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29 June 2020

Hydrogen might simulate the Russian-European energy cooperation

Germany is the first EU country to have published its hydrogen energy strategy. The transition of  the European industry and transport to hydrogen fuel will reduce harmful emissions, create new markets and make hydrogen technologies an export bestseller. The potential of this market is enormous. But will there be room for Russian oil and gas suppliers?

Florian Willershausen, Creon Capital

Source: RBC.ru

Florian Willershausen, Director of Creon Capital, a Luxembourg-based company managing the Creon Energy Fund. The Fund invests in green technologies, renewable energy and logistics projects. The Fund is the core part of Creon Group, a strategic consultant in the transition to sustainable development and integration of ESG factors.

Anyone who has ever thought about the future of energy supplies to Europe should take a walk at Cuxhaven Station in Lower Saxony. From here, the Coradia iLint Blue Train leaves every hour to Buxtehude. The silent train of the French manufacturer Alstom is hydrogen-powered and climate-neutral; instead of carbon dioxide the hydrogen drive emits only a few drops of water per meter of motion. So far, this train is one third more expensive than diesel, but Lower Saxony and other federal states are actively subsidizing the new technology. Sooner or later, hydrogen trains will replace their polluting diesel-driven ancestors.

Such faith will affect not only diesel engines: at least in the EU where the member countries have committed to significantly reduce CO2 greenhouse gas emissions to the atmosphere under the Paris Agreement. Fuel cell technologies are ready for mass use in public transport, buses, trams; pilot projects are testing this technology on ships and even in aviation. The potential of new markets is enormous: according to the Bloomberg‘s report „Hydrogen Economy Outlook“, by 2050 24% of the world’s energy demand will be covered by hydrogen, and its price will fall to the current level of gas price.  

Germany’s hydrogen strategy

The policy towards hydrogen was finally documented by the National Strategy for the development of Hydrogen Energy in Germany published in June. The country’s long-term goal is to create a climate-neutral economy with a reduction in CO2 emissions by 95% from 1990 levels. Hydrogen is given the central role in the process, as the technology will be implemented not only in transport, but also in metallurgical and petrochemical production.

Germany will allocate more than 10 bln Euro by 2023 for the development of hydrogen energy: 7 bln for the market launch (for creating framework conditions and stimulating domestic demand), 2 bln for international cooperation, and another 1 bln for the industry, which should implement hydrogen technologies in order to become its largest exporter globally.

At the same time, the German government considers that only “green hydrogen” is environmentally friendly, being sourced from renewable energy, solar and wind. In the North Sea and in the Baltic, Germany will require additional wind generating capacities to expand output. Over time, “green hydrogen” should replace grey, blue and turquoise hydrogen, that is, obtained from fossil fuel such as natural gas or methane with CO2 emissions.    

However, the strategy recognizes that Germany would be unable to meet its hydrogen needs on its own, and it will have to import either electricity to produce “green hydrogen” or feedstock. Two bln Euro allocated for the development of international cooperation will go primarily to pilot projects of solar energy for the production of “green hydrogen” in North Africa and Morocco, where the sun shines all year round.

The place for Russian companies in the new energy economy

North Africa is not the only place well suited for pilot projects. As the hydrogen tram project shows (launched in St. Petersburg in November 2019), modern Russian cities are perfectly suitable for showcasing hydrogen technologies. Such prominent innovative examples will have a positive impact not only for the Russian economy, but also for long-term cooperation with the EU.

The potential of this cooperation is partly reflected in the Energy strategy of the Russian Federation, published on the same day as the German Hydrogen Strategy. In the document, hydrogen is designated as a fuel with high export potential. By 2024 Russian hydrogen export should reach 0.2 mln tons, and by 2035 should grow to 2 mln tons. According to the Ministry of Energy plans, Russia should take up to 16% of the global hydrogen market.

For the economy which directly depends on the export of energy resources in its development level and wealth, investing in hydrogen is completely justified. In the overall export balance this technology can become an additional development driver. In order to realize these ambitious plans, Russian corporations need to develop hydrogen energy today and rapidly revise their business models, because the energy transition that the Germans are aimed at will inevitably lead to decrease in demand for oil products and natural gas in the near future. 

Hydrogen power driver is the domestic market

The development of hydrogen power begins with the domestic market and its needs. In the interests of overall energy security, local hydrogen demand should be assessed and met first, in order to ensure reliable supplies to foreign markets in the future.

Russian oil and gas companies need to be ready to produce hydrogen from renewable sources in locations close to the destination markets, EU countries in the first place. With industrial production of hydrogen, and with mass transit switched to electricity, the EU’s overwhelming power demand will grow many times, and cannot be covered only by wind and solar energy.

Meanwhile, the Russian business should develop its own international investment projects for hydrogen infrastructure: construction of pyrolysis plants and hydrogen filling station network, development of carbon by-product sales concept, introduction of competitive pricing principles. European funds and institutional investors can do much to help, as they are willing to invest in hydrogen and green economy projects that meet ESG standards:  environmental, social and governance factors of sustainable development and doing business.

Oil companies serving the green economy

It’s the oil companies that should immediately start thinking about hydrogen as this technology will directly affect their business models. Shell was the first to realize it. The Dutch-British corporation consciously chose the path of reshaping its business models and started to invest in renewable energy, synthetic fuel and electric cars. Currently, these business lines are in contradiction to the main activity of the company, which is based on production, processing and trading of petroleum products. However, in the long term, with the onset of green economy, advanced technologies will become tremendous growth drivers for the corporation. 

Gazprom should also think about a paradigm shift, especially since hydrogen technologies are consistent with the existing business strategy of the company, and can even complement it. The company has an extensive network of pipelines that can transport not only natural gas, but also hydrogen. In fact, Gazprom is already exploring the hydrogen potential and has ordered a feasibility study to the Karlsruhe Institute of Technology (KIT) in Germany. The time is now to take a decision and make the right choice.