The growth of the hydrogen economy will reshape geopolitical relationships that have been based around the extraction of fossil fuels, according to a report from the International Renewable Energy Agency (Irena).

The recent volatility of oil and gas prices is a stark reminder of the centrality of fossil fuels to geopolitics, and vice versa. The report outlines ways in which the hydrogen market can reduce dependence on countries that provide fossil fuels, and therefore their geopolitical influence.

“Governments have a unique opportunity to shape the advent of hydrogen, by contributing to the design of markets supportive of the energy transformation while avoiding existing limitations and inefficiencies, reducing inequalities, and influencing geopolitical outcomes towards cleaner and fairer energy systems,” says Irena director general Francesco La Camera.

New trade patterns

The nature of hydrogen production means the development of the hydrogen economy will not exactly mirror that of fossil fuels. Hydrogen is a conversion business rather than an extraction business, and so is not restricted to where fossil fuels are located.

“This will limit the possibilities of capturing economic rents akin to those generated by fossil fuels, which today account for some 2pc of global GDP,” says the Irena report—titled Geopolitics of the Energy Transformation.

2pc – Global GDP from fossil fuels

And as the costs of green hydrogen fall, new and diverse participants will enter the market, reducing costs and making hydrogen even more competitive with other fuels.

This is likely to lead to the development of a more open market that is less dictated by specific regional trade flows.

A growing array of bilateral deals indicates that this phenomenon is already underway. More than 30 countries and regions now have hydrogen strategies that include import or export plans—including those that have not traditionally exported energy such as Chile, Morocco and Namibia.

Phased development

The geopolitics of clean hydrogen is likely to play out in several stages, according to the report. Green hydrogen is projected to start competing with blue on cost by the end of this decade. This will begin the initial transfer of hydrogen production away from regions that are incumbent fossil-fuel producers.

As decarbonisation strategies begin to bite in the 2030s, hydrogen demand starts to increase dramatically from 2035, rising to 400-500mn t/yr by 2050, depending on scenario. Early movers with a stake in the hydrogen value chain could see significant benefits to their economies.

In the long run, countries with ample renewable potential could become sites of green industrialisation, using their potential to attract energy-intensive industries such as steel-making to be sited next to hydrogen production.

Shaping rules

Setting standards for the hydrogen economy—especially on low carbon criteria—could become the focus of geopolitical competition or international cooperation.

“Governments have a unique opportunity to shape the advent of hydrogen” La Camera, Irena

“Divergent standards could slow down progress and lead to market fragmentation, stir regulatory competition, and erect trade barriers,” says the report.

It emphasises that certificates of origins—similar to guarantees of origin used in the electricity market—based on a transparent and credible international system, will be vital in monitoring hydrogen’s contribution to climate change efforts.

Pricing risks

A clear pricing mechanism would support the rapid evolution of the global market in hydrogen. The currency chosen will be positioned to become a global benchmark as the market expands—and those associated with that currency sheltered from foreign exchange volatility.

"For instance, the EU, likely to become one of the key import markets, seeks to denominate its future hydrogen imports in euros,” says the report, noting that other pricing factors could be key in shaping how the market develops.

“Putting a price on carbon might be helpful—or even necessary—to make green hydrogen competitive with the grey variant and, ultimately, with fossil fuels. In that sense, hydrogen may become embroiled in a broader set of carbon trade wars.”

---

Author: Tom Young