Surging gas prices in the wake of Russia’s invasion have made hydrogen and ammonia produced using renewables increasingly competitive, study finds

Green hydrogen and ammonia produced using renewable electricity are becoming increasingly competitive with fossil-fuelled incumbents in many parts of the world, thanks in part to rising gas prices in the wake of Russia’s invasion of Ukraine, a fresh analysis has suggested.

While global gas prices had already surged over the past year, the conflict in Ukraine has seen an even greater spike, which has in turn driven up the cost of products made from fossil gas, such as ammonia and hydrogen, according to BloombergNEF.

As such, a new study by the green energy research specialist suggests the crisis is rapidly improving the investment case for green hydrogen and ammonia, underscoring the far greater risks attached to fossil fuel-based industries which are inherently exposed to risks of market volatility and geopolitical events.

“This has opened the door for green hydrogen and ammonia produced from renewable electricity to compete with unabated natural gas-based processes,” the report states.

Since the start of the invasion on 24 February, gas prices in Europe have averaged €120 per megawatt hour, which is over six times the value over the same time period in 2021, while prices in Japan and South Korea have also surged almost five-fold over that timeframe, according to the study.

As a result spot prices for ammonia, a gas-derived product primarily used for fertiliser, have also tripled, said BNEF.

Surging fossil fuel prices have served to focus Western policymakers’ minds on domestic energy security, both to try and protect consumers and businesses from the steep rise in energy costs, and also to try and curb revenues for Russia, which remains a major exporter of oil and gas and has used the resulting revenues to fund its war effort.

Yesterday the EU, US, and UK all set out plans to slash imports of Russian oil and gas over the coming year and beyond, and to instead look towards alternative sources of energy, such as LNG, renewables, hydrogen, and biomethane.

And with no immediate end in sight for the war in Ukraine, BNEF warned that prices for gas and ammonia could rise yet higher as the conflict continues, further improving the financial case for green hydrogen and ammonia.

Rising grey ammonia costs “have opened a rare opportunity for green production processes”, it said.

Conventional ammonia is produced by combining hydrogen with nitrogen from the air, with the hydrogen mostly produced from splitting fossil gas in a steam methane reformer. Hydrogen produced using methane is known as grey hydrogen, or blue hydrogen if the process uses carbon capture and storage (CCS) technologies to eliminate most of the emissions.

Green hydrogen, on the other hand, is produced through a process known as electrolysis, which uses renewable electricity to split water into its component parts of hydrogen and oxygen, and therefore generates zero emissions, making it an attractive alternative energy source for aviation, shipping, energy storage, and many other applications. Green hydrogen can also in turn be used to produce green ammonia, which is increasingly being touted as a low carbon fuel for various processes, such as shipping, in its own right.

Analysts noted that the surge in gas prices has served to amplify trends that were already underway, with many experts predicting green hydrogen costs could fall rapidly in the coming years as the nascent industry scales up and wind and solar power prices continue to fall.

Earlier this year, the International Renewable Energy Agency (IRENA) estimated green hydrogen could cover up to 12 per cent of global energy use by 2050, bringing with it major benefits for economic competitiveness and redrawing trade maps to create new geopolitical centres of power as the world’s traditional reliance on oil and gas declines. BNEF has itself also touted green hydrogen as a multi-trillion dollar opportunity, estimating it could out-compete low carbon blue hydrogen that combines hydrogen production from fossil gas with carbon capture and storage systems by the end of the decade.

However, the BNEF study cautions that while green hydrogen and ammonia are becoming increasingly competitive amid the current crisis in Ukraine, there are currently very few production facilities worldwide, although many have been proposed.

Moreover, the cost case for green hydrogen and ammonia differs geographically. It said the economics would not work as well in favour of green ammonia in the US, for example, where gas prices remain lower.

But in regions where green hydrogen and ammonia can be produced relatively cheaply thanks to abundant low-cost renewables – such as Spain, China, or India – it could already be far cheaper than grey ammonia, potentially saving producers in these countries millions of dollars in recent months, BNEF said.

“This shows that green ammonia – and even green hydrogen – could be an effective hedge for grey ammonia at today’s gas prices,” the study asserts, adding that “beyond pure economic signals, the crisis could still drive interest in green processes”.

“While the economic story may change in a few years, companies could still view green hydrogen as a more viable option than they once did – especially as they look to wean themselves off gas for social, environmental and security-of-supply reasons,” it concludes.

The economic fall out from the war in Ukraine is impacting multiple sectors and could yet provide a significant boost to clean tech development around the world, as governments and businesses rush to diversify their energy supplies. It increasingly looks as if green hydrogen and ammonia will soon catch the eye of policymakers and investors alike. 

Want to find out more about how the net zero transition will impact your business? You can now sign up to attend the virtual Net Zero Finance Summit, which will take place live and interactive on Tuesday 29 March and will be available on demand for delegates after the event.

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