Document(s) 9 of 26

Introduction

The EU Hydrogen and Fuel Cell Technology Platform has concluded that early European markets could become established between 2007 and 2010 for fleet vehicles and portable fuel-cell applications, while large-scale stationary applications could achieve commercialization by 2015 and European mass-market transport applications before 2020 (European Union, 2005). Indeed, given the right support there could potentially be 1–5 million fuel-cell vehicles (FCVs) by 2020 globally, growing beyond 100 million between 2030 and 2040.

In short, a fully fledged hydrogen economy could be just over two decades away. But if we do not start today, 10 years from now it will still be two decades away. After all, the transition to mass production will require a massive overhaul of the energy infrastructure, and the success of this will depend entirely on significant public policy developments and funding.

Developing a hydrogen economy therefore requires visionary leaders – both in government and in business – who are passionate about making it happen; who can focus and keep their resolve. As a long-term solution to a long-term problem, it will require highly sophisticated levels of cooperation, coordination and commitment.

Hydrogen today – A snapshot

For an energy company, dealing with hydrogen is of course nothing new. Shell has over 40 years' experience of using hydrogen in its refineries, where it handles more than 7,000 tonnes a day as part of a drive to produce ever-cleaner and better-performing traditional fuels. A dedicated unit, Shell Hydrogen,¹ was established in 1999 as a global business in order to pursue opportunities related to hydrogen and fuel cells in transport and distributed power applications. Its aims are threefold: first, to supply hydrogen in the most cost-effective way possible, in whatever form the markets want it; secondly, to support the development of technical solutions required to convert primary energies to hydrogen; and thirdly, to stimulate the development of technologies that will advance a hydrogen economy. It operates hydrogen stations in all the major hydrogen markets, and believes hydrogen can become an important element in the future energy mix, along with the cleaner traditional fuels and important advances such as modern biofuels and gas-to-liquids components.

In 2003 the very first publicly accessible hydrogen refuelling station in the world opened in Reykjavik, Iceland.² And since then various hydrogen stations for fuel-cell vehicles have opened, some as part of the Clean Urban Transport for Europe (CUTE) initiative – for instance in Amsterdam and Luxembourg.

In North America an "East Coast corridor" is being built, starting with a station in Washington, DC. This showcases the first hydrogen dispenser fully integrated at a regular retail gasoline station in the United States. A combined hydrogen/gasoline site, it demonstrates to people that hydrogen is nothing special: they can walk up to the pump, touch it and see hydrogen refilling taking place while they are refilling their own gasoline cars. In November 2007 the corridor was extended, with a station in the city of White Plains, New York.

On the West Coast, the California Fuel Cell Partnership, some 20 partners including automotive and energy companies, fuel-cell developers and government, not only operates an extensive public programme of events, but has opened a state-of-the-art facility serving 55 FCVs. Up to three new projects are now planned to open in 2008.

In Asia the Japan Hydrogen and Fuel Cell demonstration project (JHFC) has 12 refuelling stations serving 59 FCVs. The Ariake station that Shell operates is probably the most utilized hydrogen station in the world, having already serviced 2,000 vehicles from nine different auto manufacturers.

In China, following a feasibility study with Tong Ji University and two local Chinese partners, Shell has shared knowledge and expertise to help build Shanghai's first hydrogen station. Completed in 2007, it is the first step to establishing a cluster of hydrogen stations, with over 1,000 Chinese FCVs planned by 2010.³

And finally in India, which has chosen a strategy of focusing first on the cheaper and simpler hydrogen internal-combustion engines, Shell has embarked on a feasibility study with Indian car companies such as Mahindra and Mahindra to make hydrogen available at integrated retail stations – hydrogen supply points that will form a hydrogen infrastructure no different from that required by future fuel-cell vehicles.

All this indicates that the industry will be able to bring hydrogen-powered FCVs to the point where both vehicles and fuel are attractive and affordable. Indeed, a clear vision of the road ahead is emerging. It is therefore time to take the next step; and that means implementing more realistic scenarios. Continuing to serve a handful of vehicles from single sites will not move us forward.

Lighthouse Projects – The bridge to commercialization

The fastest and most cost-effective way to do this is via Lighthouse Projects – clusters of consumer-friendly retail sites where over 100 hydrogen vehicles from different car companies are served by more than four hydrogen stations. Operated by two or more energy companies and involving fleet owners, they would be run on a semi-commercial basis in international collaboration with government as public-private partnerships. As such, they will not only attract industrial commitment but also generate a critical mass of researchers and entrepreneurs, accelerate best practice and give confidence to the financial community.

Lighthouse Projects will thus play a crucial role in bridging the gap between the current demonstration projects and commercialization – a stepping-stone to a full commercial infrastructure rollout. They will obviously be much more efficient to run than the current stand-alone retail stations. They can also escalate in scale and sophistication, progressing from clustered integrated retail stations to clusters connected through corridors, as the infrastructure is steadily filled in.

By focusing initially on a limited number of Lighthouse Projects in North America, Western Europe and North-East Asia, we can build and test the strategies, disciplines and incentive mechanisms needed to coordinate activities for the next phase of development and enable the industry to grow. In fact, failure to do so could have serious consequences.

First, there is a real danger that if efforts are not focused, government funding and industry attention will become hopelessly fragmented, with valuable time being lost through duplication and reinventing the wheel. This is entirely possible – we have already experienced the issue of infra­structure "earmarks"⁴ in the United States; while in Europe there will be a strong push from all 25 individual member states to site activities in their own countries. But if the next move sees groups of five or six vehicles scattered in 100 locations around the world, we will end up going nowhere fast. Together, we need to work out where the early markets will be.

The second danger is that even if we get over the technology and mass-production hurdles for FCVs, we will run into a huge infrastructure "utilization hurdle" that significantly increases hydrogen supply costs. A series of scenarios, resulting from an internal Shell study of the rollout of vehicles and fuel infrastructure in a major metropolitan area, demonstrates this point clearly. In one, retail stations are located in areas and sites which do not stimulate good additional demand for FCVs and experience low facility utilization. In others, however, there is closer coordination with vehicle manufacturers on their anticipated customer needs and with local authorities on effective site development; and this is further exploited with effective utilization of facilities by realistic Lighthouse Projects. The result? A much clearer alignment of capacity with anticipated demand and more cost-effective matching of customer interests.

The model showed, not surprisingly, that a coordinated infrastructure rollout, which makes good use of existing manufacturing and retail assets, realizes much lower fuel supply costs – by up to a factor of two! The alternative is higher hydrogen fuel prices, which will simply discourage vehicle purchase. There is therefore a great need for mechanisms like larger-scale Lighthouse Projects which encourage coordination between governments and vehicle and fuel suppliers so that the industry can grow from its pre-commercial beginnings to the next phase of early commercial development.

But little can be achieved in isolation. We need international collaboration – substantial public-private partnerships, with a clear focus on commercialization. These will not only attract industrial commitment, but also accelerate best practice, attract investors, create markets and generate a critical mass of entrepreneurs. After all, it is the presence of sophisticated venture capitalists that transforms an opportunity into reality: attracting and providing capital and good management; nurturing start-up companies and linking them through the value chain; lobbying informally on the industry's behalf; and handsomely rewarding investors and entrepreneurs, thereby attracting future capital. In short, keeping their eyes firmly on the commercial ball.

Venture capital funds will support and accelerate economic activity wherever Lighthouse Projects and hydrogen power plants are being developed. One can see such funds in action in North America and Europe, where they play an active role in a wide range of projects and technology ventures. A New Energy venture capital fund has been set up in China, funded by a combination of large Chinese entities, such as the Science and Technology Commission of the Shanghai municipality, and multinational companies like Goldman Sachs and Shell. This fund will be co-managed by London-based Conduit Ventures,⁵ which also managed the modest but successful hydrogen and fuel-cells fund Conduit I, and Chinese partners.

Flagship energy systems – Integrating CO₂, power and mobility

Of course, a hydrogen economy is not simply about transportation. With central production being the most economic route to supplying hydrogen at the pump, we should also accelerate experimenting with hydrogen-powered power plants and large-scale fuel cells. Initially using hydrogen turbines, these flagship energy systems could use Shell's proprietary gasification process to convert (carbon-intense) fossil fuels such as coal and produce hydrogen and CO₂ of high purity. In one large, integrated energy complex, hydrogen could be applied to generate low-emission power, hydrogenation of crude oil in refineries and hydrogen for transportation purposes, while CO₂ could be captured and stored, and in some cases could be used to enhance oil recovery. After resolving significant technical hurdles, this would be the next big step towards a new energy system based on hydrogen.

Hydrogen stations will be hydrogen supply points, but not just to fuel-cell vehicles. Micro-grids will also supply hydrogen to residential fuel cells, efficiently producing heat and power for domestic use. Metal-hydride cartridges can be exchanged here to power clean two- and three-wheelers, be they equipped with fuel cells or, initially, hydrogen internal-combustion engines. Stations will exchange or recharge hydrogen-based energy cartridges for portable and hand-held devices. The availability of 100 kW fuel-cell vehicles will give new meaning to distributed power generation, with their mobile power generator and energy storage devices flexibly deployed to refuel at home and also to power both residences and workplaces – wherever humans are active.

This will reduce the size of the energy infrastructure's required overhead and put to good use all power generating capacity, of which half is now dormant at any moment in time. Indeed, a new energy infrastructure based on hydrogen will not only introduce significant savings in the use of energy and capital investments, but it will reduce a nation's medical bill by providing a cleaner environment, thereby freeing up even more capital.

But let us come back from the future and concentrate on finding pathways to get there. Current activities and investment in creating a hydrogen economy focus on the developed areas of the world: mainly North America, Western Europe and Japan. Does this mean that developing countries will take a back seat?

Issues for developing countries

Shell's recently issued "Global Scenarios to 2025" (Shell, 2005) includes trends for demography and energy demand growth. The world's population is likely to increase by 50 per cent in the first 50 years of the twenty-first century – from about 6 billion to about 9 billion. Some regions, however, will become more populous faster than others. This analysis shows that, despite net migration of about 2 million people each year into the developed countries, their share of the global population will steadily fall.

In Asia, population growth of 1.3 billion will also not prevent a slight decline (about 2 per cent) in its share of the world population. Meanwhile Africans – despite HIV/AIDS – will increase their share by nearly a third, from nearly 14 per cent to about 20 per cent of the world's population.

On a country-by-country basis, the shift in population share is noteworthy. For example, consider China growing from 1.28 billion in 2000 to 1.4 billion in 2050; and compare that with India, growing from 1.02 billion (i.e. 20 per cent fewer people than China) to 1.53 billion (i.e. nearly 10 per cent more people than China). The Russian Federation's population, on the other hand, is expected to decline by one-third within the same time period. In general terms, the developing world population is projected to increase from 81 per cent of the world total in 2005 to 84 per cent in 2025 and 86 per cent in 2050.

Previous scenarios observed a clear trend in urbanization, most notably in the developing world. This trend shows no signs of abating. In developed regions 75 per cent of the population already live in urban areas, and this is expected to rise to 80 per cent by 2025. In developing countries, however, the shift is much greater: from 43 per cent of people in 2005 to 54 per cent by 2025.

What makes this shift so significant is not the percentage rise, but the rise in total population in developing countries. This means that while the rural population will stay approximately the same, cities will have to absorb all the growth in the world's population. This will put increasing pressure on local capacity to provide clean water, housing and food – not to mention education, healthcare and other services or public goods. This will, in turn, put increasing pressure on energy provision.

Growth depends on energy; and if the energy industry does not rise to the low-carbon challenge, it could stand in the way of world economic growth.

Developing countries and hydrogen

A fit between this "highest tech" of mobility and energy technologies and the often "low-tech" reality of developing countries may be closer than is first apparent. In fact, in some areas it actually makes a lot of sense. It must be remembered that the predicted timeline for the hydrogen economy is long – it is at least 20 years away for developed countries. Developing countries can then implement it after developed countries have taken out the initial flaws – and having spent billions of dollars doing so.

New energy systems will develop from clusters, and hydrogen is particularly efficient in urban areas. These relatively low infrastructure investments will not only bring clean mobility, but clean energy as well. Indeed, in 20 years' time the same amount of primary energy may transport someone over twice the distance – or, more pertinently, transport twice the mass – but with a significantly reduced environmental footprint.

Developing countries have another advantage: legacy assets often obstruct the deployment of new technology. Countries with little legacy technology embedded in their current energy infrastructure can actually leapfrog those with much more, skipping one or more generations of technology.

Could a new energy infrastructure based on hydrogen and fuel cells – developed over, say, a 30-year period – be the tool to modernize and diversify emerging economies and promote inclusive growth? A new industry, however, requires the presence of not just a healthy small and medium-sized enterprise sector, but an enabling environment characterized by political stability, property rights, rule of law, the right investment climate, financial services and products, and a transparent and stable legal infrastructure.

Designing a hydrogen roadmap

Hydrogen is a long-term solution to a long-term problem, but if we do not start today, it will remain a long-term solution. While developed countries are implementing Lighthouse Projects, how can developing countries move towards a hydrogen economy?

This is a difficult question and the author does not know the answer. However, we do know where to start, and this is by designing a hydrogen roadmap integrating all the expensive lessons that the developed countries have learnt.

What are these? Well, one thing is clear: the vehicle is on the critical path and the volume must go up – it is a condition for successful rollout. An effective component supply chain is therefore essential for vehicles and other applications to move down the cost curve towards mass production. This means giving component suppliers a realistic outlook on activity and investment levels over future years, while applications achieve the necessary performance and attractiveness criteria.

From a fuel provider's perspective, hydrogen distribution from central production must be developed as early as possible in order to address the issues of supply and distribution logistics. As developing countries will probably roll out later, and therefore with less uncertainty, they should be able to deal rapidly with relatively high volumes.

Then there is the public response. This can vary enormously – from enthusiastic to fearful – depending on how effectively public engagement has been conducted locally and how politicized the subject has become. For example, in communities like Iceland,⁶ where support and desire have been built up over several years, implementation was swift. In Washington, DC, however, where the hydrogen project was originally greeted with both community and regulatory suspicion, significant delays and budget overruns resulted.

A hydrogen roadmap should therefore address public awareness and education as early as possible, so that there is a fertile ground of public support and regulatory experience when take-off does eventually become possible. Otherwise, progress will suffer long and unnecessary delays. This means informing key decisionmakers and future customers about the long-term benefits and near-term realities of hydrogen, fuel-cell systems and related infrastructure. We also need to work out a clear customer value proposition and address the barriers to social acceptance – town planning, health and safety issues, risk assessments, etc.

This will not only facilitate market acceptance and manage expectations, but help create the necessary human capital – researchers, technicians and engineers. It means establishing qualification guidelines for trade and industry, and engaging industry associations to coordinate and step up this activity.

But it is not just the public who need to have confidence in hydrogen, it is also investors. They need to see both a transparent legal infrastructure and a stable environment. For example, what will regulations, codes and standards look like, and what permits will be required? What taxes will this industry face and in what form? What incentives will be put in place and for how long? A government's public commitment that hydrogen vehicles will not attract taxes for, say, the next 25 years will go a long way in stimulating development and attracting activity, probably without missing out on net fiscal revenue. Also, we should not lose the opportunity to develop and apply incentives to reduce CO₂ emissions in the broader policy arena.

In short, there must be a clear line of sight to normal – competitive – commercial operation in order to build confidence in hydrogen's long-term viability. It means having a coherent framework of incentives and regulations that crosses different countries – reducing risk and "friction", and providing a focus for industry development. Clarity on fiscal and other long-term economic incentives is therefore essential for establishing credibility – stimulating infrastructure investment, building up vehicle demand and establishing supply chains – while the economies of large-scale production build up. Naturally, these incentives will be structured to reduce as progress allows, but it must be clear how this will happen.

Intellectual property rights are crucial for encouraging new technology and protecting investment in R&D, while discouraging broad claims which can delay development. IP rights should be considered in the context of internal – particularly American and Japanese – patent practices.

CO₂ – A big business opportunity

During the early rollout stages of hydrogen as a transportation fuel it will mainly be made from natural gas, which will be available from existing hydrogen production facilities, such as refineries and gas production sites. When FCV penetration takes off, new production facilities will be built – mostly in the form of semi-central production sites – but still using natural gas and coal as feedstock.⁷

Central manufacturing is not just the lowest-cost method to deliver hydrogen to the customer at a retail site, but it will also enable up to 90 per cent carbon capture and sequestration, heralding the "clean" hydrogen phase. For quite some time hydrogen and CO₂ will be two sides of the same coin, so we need to set targets for the latter and create incentives for its capture and storage. Shell is capturing and storing CO₂ in demonstration projects now, but still needs to see if it can be done on a larger scale. It will take a decade to test the carbon-capture technology. According to Shell's CEO, Jeroen van der Veer, "And then we have to work things out with governments so we can make it [economically] worthwhile, because right now if you capture CO₂, you don't get credit for it, which just isn't logical. A unit stored should be the same as a unit saved" (US News & World Report, 2007). Yet even without sequestration, there are modest CO₂ advantages to using hydrogen thanks to energy efficiency improvements. Natural gas and coal will not be replaced by renewables as feedstock until the turn of the century, and there are important reasons for this.

Solar and wind generally produce electricity, but it will be many years before non-fossil power is able to meet all electricity demand. Indeed, by 2050 it is estimated that 50 per cent will still be generated from fossil resources. There are therefore strong arguments for using renewables directly for electricity instead of converting the electricity to hydrogen, which is less energy-efficient.

However, in certain regions and at certain times the excess electricity from renewables can sensibly be converted to hydrogen. We may see this first after wet seasons and on islands, such as Iceland or Tasmania. "Green" hydrogen will thus develop from locations which particularly favour renewables. Ultimately, and in regions where electricity demand is already mainly supplied by renewables, more and more may be used to produce hydrogen. It may take 30–50 years before improvements in conversion efficiencies shift this paradigm.

Effective hydrogen roadmaps

Above all, hydrogen roadmaps must underline the importance of a clear, coordinated focus on commercialization by all relevant parties. In fact, it is essential if we are to attract investors and convince them that a hydrogen economy can be not only cost-effective but highly profitable – the carrot for all entrepreneurs.

The author believes that 80 per cent of individual roadmaps have common content, and that an institution such as the United Nations University can play a vital role in building a template for hydrogen roadmaps. The main players in this fledgling industry are certainly keen to support this effort by communicating the latest lessons learnt. They are equally keen to develop relationships with their industrial partners of the future, augmented by visionary investors and funds managed by firms that are expert in the hydrogen and fuel-cell industry.

As with many of the issues that are facing developing countries, the creation of a new energy infrastructure will not be easy. But with passion, purpose and partnerships, we will surely find a way.

Notes

¹ See www.shell.com/hydrogen.

² For a discussion of Icelandic New Energy and the ECTOS project see chapter 9 in this volume.

³ For additional information on the hydrogen infrastructure in China see chapter 15 in this volume.

⁴ By "earmarks" is meant politically motivated conditions to incentive schemes, for instance favouring certain regions, technologies and collaborations that industry would normally not have chosen.

⁵ See www.conduit-ventures.com. Conduit Ventures is regulated by the UK Financial Services Authority.

⁶ See chapter 9 this volume.

⁷ On coal gasification and hydrogen in South Africa see in this volume.

REFERENCES

European Union (2005) Strategic Overview, European Hydrogen and Fuel Cell Technology Platform, June, available at www.hfpeurope.org.

Shell (2005) "Global Scenarios to 2025 – The Future Business Environment: Trends, Trade-Offs and Choice", Shell International, available at www.shell.com/scenarios.

US News & World Report (2007) "On the Record: Jeroen van der Veer", 27 August.

Document(s) 9 of 26