In this extended episode we had our first three-peat, with Paul Martin from Spitfire Research rejoining the podcast. When he first joined us in February and April of 2023, we had a terrific discussion on the diseconomies of scale, hydrogen and hopium, and it seemed timely to revisit the outlook for scale and technology transfer in the hydrogen market.
It was great to explore why funding has continued to flow towards hydrogen in the face of the techno-economic and thermodynamic challenges that these investments are seeking to overcome. We discussed the notion of predatory delay and the emerging infrastructure challenges of connecting renewables to the transmission infrastructure. Paul also debunked the underlying assumption that Wright’s Law is broadly applicable to reducing capital costs whereas the cost improvements are largely restricted to hydrogen electrolysers and note the balance of plant. We also explore the importance of reserves and resources.
Paul then offered a reprise of why the techno-economics simply don’t work for green hydrogen with current black hydrogen prices at around USD 1.00 – 1.50 / kg EXW. We contrast two (polar) scenarios where we assume free capital or free electrons to try to make the numbers work. We conclude that a carbon pricing mechanism is needed to get green hydrogen competitive with current production routes. Paul referred to his discussions with Michael Cembalest and the recent JP Morgan Energy Paper as moved into discussions around e-fuels.
We briefly explored the outlook for renewable fuels and reflected on policy history, our podcasts with Paul Bryan in March 2022 and April 2022 and the differences between price of sale (to market) and cost of production (at refinery). We discussed why harder to abate sectors (such as aviation) are getting their efforts underway while easier to abate sectors (such as land transport) appear less systematic in the uptake of low-carbon energy alternatives. Paul introduced the concept of the time value of CO2 in the atmosphere and the need to make quicker inroads into atmospheric reduction.
Is there a place for industrial green hydrogen? Paul brings us to Michael Liebreich cost per ton of abatement rankings and reflected on some of the confusion that has arisen around using hydrogen as a decarbonisation strategy rather than decarbonising hydrogen (in its current industrial applications – which for the avoidance of doubt rarely if ever is an energy carrier). In the absence of policy, super additive benefits are needed (beyond carbon reduction) to drive consumer and industrial product uptake.
We then explore some policy interventions and Paul contends that subsidises make sense where Wright’s Law is likely to apply, and in turn support technology scaling. We discussed the development of battery technology reflecting on LFP market trajectory and the scale-up challenges for sodium ion technology. We reflected different approaches to capital for technology scale up, and the importance of patience. We specifically touched on the Biden Administration Loans Office and a recent podcast with Jigar Shah on Cleaning Up podcast, as an example of targeted policy support.
Paul and I conclude our conversation with Paul reframing the question we are trying to answer. We should not be thinking ‘what we burn?’, but ‘how we provide energy services?’.
Transcript
CB: Hello everyone, and welcome to Tech Transfer Talk. My name is Cameron Begley, Managing Director of Spiegare, and joining me today on our first-ever three-peat is Paul Martin from Spitfire Research. Paul, who’s based in Canada, joined us a couple of years ago now talking about the economies of scale and distributed production. And Paul’s joining us today to just reflect a bit on the conversations around green hydrogen ambition and where things are at. Paul, thanks for joining us.
PM: Oh, you’re welcome.
CB: It’s terrific to have you back, Paul. And I guess just to start things off, what have you been up to the last year and a half or two years in terms of your activities with the Hydrogen Science Coalition and your own personal consulting?
PM: Sure. Well, there’s a lot that I can’t talk about because of confidentiality agreements and the like, but my consulting business is kind of divided into three areas. One of them is the conventional thing that kind of flows from my years working at Zeton, and that’s helping people who are developing new chemical processes, technology scale up from the laboratory through piloting and demonstration, and ultimately to commercialisation. So I’m still doing a fair bit of that with a number of different clones, most of whom I can’t mention. I’m helping investors make better decisions about innovation-related plays, doing a lot of technical due diligence and working with investors in that capacity. And the third thing that I do is, I’m working with industrial clients who are looking at decarbonisation in earnest, particularly of heating. So, helping them figure out how to, you know, what the real options are for industrial heating, decarbonisation and helping them understand that problem, which is less of a technical problem and more of an economic and policy problem. So, a lot of the time it’s naive companies that have made ESG (Environmental, Social, and Governance)-related commitments that they are now struggling to implement, and they lack the policy support that would help ensure that if they take decarbonisation action, their competitors would have to do the same. So, if you have to be the first penguin off the edge of the ice floe, and you have to spend a bunch of money to transition to a more expensive energy source in order to do the same job that your competitors are doing. You know, by burning stuff and using the atmosphere as a free public sewer, that’s not going to look very good on the balance sheet. So, anyway, that’s kind of it. As far as interesting assignments, one of them that I had was I was involved as an expert witness in a court case in Australia…
CB: That’s exciting.
PM: Yeah, I got to travel to Australia to give my evidence and it’s actually kind of a long process. But what was happening is an organisation called the Australasian Centre for Corporate Responsibility was suing Santos, who’s a gas company, over ESG related claims that they were making in regard to wanting to be Net Zero gas suppliers. So, the strategy that they were planning to use was to make hydrogen and capture the CO2 and bury it, and then sell hydrogen blended into natural gas to their clients, and then take credit for the reductions in GHG (greenhouse gas) that were coming from other clients who were achieving. So, that was not giving them any of those attributes, taking those attributes for themselves and then saying, well, ‘Look, all of our scope one and two emissions have been negated by the fact that we’ve reduced our clients’ emissions’…you know, ‘Our scope three emissions, our proportionate amount.’ And so, I was retained to act as an expert witness. I had to write several reports and then a joint report with experts for the other side. And then they did not want to have a virtual meeting. I guess they did that. So, it was get on the plane and then the barrister for the other side got sick, so I was delayed. So, I got to spend eight days in Sydney in return for an hour and three quarters of being grilled by a fellow who was earning an awful lot more than I was per hour. So, that was pretty exciting.
CB: Eight days in Sydney’s not a bad payoff.
PM: Yeah, that’s pretty, pretty awesome. I’ve got to admit, I really enjoyed my time there.
CB: There is a slight irony in the fact that it had to be face-to-face, Paul, because I wonder if the carbon credits got claimed by you, or by your client, or by the other litigant in the process. And I’m kind of hoping that sustainable aviation fuel was purchased for the purposes, or at least there was a book and claim somewhere.
PM: Well, that’s a really good question for somebody else. I simply showed up for the flight that was arranged.
CB: But it is interesting in a way, that this case that you’ve been involved with and the claims that were being made, if I broaden that idea out a little bit more around hydrogen and maybe even just efuels and the like, the OPM and hopium have kept flowing since we last spoke. And the hopium is, your turn of phrase, the OPM is Other People’s Money in this conversation. There’s phrases that we’ve, I think you’ve used commonly, we certainly use amongst our peer group, but they keep flowing. Where are they flowing to and why do they continue to flow in what I suspect we’re going to talk about is the hope that somehow thermodynamics will bend in the face of a lot of money.
PM: I would say that, you know, when people ask me what’s the deal? Why does this idea persist despite its obvious flaws and lack of scientific and economic basis? And the answer to that is pretty straightforward. The fossil fuel industry, the likes of Santos, are very interested in using hydrogen as a predatory delay strategy. They know that the writing’s on the wall. If we ever get serious about decarbonisation, and by the way, there’s still considerable debate about whether we will get adequately serious about decarbonisation and to properly decarbonise the hard bits that are going to be costly to do. But if we do so, they know that they’re toast. Their days are numbered. They have no, what’s the point of, for instance, being a gas distributor and having pipes at a gas from door-to- door if there’s no gas to carry in them? Certainly biogas will never scale to anything approximately the number of joules that are currently distributed in the form of natural gas. So, hydrogen becomes an obvious thing that you could do if money were no object. And that’s actually what I was acting as an expert witness in, in relation to, was this kind of fallacious notion that you can just put hydrogen in the natural gas network and it’ll all be fine. The other group of people, other than the fossil fuel industry, who are really interested, as I said, in predatory delay and keeping us burning fossils for longer and feeling good about it, because of the hope, even a false hope of some future replacement that’ll just allow the business model to continue, the other group are people that are, for instance, very interested in making large quantities of wind and solar electricity and are very frustrated with our unwillingness and seeming inability to build grids to get their products to customers. So, those guys are you know, you can imagine you have some tremendous wind resource somewhere, and you have a licence or a permit or the potential to get one to be able to build a project. You can smell the dollar signs but then you can’t get a grid connection. And so you think, what else can I do with electricity to make money? And so they’re reaching around for everything and hydrogen is just one of those things. There are others, but they are reaching around for hydrogen in a big way. And the fundamental problem there keeps rearing its head, and that is capital utilisation. Capital utilisation is fundamentally poor when the feedstock is intermittent. In this case the feedstock being electricity. So, the result is structurally high cost. The other problem is that where the opium and the hopium come in is people imagine that all technologies are the same, and so they all follow the same sort of Wright’s Law learnings in terms of capital costs, the marginal capital cost declines. And that’s not the case. Not all technologies follow Wright’s Law. We’ve built too many tanks and pumps and things like that. We expect tanks and pumps and stuff like that to get cheaper just because we make more of them.
CB: And it was nice of you to clean up stuff like that, because you have shared a different version of that with me. So for the under 18 listeners that might be out there. Thank you.
PM: I just have to mention that my old boss for many years used to refer to tanks and pumps and expletives, like that as things that look complicated but really aren’t.
CB: Yeah. Are really off the shelf. And just to come back to this idea of these stranded solar and wind renewable assets momentarily. So, you made the point there that hydrogen is seen as one potential use of those. So I guess a starting point is if I had that effectively, say stranded asset, that may not be technically the right way to describe it, but if it’s not connected to a grid, it’s kind of stranded. If we’re not making hydrogen, is the conversation then about do we just get portable batteries, store them up and find a way to move them out? Truck, truck out batteries full of electrons? Or I mean, is there a choice or is it not really a choice?
PM: Well, I think we have to think about the difference between reserves and resources. So, in a mining context one talks about reserves and resources. So, the resource is a quantity of material that we know or suspect to exist. And a reserve is the smaller subset of that resource that we can extract at today’s price of material and make a profit.
CB: Yeah, okay.
PM: So, obviously reserves are smaller than resources. Always. The thing that people don’t understand is just because there’s a resource doesn’t mean that there could possibly ever be a reserve. And the example that I use there is gold in the ocean. So, we can do a calculation. And you find out the concentration of gold and seawater is a fraction of a part per billion. But there’s a lot of seawater.
CB: Oh hello, we’ve got a resource.
PM: Well, when you do the math, you find out that at today’s gold prices, that resource is worth trillions of dollars.
CB: Right. So, is this the point where I boil the ocean, Paul, or is that a whole other conversation?
PM: There you go. Well, we’re well on our way to boiling the ocean. Well, we are dumping fossils into the atmosphere, although that’s not our intent. But the point is that the ocean will never have gold reserves in it. Like ocean seawater will never have reserves in it. So, let’s say that I have a substantial project in Western Australia where there’s a high anti-correlated wind and solar with high-capacity factor. But I’m so far away from anybody that wants electricity that I can’t economically build an HVDC cable. The problem is that what that ultimately means for you is that unless you can make something there that is transportable by a means that is affordable, your resource isn’t a reserve. So, there’s a potential to make wind and solar but if you can’t make money doing it, then prices have to get higher for that resource to preserve.
CB: What if we introduce an immutable carbon price?
PM: Well, then you could imagine doing the math and saying, ‘Well, I might be able to, for instance, make some hydrogen in this faraway location and do it on a significant scale sufficient to be able to build a Haber Bosch plant to make ammonia, which I could then ship to people that want to use it as fertiliser.’ And by so doing, we could stop making hydrogen the dirty old way by reforming natural gas or gas by coal. Instead, make the hydrogen by electrolysis and ship this green ammonia product for its proper use as a fertiliser and as the base of the nitrogen chemicals industry. The problem is that nobody who’s a farmer is going to pay a cent more for green ammonia than for the black stuff. So, what you find is this nonsense idea, utter craziness of trying to make ammonia as a way to move hydrogen around. So, you know, at the other end, we break the ammonia with input energy that you have to get at a destination where you don’t have enough. You have to crack the ammonia back to nitrogen and hydrogen. And I just refer to that as energetic vandalism because that’s exactly what it is. It’s absurd. And the other crazy thing that you get is people talking about trying to use ammonia, which is a toxic and corrosive gas as a fuel.
CB: Winding our way back to this stranded asset. And I think it was really good exploring, you know, resources and reserves and unpacking that, because now you’ve got people that have built wind and solar based on the resources, but haven’t thought about the reserve question. So, now they’re turning to hydrogen, and with hydrogen and electrons the mind turns to electrolysis. So, is the engineering stacked against us to actually deploy these electrolysers? So, let’s set aside that you’ve now got stranded hydrogen as opposed to stranded electrons just momentarily. But there’s a lot of emphasis on the electrolyser at the moment and a narrative that I’m picking up. And I know you’ve commented on, Paul, around ‘Well, yeah, we’ve got this Wright’s Law problem with electrolysis.’ So, what is the natural limit? If I can go to the engineering limit of electrolyser technology and try to get what we’re seeing on the bench and in the pilot scale, why is this not translating to a better outcome in terms of when we get into a production scale?
PM: So, I think we have to clarify a little bit. The problem with electrolysis isn’t that it doesn’t work and isn’t that we can’t make it better. The problem with electrolysis is that right now you can’t afford either the electricity or the capital. Even if you get free electricity, the capital cost alone makes the hydrogen too expensive due to the poor utilisation of the capital and the capital cost. The problem with the capital cost is that it won’t, in my opinion, and this is based on decades of scaling technology for clients, it will not follow a Wright’s Law learning rate that’s sufficiently high, and in fact, only part of a hydrogen plant, only the electrolysis stack will follow the Wright’s Law learning to basically any extent. So, the result is that right now, about half the cost of a hydrogen plant, in fact, more than that, pretty much three quarters of the cost of the finished hydrogen facility, including all the facilities-related stuff, is stuff that has no Wright’s Law component at all.
CB: So, the electrolyser isn’t the main game in building out the plant?
PM: Yeah, the electrolyser might get cheaper and should get cheaper. If we decide that we really want to do electrolysis at scale, we want to build the 1000 GW worth of them, for instance, that we would probably need to replace just the black hydrogen that we use in applications that are durable post-decarbonisation, not desulfurising gasoline and diesel before we burn them, because we won’t be doing that anymore but everything else. Then we can probably count on electrolysis stacks getting cheaper because we’ll mass produce them in factories that are highly vertically integrated, and they have robotic technology installed in order to reduce the labour cost. So, we can probably count on electrolyser stack costs following a Wright’s Law learning rate. The problem is that the stack is only part of the cost of the overall facility, and in fact, it’s not the majority of the cost, it’s already a fraction of the cost. And the other stuff is a boat anchor around your neck helping you swim, you know, as far as the cost of hydrogen. So, this is the thing that a lot of people don’t understand. They seem to extrapolate future costs of hydrogen based on assuming that the cost of a whole hydrogen facility is going to get smaller and smaller and smaller and smaller, and hence the proportion of that cost per kilogram of hydrogen will keep getting smaller and smaller and smaller.
CB: There’s a constant partner variable part here and the problem is the constant is two thirds to three quarters of the total cost. Whereas, as you’ve just articulated, Paul, this idea that everything’s going to drop is wrong. And I was going to say fallacy, that might be a little bit harsh, but let’s just call it an assumption, that might be a better place to start.
PM: Assumption. It’s a bad assumption that arises from a poor understanding of engineering economics.
CB: Yeah, yeah. Is there a pathway here? I mean, what’s this cost going to get to do you think in the midterm where you’ve only got 25% or 33%, say, of cost down coming through Wright’s Law, through the electrolyser stack, where do you think we’re going to get to in terms of a cost of goods for green hydrogen?
PM: For reference, a reference cost, Gulf coast, United States now, mind you, this is not a distributed cost. This is the wholesale cost for hydrogen might be between $1 and $1.50 US per kilogram. Now that’s with no carbon tax. And that’s generating, you know, ten kilograms of CO2 per kilogram of hydrogen and probably another four of CO2 equivalent in the form of methane emissions. So, very emissive, very dirty hydrogen, but still very cheap at a dollar to $1.50 a kilogram. The thing is, though, that that’s $11 per million BTUs of higher heating value. Starting with a feedstock that costs you $3.50. So, just making hydrogen out of natural gas increases the cost per joule by a factor of three. And that’s the black stuff. That’s the way that we make it now. So, if you look at green hydrogen, the math is fairly simple. Let’s imagine that you find an electrolyser lying by the side of the road, and you find Oompa Loompas, you know, who are happy to install your electrolyser for free on donated land.
CB: Oh, so we’ve got free land and free electrolyser.
PM: Oh, yeah, we got a free electrolyser.
CB: Are we gonna throw in free electrons as well?
PM: Uh, no, no, we were going to figure out how many cents per kilowatt hour we can afford to pay, even if the capital cost is zero. So, round numbers and electrolysers takes between 50 and 65 kilowatt hours per kilogram. So, let’s use 50 to be optimistic. I mean, I’ve never seen a commercial proposal that’s come in at 50, but let’s use 50 just to make the numbers nice and round. So at 50 kilowatt hours per kilogram of hydrogen and your target is $1.50 a kilogram, you can afford to spend $0.03 per kilowatt hour if you’ve spent no capital. And you can look at it the other way. Now, let’s say that your electrolyser capital cost is the current approximately $2 million per megawatt, or $2,000 a kilowatt. Even if you feed that with free electrons and you only feed it at 35% capacity factor, you’ve already blown your $1.50. You know, and that’s assuming no discount rate or anything. It’s just assuming that you throw in the capital and the electrolyser lasts for a period of time. So, the problem is that you can’t afford either the capital or the electrons at the moment to compete with black hydrogen at, you know, without a carbon tax. And adding a carbon tax on just the CO2 of $150 per tonne only takes the black hydrogen from $1.50 to $3.00.
CB: Wow. At $150 a tonne.
PM: Yeah, because it’s ten kilograms of CO2 per kilogram of hydrogen. So, you know, ten tonnes of CO2 per tonne of hydrogen and $150 a tonne. It works out to $1.50 a kilogram of hydrogen on top of your raw material and capital cost for your electrolyser that gives you a $1.50. So, you’re up to $3.00. Well, real green hydrogen projects in the world, costs of production again, wholesale ex works of between $6 and $15 a kilogram. And if the capital makes up half of that, which it does, even if the electrons are free, you’re not getting below three. If the capital were to be free, you’re still only talking about $0.06 a kilowatt hour, which is still pretty cheap if it’s going to be firmed in any way. So, the economics just fundamentally do not work. Green hydrogen is very expensive. And it’s structurally expensive. So, this leads to a couple of conclusions. Number one, you’d be daft to use it as a fuel for any purpose. And you’d be really, really crazy to use it to make a fuel unless all you’re doing is hydrotreating it. So, you can use green hydrogen and get away with it, if you’re going to do the hydrotreating of esters and fatty acids, for instance, where decarboxylate and then break off a little bit of of a fat fatty acid and end up with a chunk of alkane about the right length to use as a jet fuel.
CB: Yeah. So, getting into the HEFA (Hydroprocessed Esters and Fatty Acids) and SAF (Sustainable Aviation Fuels) conversation at that point.
PM: Yeah. So you could afford to use green hydrogen for that small amount of hydrogen that you need in order to make HEFA. But if you’re going to try to reverse thermodynamics by starting with water and CO2 and electricity and end up making jet fuel, just give your head a shake. That is never, ever going to pencil out. Like it doesn’t matter what route you take. And in fact, one of my engagements that have been quite enjoyed for the past three years, is that I’ve been helping out an analyst for JP Morgan in the States named Michael Cembalest, with his eye on the market ‘State of Energy’ paper each year. And this year, Michael’s paper includes a section that has a nice chart which shows kind of the food web of sustainable aviation fuel. It shows all the insane pathways that you could possibly take, you know. Start with biomass. What can you do? You know, start with food, biomass. Start with cellulosic biomass, woody biomass, you know, start with electricity and water. What are the pathways that you can take? And I’ve mapped out all of them that I’ve come across. And it’s an interesting web. And basically the only ones that make any sense are the ones that involve, you know, foodstuffs, the HEFA, for instance. But that has the fundamental problem of not being scalable.
CB: Just to clarify that because of the feedstock or because of the process, it’s because of the feedstock or because of the process.
PM: It’s because of the feedstock.
CB: Yeah, okay. Just to draw the distinction there. Yeah.
PM: So, it’s not scalable because we can’t produce enough food oil to match the demand. So, the result is that you end up having to chase these other more difficult pathways, like for instance, the dehydration of ethanol to ethylene and then short oligomers, you know, or the methanol pathway. So, you gasify and then produce methanol from the syngas. And then you do methanol to olefins to make olefins. And then you short oligomerise those. And then there’s the dumbest of the dumb, stupid with stupid sauce on top, which is where you try to take the syngas and feed it to Fischer Tropsch. So, a process that can’t make money when you feed it free natural gas with a free atmosphere to dump stuff into, is somehow going to make money making just aviation fuel, in a decarbonised future, starting with either gasified biomass or worse still, syngas made the hard way by reversing, you know, CO2, the reverse of the shift with hydrogen. I mean, you had that one up and like, the cost will just be astronomical. That process, you know, Fischer Tropsch, the ‘FT’, can stand for Fischer Tropsch, and it can also stand for ‘effing terrible’.
CB: I have heard that as well. ‘Fundamentally terrible’ is what you meant there, of course, Paul, that’s the only f word we know on the podcast…
PM: No, no, it’s fundamentally terrible…
CB: Fundamentally terrible…
PM: …because what it does is, it’s a chain growth model, right? And so, you end up with always short chain stuff. And the big problem here, Cameron, is that people are focusing on these dumb, hard to decarbonise sectors that really should be worked on last. And they’re grinding the gears, spending their time worrying about them now, when what we should be doing is the easy to decarbonise sectors which we can decarbonise at a cost per tonne of CO2 emissions averted. That’s in some cases, even negative for the end user. Why on earth wouldn’t we just mandate all the policy behind it and just go after getting rid of gasoline and diesel and land transport, and not worry about these aircraft that need liquid fuels? And just worry about the aircraft later after we’ve done that big thing, that would make a lot more sense to me.
CB: So, that’s a very interesting point to pick up on Paul. And it’s a conversation that I’ve been involved in recently with a number of folks. And how I’d summarise it at the moment is that SAF has hijacked the agenda. And what I mean by that is that a combination of policy coming predominantly out of Europe, but other jurisdictions now, and then, the airline industry got around it and said, ‘Hey, let’s get organised around this.’ And it seems to have dragged everyone into a focus hard on, hard to abate, to pick up the point you just made rather than say, ‘Oh, hang on a tick but there are a lot of easier things we could do first, why aren’t we doing those to get the, let’s say, the carbon or environmental outcome?’ The cart has been put in front of the horse by some considerable distance. Now, I’m not actually trying to say, ‘Oh well, oh, that’s a horrible, horrible thing, the aviation industry, you know, like it’s good that they’re trying to make the move, but we’re missing all the low hanging fruit, so to speak, I’m mixing the metaphors here. But we’re missing the low hanging fruit trying to reach for the apple at the top.
PM: The thing that bothers me about the whole discussion is that people don’t realise that there’s such a thing as a time value of CO2 in the atmosphere. It’s very much like talking about monetary investments, and that early money matters a lot. And early removals of CO2, or in this case, really what we’re talking about is not removals of CO2, but prevention of fossil fuels in the first place. The early avoidance pays the best dividends for future generations. And if we can do the early gains at as low a cost as possible, we will be able to make as much of an investment in reducing those emissions with our limited resources that we can manage. And then once we’re done with that easy stuff, when we get into the stuff that’s costing us north of $150 a tonne, then we can start talking about, ‘Well, what are our priorities?’
CB: Yeah. It’s interesting framing that in economic terms as the time value concept. So, we had Roger Wise on the podcast last month. I’m not sure whether you know Roger, Paul. He’s a venture capitalist out of the United States who’s been in biobased economy for 25 years. And he talked about the environmental debt we’ve just run up by using the atmosphere as a sewer or using, you know, the idea of Skyfill. So, it’s interesting you’ve introduced the idea of the time value of emissions, which complements that idea of running up a debt, because the sooner you pay off the debt, the less interest you pay. Or in this case, the less environmental damage that you cause.
PM: You see that the biofuels guys, they to me were, you know, I spent a long time with my former employer working on biofuels related projects. The theory at the time was $150 a barrel of oil was very expensive and therefore alternatives should start to pay. And that was the driver behind biofuels, was less decarbonisation and more a thought that we can get this decarbonisation benefit and it won’t cost us anything because petroleum is expensive. And that never panned out. And I knew it was never going to pan out because people were constantly confusing, as we were talking about earlier with, with hydrogen, we were talking about production costs, the number of people that were imagining that they were going to be able to buy green hydrogen at $3.00 a kilogram, for instance, for some purpose. But no, that’s what it costs to make it. That doesn’t include any distribution. It doesn’t include any dispensing. It doesn’t include anything else. You’re never going to be paying $3.00. An example I can use is that wholesale natural gas, as I mentioned in the United States, is about $3.50. So, about $5 Canadian per million BTUs. But what I pay as a retail natural gas consumer in Ontario is $20.
CB: A bit more than that.
PM: Yeah, yeah, a bit more than that. A factor of five. You know, 4 or 5 more than that. And that works out to $0.07 a kilowatt hour. The downside to that situation, people imagining that they’re going to get stuff for cheap, is they think it’s going to pay for itself. And that takes the pressure off the policy measures that are necessary. Where I was going with this was that this distributed cost versus production cost was a big problem with biofuels people. And I saw the same kind of silly reasoning where people were saying, ‘Oh, well, I can make, you know, ethanol for $1.00 a litre.’ Like, great, run a business. Because you sure as heck can’t sell it to anybody for a $1.00 a litre. No, you know you’re not a retailer.
CB: Yeah, yeah, yeah. What you can make it for and what it gets to at the pump or at the point of consumption. So, interestingly enough. Paul, a mutual, a good mutual friend of ours, Paul Bryan, had this conversation with me 20 years ago. What I would define as the start of the biofuels push under the Bush administration. Around the second one, from ‘04 to ‘08, where…
PM: I was big involved in that.
CB: And Paul [Bryan] was involved in that. And he said to me, we had this very conversation about what you sell it for, and the cost of goods, you’ll find are actually quite different conversations. And we, of course, all of us as engineers, understand this conversation. But perhaps that nuance gets lost a little bit in translation from engineering to others.
PM: Absolutely. And so, you’ll see these reports that are being put out by, you know, financial analyst type companies, talking about future costs of, of green hydrogen, and they’re talking about cost of production. But then people pick this up and think they’re going to be able to buy hydrogen at that price to put into a vehicle, or to burn in their boiler in their home in order to warm their home up. And it’s just nonsense. And the costs of distribution of hydrogen are rather high because the natural gas infrastructure would take significant modification and would also have difficulty delivering anything close to the amount of energy that we currently deliver through that network in the form of natural gas. So, the cost and distribution of hydrogen are really high, and they’re structurally high. They’re high for reasons that are the result of the properties of the molecule. They’re not something you’re going to fix with innovation.
CB: That’s a good point that it’s not an innovation problem. It’s just the thermodynamics and the chemistry of what’s going on. So, it prompts the question in my mind here, Paul, with all of this drive for green hydrogen, the inversion, I think globally around chasing harder to abate rather than easier to abate, is there in your worldview as it stands today? Is there a place for green hydrogen in industrial… I’m not even going to ask you about energy, because we both, I think, have very strongly aligned views on that. But when I think about hydrogen, green hydrogen for industrial applications, whether it’s the chemistry or metallurgy, fertiliser, is there a place in the next 5 or 10 years or, or maybe further, where green hydrogen is going to come into play, or is it just going to be the last thing that becomes economically viable?
PM: Well, I think a better way to look at that is the way that Michael Liebreich, has been looking at it. And so, what Michael I think quite rightly focused on the cost per tonne of abatement and what you can do, for instance, with electricity. So, if you have electricity available, the best thing to do with it is to, if you have green electricity, the best thing to do, the thing that produces the greatest bang for the buck, so to speak, with that green electricity is to displace black electricity from the grid. So, let’s assume that you’ve done all of that, that you can do. Then the next thing you should do is you should grow electrical consumption in the form of decarbonising things like heating, by means of heat pumps and transport by means of electric vehicles. But I mean land transport and near-shore ships and short-range aircraft and the like, things that you can do with batteries. And it’s only once you’ve achieved all of those things that you even start about making anything else from electricity. So, that goes for switching from carbon thermic reduction to electrochemical reduction for various chemicals and various materials. It goes for using green hydrogen, for instance, to drive the oxygens off of iron, to iron ore to make iron, which is one that people talk about all the time. And it’s a big thing… They call it green steel, but it’s really what we’re really talking about is green iron. And then of course, displacing black hydrogen from applications, durable post decarbonisation like ammonia production and ethanol production and the various other, you know, myriad uses of hydrogen in the chemicals industry. The trouble, as I said, is that people are constantly getting this, cart before the horse. And they’re thinking about ways to use hydrogen as a decarbonisation strategy without thinking about decarbonising hydrogen itself. Because the marketing problem of decarbonising hydrogen itself requires policy support, right? So, if you don’t have the policy support, you’re not going to decarbonise anything, except where you get some super additive benefit from the decarbonised alternative, which you can argue you get with EVs. I mean, electric vehicles are really fun to drive.
CB: Yes, they are.
PM: And the emissions are very low and they also happen to save money if you can charge it at home, which means that the cost per tonne of emissions reduction is negative. The problem is that they are opportunities for super additive situations where we get some efficiency improvement that offsets the cost of the decarbonisation to us by virtue of switching to a more expensive, higher grade energy medium like electricity versus natural gas or gasoline or what have you. It’s really only limited to a few things. Electric vehicles are one and heat pumps for comparatively low temperature heating or for, in industry recycling heat from heat rejection back to reuse. And that’s one I’m kind of bullish about because I’m seeing very interesting things being done. Very creative things being done in industry up to about 250 degrees C.
[00.37.37]
CB: Yeah, okay. So, notionally lower temperature is a process heat.
PM: Correct, yeah. And when you look at the histogram of how many joules of heating energy industry uses versus temperature, what you find is that in most places in the world, at least 50% of industrial heat is used below 300 degrees to 350 degrees C.
CB: So, you’ve got you’ve got 50% of the market that could be addressed with this approach that you’re becoming bullish about.
PM: And the other 50% you would have to do the hard way, which is that a coefficient of performance of one with an electric heater. And that’s obviously harder to do. Really need policy drivers in order to get the high temperature heating to pencil out. Because right now what you’re asking to do is to switch from an emissive but low-cost fuel to electricity.
CB: That’s actually a really nice summary. So, just going back to Michael’s cost per ton of abatement and recapping that conversation, the answer to my question is nothing in the foreseeable future.
PM: We haven’t even begun the electrification of land transport and heating.
CB: Which is the easy win because they don’t fall out of the sky if the engine stops.
PM: So, until those things are substantially complete, thinking about even the most sensible uses of green hydrogen, which is to displace black hydrogen from applications that we need post decarbonisation, like ammonia production, methanol, a number of things in the chemical industry, and maybe green iron production, doesn’t make any sense. And remember that there’s another magic thing called direct air capture, which I think…
CB: Oh yes, I know, I know how how much you like this conversation.
PM: Round numbers. People are talking about $1,000 a tonne. Direct air capture. And I find even that a little hard to believe. I think that’s probably a little light, given that taking the CO2 out of a 3.8 bar partial pressure syngas stream and burying it under perfect conditions in Alberta costs $165 a tonne.
CB: Right. That’s a really interesting benchmark, isn’t it?
PM: Very brilliant project, Shell Quest, paid for by the Canadian taxpayer. Done very competently by Shell and Fluor Daniel, I guess Fluor now, no Daniel anymore. And burying a million tonnes of CO2 per year. And the cost per tonne of CO2 goes up and up and up every year because the cost of energy goes up and it’s energy intensive.
CB: You need to put energy in to get it out.
PM: Yeah. So, per, that’s the beauty of that project, is that because we paid for it, you know, the rest of the world. Good. Good for you. I wish you would pay attention to the numbers. The numbers are public. So, you can look it up. You don’t need to believe anybody’s lies. You can. The Government of Alberta website. You can find out. They, you know, and they use a very generous discounting rate, like a discounting rate that no business would ever use. And, come up with a number and it’s $165 Canadian a tonne. And remember, this is only taking 78% of the CO2 out of the syngas stream. The other 45% of the CO2 that comes out of the flue of the tube furnace of the reformer, they’re not even touching that. That’s just going straight to the atmosphere.
CB: Yeah. There’s a nice parallel there Paul, because you mentioned earlier about predatory delay and what you’ve just described there’s the other great slight of hand trick, which is to socialise the losses and privatise the gains.
PM: And that’s a very common strategy and one that we shouldn’t let them get away with, but we constantly let them get away with. So, when one looks at decarbonisation, the cost per tonne of abatement is really important and things that are costing north of 300 bucks per ton we probably shouldn’t be even thinking about yet.
CB: Yeah, which goes back to that. Why aren’t we taking the low hanging fruit?
PM: And the thing that drives me particularly crazy, Cameron, is that the industry says, ‘Sure, we can’t do it right now, so subsidise us.’ And the thing about subsidy is that subsidy is quite sensible when you’re in a Wright’s Law learning environment. So, the subsidy that was used to bring solar and wind and batteries to scale. Well, less batteries, batteries more or less scale themselves. And I’ve got to come back to this because it’s a beautiful story. But wind and solar, they followed a very good Wright’s Law curve and subsidy got them to where they are. But it was always very clear that there was going to be a Wright’s Law benefit plus a scale increased benefit for, you know, with wind turbines. Making them taller means that their swept area goes up. It also means that they get access to better winds. So, there’s benefit to increase scale even though it’s difficult to do. Point being, though, that subsidy was powerful there because what it did is it got us through the first number of doublings necessary to get the cost down on that Wright’s Law learning thing. The problem with hydrogen is that with a depressed Wright’s law learning rate, because a good chunk of it is tanks and pumps and stuff like that that have no Wright’s law learning associated with them at all, the subsidies are not going to get us there. All the subsidy does is subsidise his energy use. So, that’s not really very useful.
CB: That’s a really interesting idea. That’s a really interesting policy concept, Paul. That this is where perhaps the absence of engineering input into policy becomes quite apparent because, you know, taking that idea that, okay, so what where will Wright’s Law apply? Let’s subsidise to accelerate or support to accelerate. And then as we start to plateau, the market then picks it up and the rest is history in a way.
PM: One of the things that I deal with, with innovators and with investors, particularly venture capitalists that are looking at investing in innovation-related plays, is talking about cost to scale. And the example that I use is batteries. So, lithium-ion batteries, when they were originally developed, they were north of $5,000 a kilowatt hour. And people were buying them at $5,000 a kilowatt hour for applications that needed the very best battery on Earth. Very high value applications that needed the very best battery on Earth because people’s lives depended on it, or there was some functional benefit to doing so. That provided a market for the very early first couple of doublings, and then once they got through that, then they became cheap enough for mobile applications, you know, cell phones and laptops and you know, MP3 players and whatever, all those sorts of things. And that market. Increase the doublings again and again and again. More and more doublings came out of that and the price just fell. And by the time it got low enough that the mobile electronics were already fully adopting, then it went into power tools, and by the time it was in power tools, people were thinking, ‘Well, if this keeps going, we could probably afford to build a car’. And people are going nuts, like, ‘Why would you build a car with batteries that cost, you know, $500 a kilowatt hour?’ Well, the last LiFe cells that I bought from China cost me $60. Yeah, $60 a kilowatt hour. And they’re not finished going down. And sodium-ions are going even lower than that.
CB: Yeah. The next frontier in battery tech. So, the batteries are really fascinating. Case study of no subsidy needed. You just found applications as you came, very high value, and you just came down the curve and the scale came with you.
PM: But the problem with the battery example that I just gave you is, in fact an important lesson that, okay, a natural path to scale where it occurs is really wonderful. If you lack a path to scale, and your only path to scale is give me billions of dollars and I will be able to do enough doublings myself, to get my cost down low enough that I that people can afford my product. Then you’re in trouble. And that’s the trouble with sodium ion, because sodium ion doesn’t have that path to scale. There’s some benefit to sodium ion that cell phone makers will want to pay more for a sodium ion battery. Its path to scale is give me billions of dollars and that’s a problem, right? So, we see that it’s going in the right direction and it’s got everything going for it. The path to scale for sodium ion is not really absent, but it’s give me billions of dollars. The good news is it’s got CATL (Contemporary Amperex Technology Co., Limited) behind it. And they have billions of dollars.
CB: Yeah, yeah. Is there a strange analogy here, though? So, let’s take the battery example. You’ve got an established market for lithium ion. And then you’ve got a new entrant that is going to provide a different offering but now has to compete with an incumbent that has all their capital depreciated. They’re established in terms of their manufacturing processes and just an entrenched competitive advantage. And the analogy that struck me there, Paul, was the biobased economy stuff, where you’re trying to come in and compete with fossil resources, but you’ve now got to compete with depreciated capital, new forms of product risk, technology risk, market risk. Is that the right sort of framing do you think here?
PM: Very, it’s a very good framing. And one of the things that you find is that China’s a magical place in a lot of ways. One of the things that it does really well is being kind of technocratic. The government can just say ‘This shows promise. We can see a destination here. We’re just going to do it. Don’t worry about capital. Don’t worry about your cost of capital. It’s handled.’ It’ will magic it away. And you know that that makes things some things a lot easier than, you know, the rest of us in other parts of the world where we have to contend with venture people who want a huge return in risk,
CB: It’s just inherently different. When the Chinese are asked about what they think of the French Revolution, it’s a little bit too early to tell. They’re playing the long game.
PM: Well, you know, I think we shouldn’t give them too much credit. And it is a nation that has a lot of advantages from a business perspective in relation to innovation. But let’s be clear, even China can’t make a nuclear reactor make sense.
CB: No, a whole other topic for exploration at the time. But let’s perhaps acknowledge the Chinese have a different view on capital and capital markets, which from an engineering and technology sense, advantages mid- to long-term development. It’s got other…
PM: It’s possible to do things in China that are impossible anywhere else in the world right now. It’s fascinating to watch. It’s extremely powerful from an economic perspective. And it is a really important lesson to people in the rest of the world who are developing technology. Even if you can see a beautiful destination at the end, if you lack a path to scale, chances are the place that you can get your thing done is pretty much limited to China.
CB: Yeah, that’s really an interesting observation. That’s a really interesting observation.
PM: And now, mind you, you know, during the Biden administration, you heard Jigar Shah, who was in charge of loans office for he was trying his level best and, I think quite valiantly, with a few mistakes that we could argue about. But he was trying valiantly to overcome some of that by saying, ‘Look, we’ll give you a loan guarantee. And the loan guarantee will kind of overcome some of these disadvantages, and they’ll help you get your foot firmly in place.’ And they did give a loan guarantee to Monolith, who’s a former client of mine, back when I worked at Zeton, we designed and built the pilot plant. I don’t know if you’re familiar with them, but what they do is they use plasma pyrolysis methane to make carbon black, reinforcing grade carbon black.
CB: You mentioned them the last time we chatted…
PM: …with hydrogen as a byproduct. And so, yeah, the thing that got them kicked over, I mean, they had a commercial process, but they were looking to scale it up by a factor of ten. And that loan guarantee was the catalyst, so to speak, you know.
CB: I heard Jigar Shah on Michael’s podcast…
PM: It was a very good…
CB: It was a terrific podcast wasn’t it? Yeah, at the risk of being seen to cross promote, I’d recommend listening to that, to anyone listening, because it was a fascinating conversation.
PM: The one with Jigar Shah was very good. And there are a couple others that are really excellent and you know, hats off to him, sometimes he does a very, very good job. But yeah, as I said that, it doesn’t mean that other nations couldn’t take it upon themselves to use their resources to, you know, more cleverly subsidise, as opposed to this bulk subsidy of so many dollars per kilogram of hydrogen produced. There has to be a destination at the end, because if your destination is that you’re going to take tax dollars that are earned by people and businesses making goods and services of real value to the economy, and you’re going to use that to, you know, just reduce the cost of something like energy, you’re really not doing anything. You’re really just grinding your gears. You’re…
CB: …treading water.
PM: Yeah, and that’s not really going to help because if the, if there’s no Wright’s Law or other benefit, no scaling benefit or, or the like, then at the end of the subsidy period, you still come up short, it’s still economically infeasible. And without policy support, the thing just dies. And that’s the sort of thing that we saw with biofuels. You would see when the subsidies were in place, biofuels producers could make a buck. And when the quarters were met, then they had to shut down. And, you know, it was not a way to run a business. I mean, just not.
CB: Paul, as always, a terrific conversation with you today and so many areas that we’ve traversed. I opened up, we wanted to talk about green hydrogen and the ambition and the implementation gap. And it would appear, based on this conversation, that that implementation gap is canyon like. And there’s an engineering component, there’s a policy component, there’s a techno economics component, all conspiring against green hydrogen. That might be a bit depressing.
PM: And a policy structure that’s unfortunately incentivising the wrong things.
CB: Yeah, it may be bad news for a hell of a lot of people that are listening to us today. But in its way, this is not actually about trying to take a philosophical position. I think what we’ve tried to do today, Paul, with your expertise, is actually just talk through the realities of what we’ve got in front of us. I get the impression and Paul, jump on me if I’m off beat here, I think if all the numbers could work, we would have no problem in doing it. I know the odd person has accused you of being antihydrogen, but I’ve never sensed that. You’re absolutely pro hydrogen in the right spots.
PM: It would be a puzzle to have done what I’ve done in my career to this date, if I hated hydrogen.
CB: Yeah, it would be, wouldn’t it?
PM: Having a hatred of elements in the periodic table is kind of a weird thing.
CB: It is. It is conceptually very weird, isn’t it, to say you hate…
PM: Oh no, I love hydrogen too much to see people wasting it by burning it.
CB: That’s a lovely thought.
PM: I love electricity even more so I really think that electricity has intrinsic value as merely pure exergy. It’s very easy to use it when you don’t constrain yourself with the firebox that we’ve had on our heads for the past 800,000 years or so, as humans, you know, ‘need heat, must burn something’.
CB: A passionate advocate for hydrogen and electricity. Why waste them doing anything other than the best thing with them, right?
PM: Yeah, hydrogen as a fuel is the answer to the wrong question. So, if we ask ourselves, ‘We can’t burn fossils anymore because of greenhouse gas emissions, what else can we burn?’ Then we get hydrogen, right? Because if we burn it, we’ll make water vapour. We’ll make NOx too but we’ll just sweep that under the carpet for a moment.
CB: It’s a very lumpy carpet we’ve got here today,
PM: We really got a lumpy carpet, that’s for sure. It hides all manner of sins unless you look under it. The right question, though, the one that we should be asking ourselves is ‘We can’t burn fossils anymore because of greenhouse gas emissions. How do we provide the energy services that we need in the decarbonised future without generating the greenhouse gas emissions?’ And the answer to that question is almost never hydrogen. It’s usually electricity. And if it isn’t electricity, it’s electricity adjacent usually. So, I mean, and that’s just the way that it is. And there are a lot of people who won’t like to hear that, but that’s the reality. And there are a few applications where we need liquid fuels: transoceanic ships and aircraft, and those are going to be satisfied with biofuels or not decarbonised. Those are the choices.
CB: Absolutely. Yeah. No, I think today’s been a fantastic conversation in just bringing a little bit of the engineering and policy and economic realities to this conversation because hydrogen is still the rage in Australia. It’s getting a lot of airtime around the world still, and just getting the thinking aligned not only around its role, but the timing and the and you quite rightly ask the question, it’s about energy services. Let’s think about that as the question rather than what have we burn next?
PM: Yep. That’s the way we’ve got to do it. It’s been a pleasure and great conversation, and it’s nice to have a little bit more of a technical conversation. And a lot of my talks in recent days, I’ve had to be careful about how technical I was and what I was saying, because the audience isn’t necessarily ready to receive it. So, it’s nice to be able to talk a little bit more frankly and with, you know, at a higher tech.
CB: I’m pleased that you felt free to do so, Paul. And we like the technical conversations, because if we’re doing tech transfer, you need the tech bit up front before you can do the transfer. So, with that very simple thought, thanks so much for your time today, Paul. It’s been great having you back and our first three-peater, so thank you so much.
PM: Great pleasure.Episode 46 Paul Martin
CB: Hello everyone, and welcome to Tech Transfer Talk. My name is Cameron Begley, Managing Director of Spiegare, and joining me today on our first-ever three-peat is Paul Martin from Spitfire Research. Paul, who’s based in Canada, joined us a couple of years ago now talking about the economies of scale and distributed production. And Paul’s joining us today to just reflect a bit on the conversations around green hydrogen ambition and where things are at. Paul, thanks for joining us.
PM: Oh, you’re welcome.
CB: It’s terrific to have you back, Paul. And I guess just to start things off, what have you been up to the last year and a half or two years in terms of your activities with the Hydrogen Science Coalition and your own personal consulting?
PM: Sure. Well, there’s a lot that I can’t talk about because of confidentiality agreements and the like, but my consulting business is kind of divided into three areas. One of them is the conventional thing that kind of flows from my years working at Zeton, and that’s helping people who are developing new chemical processes, technology scale up from the laboratory through piloting and demonstration, and ultimately to commercialisation. So I’m still doing a fair bit of that with a number of different clones, most of whom I can’t mention. I’m helping investors make better decisions about innovation-related plays, doing a lot of technical due diligence and working with investors in that capacity. And the third thing that I do is, I’m working with industrial clients who are looking at decarbonisation in earnest, particularly of heating. So, helping them figure out how to, you know, what the real options are for industrial heating, decarbonisation and helping them understand that problem, which is less of a technical problem and more of an economic and policy problem. So, a lot of the time it’s naive companies that have made ESG (Environmental, Social, and Governance)-related commitments that they are now struggling to implement, and they lack the policy support that would help ensure that if they take decarbonisation action, their competitors would have to do the same. So, if you have to be the first penguin off the edge of the ice floe, and you have to spend a bunch of money to transition to a more expensive energy source in order to do the same job that your competitors are doing. You know, by burning stuff and using the atmosphere as a free public sewer, that’s not going to look very good on the balance sheet. So, anyway, that’s kind of it. As far as interesting assignments, one of them that I had was I was involved as an expert witness in a court case in Australia…
CB: That’s exciting.
PM: Yeah, I got to travel to Australia to give my evidence and it’s actually kind of a long process. But what was happening is an organisation called the Australasian Centre for Corporate Responsibility was suing Santos, who’s a gas company, over ESG related claims that they were making in regard to wanting to be Net Zero gas suppliers. So, the strategy that they were planning to use was to make hydrogen and capture the CO2 and bury it, and then sell hydrogen blended into natural gas to their clients, and then take credit for the reductions in GHG (greenhouse gas) that were coming from other clients who were achieving. So, that was not giving them any of those attributes, taking those attributes for themselves and then saying, well, ‘Look, all of our scope one and two emissions have been negated by the fact that we’ve reduced our clients’ emissions’…you know, ‘Our scope three emissions, our proportionate amount.’ And so, I was retained to act as an expert witness. I had to write several reports and then a joint report with experts for the other side. And then they did not want to have a virtual meeting. I guess they did that. So, it was get on the plane and then the barrister for the other side got sick, so I was delayed. So, I got to spend eight days in Sydney in return for an hour and three quarters of being grilled by a fellow who was earning an awful lot more than I was per hour. So, that was pretty exciting.
CB: Eight days in Sydney’s not a bad payoff.
PM: Yeah, that’s pretty, pretty awesome. I’ve got to admit, I really enjoyed my time there.
CB: There is a slight irony in the fact that it had to be face-to-face, Paul, because I wonder if the carbon credits got claimed by you, or by your client, or by the other litigant in the process. And I’m kind of hoping that sustainable aviation fuel was purchased for the purposes, or at least there was a book and claim somewhere.
PM: Well, that’s a really good question for somebody else. I simply showed up for the flight that was arranged.
CB: But it is interesting in a way, that this case that you’ve been involved with and the claims that were being made, if I broaden that idea out a little bit more around hydrogen and maybe even just efuels and the like, the OPM and hopium have kept flowing since we last spoke. And the hopium is, your turn of phrase, the OPM is Other People’s Money in this conversation. There’s phrases that we’ve, I think you’ve used commonly, we certainly use amongst our peer group, but they keep flowing. Where are they flowing to and why do they continue to flow in what I suspect we’re going to talk about is the hope that somehow thermodynamics will bend in the face of a lot of money.
PM: I would say that, you know, when people ask me what’s the deal? Why does this idea persist despite its obvious flaws and lack of scientific and economic basis? And the answer to that is pretty straightforward. The fossil fuel industry, the likes of Santos, are very interested in using hydrogen as a predatory delay strategy. They know that the writing’s on the wall. If we ever get serious about decarbonisation, and by the way, there’s still considerable debate about whether we will get adequately serious about decarbonisation and to properly decarbonise the hard bits that are going to be costly to do. But if we do so, they know that they’re toast. Their days are numbered. They have no, what’s the point of, for instance, being a gas distributor and having pipes at a gas from door-to- door if there’s no gas to carry in them? Certainly biogas will never scale to anything approximately the number of joules that are currently distributed in the form of natural gas. So, hydrogen becomes an obvious thing that you could do if money were no object. And that’s actually what I was acting as an expert witness in, in relation to, was this kind of fallacious notion that you can just put hydrogen in the natural gas network and it’ll all be fine. The other group of people, other than the fossil fuel industry, who are really interested, as I said, in predatory delay and keeping us burning fossils for longer and feeling good about it, because of the hope, even a false hope of some future replacement that’ll just allow the business model to continue, the other group are people that are, for instance, very interested in making large quantities of wind and solar electricity and are very frustrated with our unwillingness and seeming inability to build grids to get their products to customers. So, those guys are you know, you can imagine you have some tremendous wind resource somewhere, and you have a licence or a permit or the potential to get one to be able to build a project. You can smell the dollar signs but then you can’t get a grid connection. And so you think, what else can I do with electricity to make money? And so they’re reaching around for everything and hydrogen is just one of those things. There are others, but they are reaching around for hydrogen in a big way. And the fundamental problem there keeps rearing its head, and that is capital utilisation. Capital utilisation is fundamentally poor when the feedstock is intermittent. In this case the feedstock being electricity. So, the result is structurally high cost. The other problem is that where the opium and the hopium come in is people imagine that all technologies are the same, and so they all follow the same sort of Wright’s Law learnings in terms of capital costs, the marginal capital cost declines. And that’s not the case. Not all technologies follow Wright’s Law. We’ve built too many tanks and pumps and things like that. We expect tanks and pumps and stuff like that to get cheaper just because we make more of them.
CB: And it was nice of you to clean up stuff like that, because you have shared a different version of that with me. So for the under 18 listeners that might be out there. Thank you.
PM: I just have to mention that my old boss for many years used to refer to tanks and pumps and expletives, like that as things that look complicated but really aren’t.
CB: Yeah. Are really off the shelf. And just to come back to this idea of these stranded solar and wind renewable assets momentarily. So, you made the point there that hydrogen is seen as one potential use of those. So I guess a starting point is if I had that effectively, say stranded asset, that may not be technically the right way to describe it, but if it’s not connected to a grid, it’s kind of stranded. If we’re not making hydrogen, is the conversation then about do we just get portable batteries, store them up and find a way to move them out? Truck, truck out batteries full of electrons? Or I mean, is there a choice or is it not really a choice?
PM: Well, I think we have to think about the difference between reserves and resources. So, in a mining context one talks about reserves and resources. So, the resource is a quantity of material that we know or suspect to exist. And a reserve is the smaller subset of that resource that we can extract at today’s price of material and make a profit.
CB: Yeah, okay.
PM: So, obviously reserves are smaller than resources. Always. The thing that people don’t understand is just because there’s a resource doesn’t mean that there could possibly ever be a reserve. And the example that I use there is gold in the ocean. So, we can do a calculation. And you find out the concentration of gold and seawater is a fraction of a part per billion. But there’s a lot of seawater.
CB: Oh hello, we’ve got a resource.
PM: Well, when you do the math, you find out that at today’s gold prices, that resource is worth trillions of dollars.
CB: Right. So, is this the point where I boil the ocean, Paul, or is that a whole other conversation?
PM: There you go. Well, we’re well on our way to boiling the ocean. Well, we are dumping fossils into the atmosphere, although that’s not our intent. But the point is that the ocean will never have gold reserves in it. Like ocean seawater will never have reserves in it. So, let’s say that I have a substantial project in Western Australia where there’s a high anti-correlated wind and solar with high-capacity factor. But I’m so far away from anybody that wants electricity that I can’t economically build an HVDC cable. The problem is that what that ultimately means for you is that unless you can make something there that is transportable by a means that is affordable, your resource isn’t a reserve. So, there’s a potential to make wind and solar but if you can’t make money doing it, then prices have to get higher for that resource to preserve.
CB: What if we introduce an immutable carbon price?
PM: Well, then you could imagine doing the math and saying, ‘Well, I might be able to, for instance, make some hydrogen in this faraway location and do it on a significant scale sufficient to be able to build a Haber Bosch plant to make ammonia, which I could then ship to people that want to use it as fertiliser.’ And by so doing, we could stop making hydrogen the dirty old way by reforming natural gas or gas by coal. Instead, make the hydrogen by electrolysis and ship this green ammonia product for its proper use as a fertiliser and as the base of the nitrogen chemicals industry. The problem is that nobody who’s a farmer is going to pay a cent more for green ammonia than for the black stuff. So, what you find is this nonsense idea, utter craziness of trying to make ammonia as a way to move hydrogen around. So, you know, at the other end, we break the ammonia with input energy that you have to get at a destination where you don’t have enough. You have to crack the ammonia back to nitrogen and hydrogen. And I just refer to that as energetic vandalism because that’s exactly what it is. It’s absurd. And the other crazy thing that you get is people talking about trying to use ammonia, which is a toxic and corrosive gas as a fuel.
CB: Winding our way back to this stranded asset. And I think it was really good exploring, you know, resources and reserves and unpacking that, because now you’ve got people that have built wind and solar based on the resources, but haven’t thought about the reserve question. So, now they’re turning to hydrogen, and with hydrogen and electrons the mind turns to electrolysis. So, is the engineering stacked against us to actually deploy these electrolysers? So, let’s set aside that you’ve now got stranded hydrogen as opposed to stranded electrons just momentarily. But there’s a lot of emphasis on the electrolyser at the moment and a narrative that I’m picking up. And I know you’ve commented on, Paul, around ‘Well, yeah, we’ve got this Wright’s Law problem with electrolysis.’ So, what is the natural limit? If I can go to the engineering limit of electrolyser technology and try to get what we’re seeing on the bench and in the pilot scale, why is this not translating to a better outcome in terms of when we get into a production scale?
PM: So, I think we have to clarify a little bit. The problem with electrolysis isn’t that it doesn’t work and isn’t that we can’t make it better. The problem with electrolysis is that right now you can’t afford either the electricity or the capital. Even if you get free electricity, the capital cost alone makes the hydrogen too expensive due to the poor utilisation of the capital and the capital cost. The problem with the capital cost is that it won’t, in my opinion, and this is based on decades of scaling technology for clients, it will not follow a Wright’s Law learning rate that’s sufficiently high, and in fact, only part of a hydrogen plant, only the electrolysis stack will follow the Wright’s Law learning to basically any extent. So, the result is that right now, about half the cost of a hydrogen plant, in fact, more than that, pretty much three quarters of the cost of the finished hydrogen facility, including all the facilities-related stuff, is stuff that has no Wright’s Law component at all.
CB: So, the electrolyser isn’t the main game in building out the plant?
PM: Yeah, the electrolyser might get cheaper and should get cheaper. If we decide that we really want to do electrolysis at scale, we want to build the 1000 GW worth of them, for instance, that we would probably need to replace just the black hydrogen that we use in applications that are durable post-decarbonisation, not desulfurising gasoline and diesel before we burn them, because we won’t be doing that anymore but everything else. Then we can probably count on electrolysis stacks getting cheaper because we’ll mass produce them in factories that are highly vertically integrated, and they have robotic technology installed in order to reduce the labour cost. So, we can probably count on electrolyser stack costs following a Wright’s Law learning rate. The problem is that the stack is only part of the cost of the overall facility, and in fact, it’s not the majority of the cost, it’s already a fraction of the cost. And the other stuff is a boat anchor around your neck helping you swim, you know, as far as the cost of hydrogen. So, this is the thing that a lot of people don’t understand. They seem to extrapolate future costs of hydrogen based on assuming that the cost of a whole hydrogen facility is going to get smaller and smaller and smaller and smaller, and hence the proportion of that cost per kilogram of hydrogen will keep getting smaller and smaller and smaller.
CB: There’s a constant partner variable part here and the problem is the constant is two thirds to three quarters of the total cost. Whereas, as you’ve just articulated, Paul, this idea that everything’s going to drop is wrong. And I was going to say fallacy, that might be a little bit harsh, but let’s just call it an assumption, that might be a better place to start.
PM: Assumption. It’s a bad assumption that arises from a poor understanding of engineering economics.
CB: Yeah, yeah. Is there a pathway here? I mean, what’s this cost going to get to do you think in the midterm where you’ve only got 25% or 33%, say, of cost down coming through Wright’s Law, through the electrolyser stack, where do you think we’re going to get to in terms of a cost of goods for green hydrogen?
PM: For reference, a reference cost, Gulf coast, United States now, mind you, this is not a distributed cost. This is the wholesale cost for hydrogen might be between $1 and $1.50 US per kilogram. Now that’s with no carbon tax. And that’s generating, you know, ten kilograms of CO2 per kilogram of hydrogen and probably another four of CO2 equivalent in the form of methane emissions. So, very emissive, very dirty hydrogen, but still very cheap at a dollar to $1.50 a kilogram. The thing is, though, that that’s $11 per million BTUs of higher heating value. Starting with a feedstock that costs you $3.50. So, just making hydrogen out of natural gas increases the cost per joule by a factor of three. And that’s the black stuff. That’s the way that we make it now. So, if you look at green hydrogen, the math is fairly simple. Let’s imagine that you find an electrolyser lying by the side of the road, and you find Oompa Loompas, you know, who are happy to install your electrolyser for free on donated land.
CB: Oh, so we’ve got free land and free electrolyser.
PM: Oh, yeah, we got a free electrolyser.
CB: Are we gonna throw in free electrons as well?
PM: Uh, no, no, we were going to figure out how many cents per kilowatt hour we can afford to pay, even if the capital cost is zero. So, round numbers and electrolysers takes between 50 and 65 kilowatt hours per kilogram. So, let’s use 50 to be optimistic. I mean, I’ve never seen a commercial proposal that’s come in at 50, but let’s use 50 just to make the numbers nice and round. So at 50 kilowatt hours per kilogram of hydrogen and your target is $1.50 a kilogram, you can afford to spend $0.03 per kilowatt hour if you’ve spent no capital. And you can look at it the other way. Now, let’s say that your electrolyser capital cost is the current approximately $2 million per megawatt, or $2,000 a kilowatt. Even if you feed that with free electrons and you only feed it at 35% capacity factor, you’ve already blown your $1.50. You know, and that’s assuming no discount rate or anything. It’s just assuming that you throw in the capital and the electrolyser lasts for a period of time. So, the problem is that you can’t afford either the capital or the electrons at the moment to compete with black hydrogen at, you know, without a carbon tax. And adding a carbon tax on just the CO2 of $150 per tonne only takes the black hydrogen from $1.50 to $3.00.
CB: Wow. At $150 a tonne.
PM: Yeah, because it’s ten kilograms of CO2 per kilogram of hydrogen. So, you know, ten tonnes of CO2 per tonne of hydrogen and $150 a tonne. It works out to $1.50 a kilogram of hydrogen on top of your raw material and capital cost for your electrolyser that gives you a $1.50. So, you’re up to $3.00. Well, real green hydrogen projects in the world, costs of production again, wholesale ex works of between $6 and $15 a kilogram. And if the capital makes up half of that, which it does, even if the electrons are free, you’re not getting below three. If the capital were to be free, you’re still only talking about $0.06 a kilowatt hour, which is still pretty cheap if it’s going to be firmed in any way. So, the economics just fundamentally do not work. Green hydrogen is very expensive. And it’s structurally expensive. So, this leads to a couple of conclusions. Number one, you’d be daft to use it as a fuel for any purpose. And you’d be really, really crazy to use it to make a fuel unless all you’re doing is hydrotreating it. So, you can use green hydrogen and get away with it, if you’re going to do the hydrotreating of esters and fatty acids, for instance, where decarboxylate and then break off a little bit of of a fat fatty acid and end up with a chunk of alkane about the right length to use as a jet fuel.
CB: Yeah. So, getting into the HEFA (Hydroprocessed Esters and Fatty Acids) and SAF (Sustainable Aviation Fuels) conversation at that point.
PM: Yeah. So you could afford to use green hydrogen for that small amount of hydrogen that you need in order to make HEFA. But if you’re going to try to reverse thermodynamics by starting with water and CO2 and electricity and end up making jet fuel, just give your head a shake. That is never, ever going to pencil out. Like it doesn’t matter what route you take. And in fact, one of my engagements that have been quite enjoyed for the past three years, is that I’ve been helping out an analyst for JP Morgan in the States named Michael Cembalest, with his eye on the market ‘State of Energy’ paper each year. And this year, Michael’s paper includes a section that has a nice chart which shows kind of the food web of sustainable aviation fuel. It shows all the insane pathways that you could possibly take, you know. Start with biomass. What can you do? You know, start with food, biomass. Start with cellulosic biomass, woody biomass, you know, start with electricity and water. What are the pathways that you can take? And I’ve mapped out all of them that I’ve come across. And it’s an interesting web. And basically the only ones that make any sense are the ones that involve, you know, foodstuffs, the HEFA, for instance. But that has the fundamental problem of not being scalable.
CB: Just to clarify that because of the feedstock or because of the process, it’s because of the feedstock or because of the process.
PM: It’s because of the feedstock.
CB: Yeah, okay. Just to draw the distinction there. Yeah.
PM: So, it’s not scalable because we can’t produce enough food oil to match the demand. So, the result is that you end up having to chase these other more difficult pathways, like for instance, the dehydration of ethanol to ethylene and then short oligomers, you know, or the methanol pathway. So, you gasify and then produce methanol from the syngas. And then you do methanol to olefins to make olefins. And then you short oligomerise those. And then there’s the dumbest of the dumb, stupid with stupid sauce on top, which is where you try to take the syngas and feed it to Fischer Tropsch. So, a process that can’t make money when you feed it free natural gas with a free atmosphere to dump stuff into, is somehow going to make money making just aviation fuel, in a decarbonised future, starting with either gasified biomass or worse still, syngas made the hard way by reversing, you know, CO2, the reverse of the shift with hydrogen. I mean, you had that one up and like, the cost will just be astronomical. That process, you know, Fischer Tropsch, the ‘FT’, can stand for Fischer Tropsch, and it can also stand for ‘effing terrible’.
CB: I have heard that as well. ‘Fundamentally terrible’ is what you meant there, of course, Paul, that’s the only f word we know on the podcast…
PM: No, no, it’s fundamentally terrible…
CB: Fundamentally terrible…
PM: …because what it does is, it’s a chain growth model, right? And so, you end up with always short chain stuff. And the big problem here, Cameron, is that people are focusing on these dumb, hard to decarbonise sectors that really should be worked on last. And they’re grinding the gears, spending their time worrying about them now, when what we should be doing is the easy to decarbonise sectors which we can decarbonise at a cost per tonne of CO2 emissions averted. That’s in some cases, even negative for the end user. Why on earth wouldn’t we just mandate all the policy behind it and just go after getting rid of gasoline and diesel and land transport, and not worry about these aircraft that need liquid fuels? And just worry about the aircraft later after we’ve done that big thing, that would make a lot more sense to me.
CB: So, that’s a very interesting point to pick up on Paul. And it’s a conversation that I’ve been involved in recently with a number of folks. And how I’d summarise it at the moment is that SAF has hijacked the agenda. And what I mean by that is that a combination of policy coming predominantly out of Europe, but other jurisdictions now, and then, the airline industry got around it and said, ‘Hey, let’s get organised around this.’ And it seems to have dragged everyone into a focus hard on, hard to abate, to pick up the point you just made rather than say, ‘Oh, hang on a tick but there are a lot of easier things we could do first, why aren’t we doing those to get the, let’s say, the carbon or environmental outcome?’ The cart has been put in front of the horse by some considerable distance. Now, I’m not actually trying to say, ‘Oh well, oh, that’s a horrible, horrible thing, the aviation industry, you know, like it’s good that they’re trying to make the move, but we’re missing all the low hanging fruit, so to speak, I’m mixing the metaphors here. But we’re missing the low hanging fruit trying to reach for the apple at the top.
PM: The thing that bothers me about the whole discussion is that people don’t realise that there’s such a thing as a time value of CO2 in the atmosphere. It’s very much like talking about monetary investments, and that early money matters a lot. And early removals of CO2, or in this case, really what we’re talking about is not removals of CO2, but prevention of fossil fuels in the first place. The early avoidance pays the best dividends for future generations. And if we can do the early gains at as low a cost as possible, we will be able to make as much of an investment in reducing those emissions with our limited resources that we can manage. And then once we’re done with that easy stuff, when we get into the stuff that’s costing us north of $150 a tonne, then we can start talking about, ‘Well, what are our priorities?’
CB: Yeah. It’s interesting framing that in economic terms as the time value concept. So, we had Roger Wise on the podcast last month. I’m not sure whether you know Roger, Paul. He’s a venture capitalist out of the United States who’s been in biobased economy for 25 years. And he talked about the environmental debt we’ve just run up by using the atmosphere as a sewer or using, you know, the idea of Skyfill. So, it’s interesting you’ve introduced the idea of the time value of emissions, which complements that idea of running up a debt, because the sooner you pay off the debt, the less interest you pay. Or in this case, the less environmental damage that you cause.
PM: You see that the biofuels guys, they to me were, you know, I spent a long time with my former employer working on biofuels related projects. The theory at the time was $150 a barrel of oil was very expensive and therefore alternatives should start to pay. And that was the driver behind biofuels, was less decarbonisation and more a thought that we can get this decarbonisation benefit and it won’t cost us anything because petroleum is expensive. And that never panned out. And I knew it was never going to pan out because people were constantly confusing, as we were talking about earlier with, with hydrogen, we were talking about production costs, the number of people that were imagining that they were going to be able to buy green hydrogen at $3.00 a kilogram, for instance, for some purpose. But no, that’s what it costs to make it. That doesn’t include any distribution. It doesn’t include any dispensing. It doesn’t include anything else. You’re never going to be paying $3.00. An example I can use is that wholesale natural gas, as I mentioned in the United States, is about $3.50. So, about $5 Canadian per million BTUs. But what I pay as a retail natural gas consumer in Ontario is $20.
CB: A bit more than that.
PM: Yeah, yeah, a bit more than that. A factor of five. You know, 4 or 5 more than that. And that works out to $0.07 a kilowatt hour. The downside to that situation, people imagining that they’re going to get stuff for cheap, is they think it’s going to pay for itself. And that takes the pressure off the policy measures that are necessary. Where I was going with this was that this distributed cost versus production cost was a big problem with biofuels people. And I saw the same kind of silly reasoning where people were saying, ‘Oh, well, I can make, you know, ethanol for $1.00 a litre.’ Like, great, run a business. Because you sure as heck can’t sell it to anybody for a $1.00 a litre. No, you know you’re not a retailer.
CB: Yeah, yeah, yeah. What you can make it for and what it gets to at the pump or at the point of consumption. So, interestingly enough. Paul, a mutual, a good mutual friend of ours, Paul Bryan, had this conversation with me 20 years ago. What I would define as the start of the biofuels push under the Bush administration. Around the second one, from ‘04 to ‘08, where…
PM: I was big involved in that.
CB: And Paul [Bryan] was involved in that. And he said to me, we had this very conversation about what you sell it for, and the cost of goods, you’ll find are actually quite different conversations. And we, of course, all of us as engineers, understand this conversation. But perhaps that nuance gets lost a little bit in translation from engineering to others.
PM: Absolutely. And so, you’ll see these reports that are being put out by, you know, financial analyst type companies, talking about future costs of, of green hydrogen, and they’re talking about cost of production. But then people pick this up and think they’re going to be able to buy hydrogen at that price to put into a vehicle, or to burn in their boiler in their home in order to warm their home up. And it’s just nonsense. And the costs of distribution of hydrogen are rather high because the natural gas infrastructure would take significant modification and would also have difficulty delivering anything close to the amount of energy that we currently deliver through that network in the form of natural gas. So, the cost and distribution of hydrogen are really high, and they’re structurally high. They’re high for reasons that are the result of the properties of the molecule. They’re not something you’re going to fix with innovation.
CB: That’s a good point that it’s not an innovation problem. It’s just the thermodynamics and the chemistry of what’s going on. So, it prompts the question in my mind here, Paul, with all of this drive for green hydrogen, the inversion, I think globally around chasing harder to abate rather than easier to abate, is there in your worldview as it stands today? Is there a place for green hydrogen in industrial… I’m not even going to ask you about energy, because we both, I think, have very strongly aligned views on that. But when I think about hydrogen, green hydrogen for industrial applications, whether it’s the chemistry or metallurgy, fertiliser, is there a place in the next 5 or 10 years or, or maybe further, where green hydrogen is going to come into play, or is it just going to be the last thing that becomes economically viable?
PM: Well, I think a better way to look at that is the way that Michael Liebreich, has been looking at it. And so, what Michael I think quite rightly focused on the cost per tonne of abatement and what you can do, for instance, with electricity. So, if you have electricity available, the best thing to do with it is to, if you have green electricity, the best thing to do, the thing that produces the greatest bang for the buck, so to speak, with that green electricity is to displace black electricity from the grid. So, let’s assume that you’ve done all of that, that you can do. Then the next thing you should do is you should grow electrical consumption in the form of decarbonising things like heating, by means of heat pumps and transport by means of electric vehicles. But I mean land transport and near-shore ships and short-range aircraft and the like, things that you can do with batteries. And it’s only once you’ve achieved all of those things that you even start about making anything else from electricity. So, that goes for switching from carbon thermic reduction to electrochemical reduction for various chemicals and various materials. It goes for using green hydrogen, for instance, to drive the oxygens off of iron, to iron ore to make iron, which is one that people talk about all the time. And it’s a big thing… They call it green steel, but it’s really what we’re really talking about is green iron. And then of course, displacing black hydrogen from applications, durable post decarbonisation like ammonia production and ethanol production and the various other, you know, myriad uses of hydrogen in the chemicals industry. The trouble, as I said, is that people are constantly getting this, cart before the horse. And they’re thinking about ways to use hydrogen as a decarbonisation strategy without thinking about decarbonising hydrogen itself. Because the marketing problem of decarbonising hydrogen itself requires policy support, right? So, if you don’t have the policy support, you’re not going to decarbonise anything, except where you get some super additive benefit from the decarbonised alternative, which you can argue you get with EVs. I mean, electric vehicles are really fun to drive.
CB: Yes, they are.
PM: And the emissions are very low and they also happen to save money if you can charge it at home, which means that the cost per tonne of emissions reduction is negative. The problem is that they are opportunities for super additive situations where we get some efficiency improvement that offsets the cost of the decarbonisation to us by virtue of switching to a more expensive, higher grade energy medium like electricity versus natural gas or gasoline or what have you. It’s really only limited to a few things. Electric vehicles are one and heat pumps for comparatively low temperature heating or for, in industry recycling heat from heat rejection back to reuse. And that’s one I’m kind of bullish about because I’m seeing very interesting things being done. Very creative things being done in industry up to about 250 degrees C.
[00.37.37]
CB: Yeah, okay. So, notionally lower temperature is a process heat.
PM: Correct, yeah. And when you look at the histogram of how many joules of heating energy industry uses versus temperature, what you find is that in most places in the world, at least 50% of industrial heat is used below 300 degrees to 350 degrees C.
CB: So, you’ve got you’ve got 50% of the market that could be addressed with this approach that you’re becoming bullish about.
PM: And the other 50% you would have to do the hard way, which is that a coefficient of performance of one with an electric heater. And that’s obviously harder to do. Really need policy drivers in order to get the high temperature heating to pencil out. Because right now what you’re asking to do is to switch from an emissive but low-cost fuel to electricity.
CB: That’s actually a really nice summary. So, just going back to Michael’s cost per ton of abatement and recapping that conversation, the answer to my question is nothing in the foreseeable future.
PM: We haven’t even begun the electrification of land transport and heating.
CB: Which is the easy win because they don’t fall out of the sky if the engine stops.
PM: So, until those things are substantially complete, thinking about even the most sensible uses of green hydrogen, which is to displace black hydrogen from applications that we need post decarbonisation, like ammonia production, methanol, a number of things in the chemical industry, and maybe green iron production, doesn’t make any sense. And remember that there’s another magic thing called direct air capture, which I think…
CB: Oh yes, I know, I know how how much you like this conversation.
PM: Round numbers. People are talking about $1,000 a tonne. Direct air capture. And I find even that a little hard to believe. I think that’s probably a little light, given that taking the CO2 out of a 3.8 bar partial pressure syngas stream and burying it under perfect conditions in Alberta costs $165 a tonne.
CB: Right. That’s a really interesting benchmark, isn’t it?
PM: Very brilliant project, Shell Quest, paid for by the Canadian taxpayer. Done very competently by Shell and Fluor Daniel, I guess Fluor now, no Daniel anymore. And burying a million tonnes of CO2 per year. And the cost per tonne of CO2 goes up and up and up every year because the cost of energy goes up and it’s energy intensive.
CB: You need to put energy in to get it out.
PM: Yeah. So, per, that’s the beauty of that project, is that because we paid for it, you know, the rest of the world. Good. Good for you. I wish you would pay attention to the numbers. The numbers are public. So, you can look it up. You don’t need to believe anybody’s lies. You can. The Government of Alberta website. You can find out. They, you know, and they use a very generous discounting rate, like a discounting rate that no business would ever use. And, come up with a number and it’s $165 Canadian a tonne. And remember, this is only taking 78% of the CO2 out of the syngas stream. The other 45% of the CO2 that comes out of the flue of the tube furnace of the reformer, they’re not even touching that. That’s just going straight to the atmosphere.
CB: Yeah. There’s a nice parallel there Paul, because you mentioned earlier about predatory delay and what you’ve just described there’s the other great slight of hand trick, which is to socialise the losses and privatise the gains.
PM: And that’s a very common strategy and one that we shouldn’t let them get away with, but we constantly let them get away with. So, when one looks at decarbonisation, the cost per tonne of abatement is really important and things that are costing north of 300 bucks per ton we probably shouldn’t be even thinking about yet.
CB: Yeah, which goes back to that. Why aren’t we taking the low hanging fruit?
PM: And the thing that drives me particularly crazy, Cameron, is that the industry says, ‘Sure, we can’t do it right now, so subsidise us.’ And the thing about subsidy is that subsidy is quite sensible when you’re in a Wright’s Law learning environment. So, the subsidy that was used to bring solar and wind and batteries to scale. Well, less batteries, batteries more or less scale themselves. And I’ve got to come back to this because it’s a beautiful story. But wind and solar, they followed a very good Wright’s Law curve and subsidy got them to where they are. But it was always very clear that there was going to be a Wright’s Law benefit plus a scale increased benefit for, you know, with wind turbines. Making them taller means that their swept area goes up. It also means that they get access to better winds. So, there’s benefit to increase scale even though it’s difficult to do. Point being, though, that subsidy was powerful there because what it did is it got us through the first number of doublings necessary to get the cost down on that Wright’s Law learning thing. The problem with hydrogen is that with a depressed Wright’s law learning rate, because a good chunk of it is tanks and pumps and stuff like that that have no Wright’s law learning associated with them at all, the subsidies are not going to get us there. All the subsidy does is subsidise his energy use. So, that’s not really very useful.
CB: That’s a really interesting idea. That’s a really interesting policy concept, Paul. That this is where perhaps the absence of engineering input into policy becomes quite apparent because, you know, taking that idea that, okay, so what where will Wright’s Law apply? Let’s subsidise to accelerate or support to accelerate. And then as we start to plateau, the market then picks it up and the rest is history in a way.
PM: One of the things that I deal with, with innovators and with investors, particularly venture capitalists that are looking at investing in innovation-related plays, is talking about cost to scale. And the example that I use is batteries. So, lithium-ion batteries, when they were originally developed, they were north of $5,000 a kilowatt hour. And people were buying them at $5,000 a kilowatt hour for applications that needed the very best battery on Earth. Very high value applications that needed the very best battery on Earth because people’s lives depended on it, or there was some functional benefit to doing so. That provided a market for the very early first couple of doublings, and then once they got through that, then they became cheap enough for mobile applications, you know, cell phones and laptops and you know, MP3 players and whatever, all those sorts of things. And that market. Increase the doublings again and again and again. More and more doublings came out of that and the price just fell. And by the time it got low enough that the mobile electronics were already fully adopting, then it went into power tools, and by the time it was in power tools, people were thinking, ‘Well, if this keeps going, we could probably afford to build a car’. And people are going nuts, like, ‘Why would you build a car with batteries that cost, you know, $500 a kilowatt hour?’ Well, the last LiFe cells that I bought from China cost me $60. Yeah, $60 a kilowatt hour. And they’re not finished going down. And sodium-ions are going even lower than that.
CB: Yeah. The next frontier in battery tech. So, the batteries are really fascinating. Case study of no subsidy needed. You just found applications as you came, very high value, and you just came down the curve and the scale came with you.
PM: But the problem with the battery example that I just gave you is, in fact an important lesson that, okay, a natural path to scale where it occurs is really wonderful. If you lack a path to scale, and your only path to scale is give me billions of dollars and I will be able to do enough doublings myself, to get my cost down low enough that I that people can afford my product. Then you’re in trouble. And that’s the trouble with sodium ion, because sodium ion doesn’t have that path to scale. There’s some benefit to sodium ion that cell phone makers will want to pay more for a sodium ion battery. Its path to scale is give me billions of dollars and that’s a problem, right? So, we see that it’s going in the right direction and it’s got everything going for it. The path to scale for sodium ion is not really absent, but it’s give me billions of dollars. The good news is it’s got CATL (Contemporary Amperex Technology Co., Limited) behind it. And they have billions of dollars.
CB: Yeah, yeah. Is there a strange analogy here, though? So, let’s take the battery example. You’ve got an established market for lithium ion. And then you’ve got a new entrant that is going to provide a different offering but now has to compete with an incumbent that has all their capital depreciated. They’re established in terms of their manufacturing processes and just an entrenched competitive advantage. And the analogy that struck me there, Paul, was the biobased economy stuff, where you’re trying to come in and compete with fossil resources, but you’ve now got to compete with depreciated capital, new forms of product risk, technology risk, market risk. Is that the right sort of framing do you think here?
PM: Very, it’s a very good framing. And one of the things that you find is that China’s a magical place in a lot of ways. One of the things that it does really well is being kind of technocratic. The government can just say ‘This shows promise. We can see a destination here. We’re just going to do it. Don’t worry about capital. Don’t worry about your cost of capital. It’s handled.’ It’ will magic it away. And you know that that makes things some things a lot easier than, you know, the rest of us in other parts of the world where we have to contend with venture people who want a huge return in risk,
CB: It’s just inherently different. When the Chinese are asked about what they think of the French Revolution, it’s a little bit too early to tell. They’re playing the long game.
PM: Well, you know, I think we shouldn’t give them too much credit. And it is a nation that has a lot of advantages from a business perspective in relation to innovation. But let’s be clear, even China can’t make a nuclear reactor make sense.
CB: No, a whole other topic for exploration at the time. But let’s perhaps acknowledge the Chinese have a different view on capital and capital markets, which from an engineering and technology sense, advantages mid- to long-term development. It’s got other…
PM: It’s possible to do things in China that are impossible anywhere else in the world right now. It’s fascinating to watch. It’s extremely powerful from an economic perspective. And it is a really important lesson to people in the rest of the world who are developing technology. Even if you can see a beautiful destination at the end, if you lack a path to scale, chances are the place that you can get your thing done is pretty much limited to China.
CB: Yeah, that’s really an interesting observation. That’s a really interesting observation.
PM: And now, mind you, you know, during the Biden administration, you heard Jigar Shah, who was in charge of loans office for he was trying his level best and, I think quite valiantly, with a few mistakes that we could argue about. But he was trying valiantly to overcome some of that by saying, ‘Look, we’ll give you a loan guarantee. And the loan guarantee will kind of overcome some of these disadvantages, and they’ll help you get your foot firmly in place.’ And they did give a loan guarantee to Monolith, who’s a former client of mine, back when I worked at Zeton, we designed and built the pilot plant. I don’t know if you’re familiar with them, but what they do is they use plasma pyrolysis methane to make carbon black, reinforcing grade carbon black.
CB: You mentioned them the last time we chatted…
PM: …with hydrogen as a byproduct. And so, yeah, the thing that got them kicked over, I mean, they had a commercial process, but they were looking to scale it up by a factor of ten. And that loan guarantee was the catalyst, so to speak, you know.
CB: I heard Jigar Shah on Michael’s podcast…
PM: It was a very good…
CB: It was a terrific podcast wasn’t it? Yeah, at the risk of being seen to cross promote, I’d recommend listening to that, to anyone listening, because it was a fascinating conversation.
PM: The one with Jigar Shah was very good. And there are a couple others that are really excellent and you know, hats off to him, sometimes he does a very, very good job. But yeah, as I said that, it doesn’t mean that other nations couldn’t take it upon themselves to use their resources to, you know, more cleverly subsidise, as opposed to this bulk subsidy of so many dollars per kilogram of hydrogen produced. There has to be a destination at the end, because if your destination is that you’re going to take tax dollars that are earned by people and businesses making goods and services of real value to the economy, and you’re going to use that to, you know, just reduce the cost of something like energy, you’re really not doing anything. You’re really just grinding your gears. You’re…
CB: …treading water.
PM: Yeah, and that’s not really going to help because if the, if there’s no Wright’s Law or other benefit, no scaling benefit or, or the like, then at the end of the subsidy period, you still come up short, it’s still economically infeasible. And without policy support, the thing just dies. And that’s the sort of thing that we saw with biofuels. You would see when the subsidies were in place, biofuels producers could make a buck. And when the quarters were met, then they had to shut down. And, you know, it was not a way to run a business. I mean, just not.
CB: Paul, as always, a terrific conversation with you today and so many areas that we’ve traversed. I opened up, we wanted to talk about green hydrogen and the ambition and the implementation gap. And it would appear, based on this conversation, that that implementation gap is canyon like. And there’s an engineering component, there’s a policy component, there’s a techno economics component, all conspiring against green hydrogen. That might be a bit depressing.
PM: And a policy structure that’s unfortunately incentivising the wrong things.
CB: Yeah, it may be bad news for a hell of a lot of people that are listening to us today. But in its way, this is not actually about trying to take a philosophical position. I think what we’ve tried to do today, Paul, with your expertise, is actually just talk through the realities of what we’ve got in front of us. I get the impression and Paul, jump on me if I’m off beat here, I think if all the numbers could work, we would have no problem in doing it. I know the odd person has accused you of being antihydrogen, but I’ve never sensed that. You’re absolutely pro hydrogen in the right spots.
PM: It would be a puzzle to have done what I’ve done in my career to this date, if I hated hydrogen.
CB: Yeah, it would be, wouldn’t it?
PM: Having a hatred of elements in the periodic table is kind of a weird thing.
CB: It is. It is conceptually very weird, isn’t it, to say you hate…
PM: Oh no, I love hydrogen too much to see people wasting it by burning it.
CB: That’s a lovely thought.
PM: I love electricity even more so I really think that electricity has intrinsic value as merely pure exergy. It’s very easy to use it when you don’t constrain yourself with the firebox that we’ve had on our heads for the past 800,000 years or so, as humans, you know, ‘need heat, must burn something’.
CB: A passionate advocate for hydrogen and electricity. Why waste them doing anything other than the best thing with them, right?
PM: Yeah, hydrogen as a fuel is the answer to the wrong question. So, if we ask ourselves, ‘We can’t burn fossils anymore because of greenhouse gas emissions, what else can we burn?’ Then we get hydrogen, right? Because if we burn it, we’ll make water vapour. We’ll make NOx too but we’ll just sweep that under the carpet for a moment.
CB: It’s a very lumpy carpet we’ve got here today,
PM: We really got a lumpy carpet, that’s for sure. It hides all manner of sins unless you look under it. The right question, though, the one that we should be asking ourselves is ‘We can’t burn fossils anymore because of greenhouse gas emissions. How do we provide the energy services that we need in the decarbonised future without generating the greenhouse gas emissions?’ And the answer to that question is almost never hydrogen. It’s usually electricity. And if it isn’t electricity, it’s electricity adjacent usually. So, I mean, and that’s just the way that it is. And there are a lot of people who won’t like to hear that, but that’s the reality. And there are a few applications where we need liquid fuels: transoceanic ships and aircraft, and those are going to be satisfied with biofuels or not decarbonised. Those are the choices.
CB: Absolutely. Yeah. No, I think today’s been a fantastic conversation in just bringing a little bit of the engineering and policy and economic realities to this conversation because hydrogen is still the rage in Australia. It’s getting a lot of airtime around the world still, and just getting the thinking aligned not only around its role, but the timing and the and you quite rightly ask the question, it’s about energy services. Let’s think about that as the question rather than what have we burn next?
PM: Yep. That’s the way we’ve got to do it. It’s been a pleasure and great conversation, and it’s nice to have a little bit more of a technical conversation. And a lot of my talks in recent days, I’ve had to be careful about how technical I was and what I was saying, because the audience isn’t necessarily ready to receive it. So, it’s nice to be able to talk a little bit more frankly and with, you know, at a higher tech.
CB: I’m pleased that you felt free to do so, Paul. And we like the technical conversations, because if we’re doing tech transfer, you need the tech bit up front before you can do the transfer. So, with that very simple thought, thanks so much for your time today, Paul. It’s been great having you back and our first three-peater, so thank you so much.
PM: Great pleasure.