these purposes, including “for the purchase of hydrogen across regions and to identify the emissions footprint of the various sources of hydrogen”. While the results of the H2PA TF efforts are non-mandatory and subject to each member’s discretion, the longer-term aim is to contribute to “the definition of clean hydrogen”.
Saudi Arabia is currently not (yet) a member of the IPHE, which is open to “national governmental entities” with “significant commitments to invest resources into research, development and demonstration activities to advance hydrogen technologies”. Active engagement in the certification discussion allows the Kingdom to shape the ongoing discussions in this field. In turn, these efforts could serve and strengthen government-to-government and business-to-business partnerships such as those strived for in the Saudi-German MoU.
Hydrogen challenges within and beyond Saudi Arabia
There is a lot of uncertainty regarding the future demand for clean hydrogen. In the long run, renewable hydrogen could replace current hydrogen production in the chemicals industry, forcing out fossil-fuel-based chemical feedstocks and form either the fuel or building blocks for fuels in aviation and shipping as there are little to no alternatives in these sectors.
There is much more uncertainty in parts of the transport sector (private and public road vehicles, busses, and trucks) and water and space heating. Here we might see a combination of applications, i.e., battery electric vehicles for more short-term distance travel for personal usage and within cities and hydrogen fuel cells for long-distance and heavy-duty road transportation. We also might see differences between regions and countries based on what policy direction they choose, e.g., more hydrogen fuel cells in Asia, Australia, and the US, and more battery electric vehicles in Europe.
The fact of the matter is that we currently do not yet know how the global hydrogen market will evolve over the next three decades. Outside of Europe, no G20 country has committed to a target for electrolyser capacity and production and consumption as most lack dedicated policy support for hydrogen (Figure 3).
In Saudi Arabia, as in other G20 countries, there are ongoing policy discussions about dedicated policies in the form of long-term roadmaps, plans, or strategies. Regarding production, and like all other governments that wish to build local production capacity – whether for domestic consumption or export – Saudi ambitions will require the support of policies that promote clean hydrogen demonstration projects like NEOM Helios.
The same goes for clean hydrogen within and beyond the Kingdom. Carbon capture and storage (CCS) could make a significant long-term contribution to decarbonising the economy. Yet the reality is only 19 large-scale facilities were online as of year-end 2019, with the US home to half the global total and totalling some 38 million metric tons per annum of potential storage, which is equivalent to 0.1% of global emissions.
Like electrolysers, many of these announcements lack essential details such as hydrogen production capacity and CO2 capture capacity and technology. Related to this are matters such as whether the upstream natural gas supply used for clean hydrogen fulfils sustainability criteria and is predominantly methane (>95%).
Saudi Arabia’s blue hydrogen ambitions will require creating value for storage and new ways of supporting CCS deployment. A new transferable asset class or unit-specific to CCS, i.e., a carbon sequestration or carbon storage unit (CSU) representing a verified tonne of CO2 or carbon securely stored, is proposed as a complementary and supplementary incentive alongside carbon pricing policies(2). This double incentive would help address past challenges of deploying CCS. These challenges include, principally, the inability of carbon pricing alone to support emergent clean technologies like CCS and the lack of a price signal for storing CO2, which has hampered commercial transactions of physical CO2 between capturers and storers in the absence of utilisation.
Action on this matter would require considerable international climate action by Saudi Arabia to establish a voluntary ‘CCS club’ under Article 6 of the Paris Agreement. This club would draw its membership from countries with a high dependency on fossil fuel production and those that wish to include CCS as a prominent part of their Nationally Determined Contributions (NDCs); this as a means of differentiated contributions based on the pursuit of cleaner fossil fuels.
Saudi Arabia must ramp up renewables capacity
Green hydrogen ambitions within the Kingdom are challenged by low levels of renewables capacity installed to date, i.e., 0.4 GW in a 75 GW power system (with another 10 GW under construction). In early 2021, Energy Minister HRH Abdulaziz bin Salman stated that Saudi Arabia aims to convert half of its power sector to gas and the other half to renewables by 2030. Departing from a conservative estimation of an 85 GW power system in 2030, average yearly commissioning of 4.3 GW would be needed (Figure 4). This is 1.1. GW short of the 5.4 GW of renewables added in the whole MENA region in 2019.
Making progress on these ambitious targets is also important in the context of installing gigawatt-scale electrolyser capacity for NEOM, which will “need a multiple of the 4 GW of renewable energy output in the next five to ten years”. For this, as well as for its blue variant, a clear and transparent regulatory and investment framework is required that will attract substantial foreign capital to invest in and fuel Saudi Arabia’s clean hydrogen ambitions. This in combination with financial enablers like:
- Government grants for CCUS projects.
- Government direct investment in CCUS projects.
- Subsidised gas and electricity prices (to make clean hydrogen more affordable).
…and policy commitments
The Saudi-German MoU puts clean hydrogen cooperation at the service of effective climate policy. This ambition raises questions of how to tackle challenges related to the Kingdom’s climate policy before hydrogen incentives and regulations can be effectively implemented. Talks of hydrogen applications and a circular carbon economy (CEE) remain limited while fossil-fuel energy products remain heavily subsidised, and the externalities of pollution are not priced accordingly, meaning that there is no effective price or ‘value’ for carbon. An exemplary of this is the current Saudi nationally determined contribution (NDC) under the Paris Agreement, which does not refer to a baseline projection and does not bind the Kingdom to strict emission targets. Without targets and metrics, progress toward climate goals cannot be quantified, and clean hydrogen demand will lack an incentive for a rapid scale-up.
In the context of its clean hydrogen ambitions and net-zero ambitions from the EU, China, and the Biden administration in the US, Saudi Arabia should formulate a more ambitious NDC, including a baseline and emissions targets for the CCE in place. Suggestions made in this context include bringing the NEOM Helios project into the Paris Agreement’s market mechanism, thereby raising revenue from the sale of emission credits.
At the end of Saudi Arabia’s G20 presidency in November 2020, HRH King Salman announced the launch of the Kingdom’s National Program for the CCE in order “to consolidate and accelerate the current efforts to achieve sustainability in a comprehensive manner”. Together with future dedicated hydrogen policy support, this could seize the opportunities and tackle the challenges mentioned here and pave the way for Saudi Arabia to become a global hydrogen powerhouse in the 21st century.
Jan Frederik Braun, PhD, is an independent climate change and energy transition researcher. The author would like to thank Noé van Hulst (IPHE) for his input.
(1) The general idea of carbon pricing mechanisms is to attach a cost to one of the negative externalities of doing business – pollution. Putting a price on carbon allows governments to tie the societal costs of emissions to their source.
(2) CSUs would have no intrinsic emission reduction or removal value but would instead provide a verified record of carbon stock addition to the geosphere. As such, CSUs could complement and supplement emissions reduction-based policy instruments.
(3) The estimation is made based on Saudi Arabia’s Renewable Energy Program 2030 target from 2019, which mentioned a planned capacity of 58.7 GW consisting of 68% solar PV, 27% wind, and 5% solar thermal.