The dawnof greenhydrogenMaintaining theGCC’s edge in adecarbonized world

ContactsAbu DhabiDr. Raed KombargiPartner DubaiDr. Shihab ElboraiPartner mBeirutDr. Yahya AnoutiPartner mzi HagePrincipal t the authorsDr. Yahya Anouti is a partner with Strategy&Middle East, part of the PwC network. Based inBeirut, he is a member of the energy, chemicals,and utilities practice in the Middle East. Hespecializes in resource-based economicdevelopment and energy economics. He advisesgovernments and oil and gas companieson sector strategies, operating models, andperformance improvement programs.Dr. Shihab Elborai is a partner with Strategy&Middle East. Based in Dubai, he is a member ofthe energy, chemicals, and utilities practice in theMiddle East. He serves major electrical industryplayers across the Middle East and North Africaby redesigning strategy, policies, governancestructures, and regulatory frameworks to navigatethe shift from fossil fuels to renewables and tohelp build modern energy delivery systems.Dr. Raed Kombargi is a partner with Strategy&Middle East. Based in Abu Dhabi, he leads theenergy, chemicals, and utilities practice in theMiddle East. He focuses on strategy development,concession agreements, commercial joint venturesetup, cost reduction, operational excellence,capability development, and operating modelassignments in the energy space.Ramzi Hage is a principal with Strategy& MiddleEast. Based in Beirut, he is a member of the energy,chemicals, and utilities practice in the Middle East.He specializes in the renewable energy sector,with a focus on policy development, programestablishment and execution, and manufacturingvalue chain localization.Strategy& Skin in the game4

EXECUTIVE SUMMARYThe global energy system stands at the threshold of a new era of abundance that willtransform energy economics. Thanks to rapidly declining renewable energy costs andtechnological advances, hydrogen can become the medium of choice for transportingcheap clean energy across the globe. The COVID-19 pandemic has accelerated the trendtoward decarbonization by reducing hydrocarbon demand substantially.Strategy& estimates that global demand for “green hydrogen,” produced with minimal carbondioxide (CO2) emissions, could reach about 530 million tons (Mt) by 2050, displacing roughly10.4 billion barrels of oil equivalent (around 37 percent of pre-pandemic global oil production).We estimate that the green hydrogen export market could be worth US 300 billion yearly by2050, creating 400,000 jobs globally in renewable energy and hydrogen production.Green hydrogen represents a promising opportunity for the Gulf Cooperation Council (GCC)1countries. They can produce green hydrogen to boost domestic industries and for export.Although countries such as China and the U.S. are seeking to invest in green hydrogen, theirexport prospects are limited by large domestic demand that will probably consume most of theirproduction. By contrast, GCC countries can export much of their green hydrogen and still haveample, low-cost renewable energy.GCC countries need to act boldly to capture this prize with a three-phase plan:1. Launch a commercial-scale pilot in partnership with a leading electrolysis operatingcompany to build capabilities and identify challenges, and start research and development(R&D). A single unit within an existing government entity should lead this effort.2. Develop the right policies and regulations to support the domestic market, define thegovernance and institutional framework, and develop the funding model.3. Build the export infrastructure and secure supply agreements with key export markets.1 The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.Strategy& The dawn of green hydrogen1

THE GROWING CASE FOR GOING GREENHydrogen, the world’s most abundant and lightest element, has a wide range of industrialapplications, from refining to petrochemicals to steel manufacturing. It is also a rich sourceof energy, far more efficient than other fuels. Hydrogen demand has been increasing at asteady pace over the past four decades (see Exhibit 1). The problem is that traditional meansof producing hydrogen generate large volumes of CO2. Fortunately, advances in electrolysistechnology and the falling cost of renewable energy are enabling the mass production ofgreen hydrogen, which is more environmentally sustainable (see “Three colors of hydrogenproduction”). These developments have altered the calculus for hydrogen and created asignificant opportunity for countries to boost economic growth and move away from fossil fuels.EXHIBIT 1Hydrogen demand is rising steadilyHydrogen demand (million tons)CAGR 8019902000201020181Transport fuel, heat, and power were 0.2 million tons in 2018.Strategy& estimate.Source: 2018 figures from International Energy Agency, “The Future of Hydrogen: Seizing today’s opportunities,” June rogen); Strategy& analysis122Strategy& The dawn of green hydrogen

Three colors of hydrogenproductionThere are three main ways to generate hydrogen,represented by the colors gray, blue, and green.Gray hydrogen. The most common process is to useeither natural gas or coal as feedstock that reactswith steam at high temperatures and pressures toproduce synthesis gas, which consists primarily ofhydrogen and carbon monoxide. The synthesis gasis then reacted with additional water to producepure hydrogen and CO2. These are well-establishedprocesses, but they generate significant CO2emissions, which is why the resulting element istermed “gray hydrogen.”Blue hydrogen. The second-most-common process,blue hydrogen, relies on the same basic processesas gray hydrogen, but it traps up to 90 percent of thegreenhouse gas emissions through carbon-capturetechnology. In some cases, that carbon is storedunderground, which requires considerable capitalcosts. Or it is reused as a feedstock for industrialapplications, in which CO2 is still ultimately releasedinto the atmosphere.Green hydrogen. The most promising process,green hydrogen, uses renewable energy to power theelectrolysis that splits water molecules into hydrogenand oxygen. Electrolysis requires energy. That thisenergy comes from lower-cost renewable sources iswhat makes this form of hydrogen “green.”There are three major electrolysis technologies withdifferent levels of maturity. One technology, alkalinewater (ALK), is the most basic and mature technologyand has a market share of about 70 percent of thecurrently very small green hydrogen market. It benefitsfrom low cost, and this process has a long operationallife. However ALK processes need to run continuouslyor the production equipment can get damaged. Theintermittent nature of renewable energy, therefore, rulesit out as a single source of power for ALK. Anothertechnology is polymer electrolyte membrane (PEM)electrolysis, which has a market share of about 30percent and is being adopted by most of the leadingelectrolyzer manufacturers. PEM yields higher-qualityhydrogen and can be operated intermittently, but isalso expensive and has lower production rates thanALK (see Exhibit 2, page 4). A third technology is asolid oxide electrolyzer cell, which is still in the R&Dstage. It offers high efficiency at low cost. However,it requires a long startup time and the components ofthis process have a short operational life.Strategy& The dawn of green hydrogen3

EXHIBIT 2How polymer electrolyte membrane technology worksPolymer electrolyte membrane electrolysis 1-Operating ProcessH 1 Voltage applied between electrodesO234H22H2O gives up electrons at the anode to2 produce4H ions and O23 H ions travel towards the cathodeCathodeSolid electrolytemembraneH2OAnode242H capture 2e– from the cathode andcombine to produce H2Bipolar platesSource: O. Schmidt, A. Gambhir, I. Staffell, A. Hawkes, J. Nelson, and S. Few, “Future cost and performance of water electrolysis: An expert elicitation study,” International Journal ofHydrogen Energy, 42 (2017), pp. 30470––30492; International Energy Agency, “The Future of Hydrogen: Seizing today’s opportunities,” June rogen); Strategy& analysisGreen hydrogen is formed by using renewable energy to power electrolysis that splits watermolecules into their constituent elements: hydrogen and oxygen. The green hydrogen formedthrough this process is a clean energy source that can be stored for a long time and transportedover considerable distances. We expect that the total demand for green hydrogen could reachabout 530 Mt by 2050, displacing roughly 10.4 billion barrels of oil equivalent (37 percent ofpre-pandemic global oil production) in various sectors such as heating, transportation, powergeneration, chemicals, and primary steel manufacturing. This is part of a broader move towarddecarbonization that has sped up thanks to the COVID-19 pandemic, which has slashedhydrocarbon demand.At that point, we expect that the yearly global export market for green hydrogen will be worthabout 300 billion. Demand for green hydrogen will be greatest among European and EastAsian countries, given their considerable energy consumption in the heating, industrial, andtransportation sectors, along with the high cost that they pay to import fuel.For these reasons, green hydrogen holds the potential to ensure an environmentally cleanerand sustainable future for our planet. GCC countries have several advantages, primarily highyield solar and wind resources that can generate power at a very low levelized cost of energy(LCOE).2 These will allow the GCC region to produce green hydrogen at scale and at low cost.However, other countries recognize the opportunity and have already taken steps to seizeit. Australia, Canada, China, Germany, and the U.S. have all developed national policies andinvested in programs to build their domestic green hydrogen industries. If GCC countries are tocatch up, they must act now.2 The levelized cost of energy is a means of comparing the economics of different types of energy technologies. It includes all costs to generatea unit measure of electricity (including the capital expenditure needed to build a facility, the operation of that facility over its lifetime, and thebreakdown costs), divided by the amount of energy produced.4Strategy& The dawn of green hydrogen

THE ERA OF GREEN HYDROGEN BECKONSGreen hydrogen is currently more expensive than traditional production processes, roughlytwice as much as gray hydrogen (see Exhibit 3). However, advances in electrolysis technology,decreasing costs of renewables, and increased economies of scale should significantly reduceits production cost and make it an economically viable solution.EXHIBIT 3Green hydrogen should become cost competitive compared to gray and blue hydrogenHydrogen cost development by production S /kg H20.50.0Renewable LCOE(US /MWh)Gray Blue Green(ALK)30—45Green(PEM)Gray Blue Green(ALK)18—26Green(PEM)Gray Blue Green(ALK)Green(PEM)14—18Note: ALK alkaline water, LCOE levelized cost of energy, MWh megawatt hour, PEM polymer electrolyte membrane.1Cost assumptions based on greenfield projects, excluding cost for buildings and cost for building cooling requirements.Source: International Energy Agency, “The Future of Hydrogen: Seizing today’s opportunities,” June 2019 n); Strategy& analysisStrategy& Green hydrogen for a decarbonized future5

Advances in electrolysis technologyDevelopments in various electrolysis technologies over the past decade, specifically PEM, haveincreased system efficiencies to nearly 90 percent, and the operational lifetime of the process isapproximately 80,000 hours. Also, we estimate that new and cheaper materials will reduce theoverall capital cost of PEM equipment, lowering the capital cost per kilowatt (kW), currently between 800 and 1,400, to as little as 200/kW by 2050. Decreasing costs of renewables Electricity represents a large share in the operating costs ofelectrolysis processes (roughly 50 percent for PEM electrolysis, assuming electricity prices of 4.5cents/kilowatt-hour). However, we expect that the installation of more low-cost solar photovoltaicand wind power plants globally over the next decade will produce the required electricity for lessthan 2 cents/kWh according to the prices of recent tenders. Increased economies of scale Yearly additions to electrolysis capacity, along with larger averageproject sizes, are creating larger economies of scale and a reduction in project capital costs.Based on these factors, Strategy& estimates that the production cost of green hydrogen using thePEM technology will be at par with gray hydrogen by 2030 ( 1.40 to 1.80 per kilogram of hydrogenproduced) and less than half by 2050 ( 0.70 to 0.90 per kilogram).Lower-cost green hydrogen will lead to benefits in a range of industries and advance the goalof making countries and companies more environmentally sustainable. This will apply to currentapplications of green hydrogen and new ones. As a result, the demand for green hydrogen isprojected to grow significantly by 2050.ChemicalsHydrogen is used as a chemical feedstock for the production of ammonia and methanol. Weforecast that demand for hydrogen for the chemicals industry should grow from about 43 Mt in 2018to roughly 120 Mt in 2050, in line with broader growth in the ammonia and methanol markets. Asgreen hydrogen becomes more cost-competitive by 2030, we expect that a large number of newammonia and methanol production facilities will transition to green hydrogen, leading to demand ofup to 55 Mt by 2050.SteelPolicies to counter climate change are expected to force primary steel producers to make thetransition from conventional techniques to more environmentally friendly processes. These includethe direct reduced iron (DRI) method, which uses hydrogen as a reducing agent. By 2050, weestimate that global annual primary steel production should be about 1.5 billion tons, of which nearlya third will be generated from the DRI method. This shift in manufacturing processes will potentiallyincrease green hydrogen demand to about 10 Mt by 2050 according to our estimates.HeatCommercial and residential heat is typically generated by burning natural gas in boilers. Injecting upto 10 percent hydrogen (by volume) into the natural gas distribution network, representing about 115Mt by 2050 according to our estimates, would not require any major alterations to equipment andwould significantly reduce carbon emissions.Power generationConventional power, from the burning of liquid and gas hydrocarbons, currently represents thelargest share of electricity generation around the world. Countries with limited renewable energy andhydrocarbon resources (such as Japan and South Korea) rely significantly on expensive importedand polluting fuels. Importing electricity through transmission lines is problematic due to highcosts, system losses, and geographical barriers. However, green hydrogen presents an alternative.Countries that today rely on importing hydrocarbons could instead import low-cost green hydrogenand convert it into electricity through large-scale fuel cells in domestic power plants.6Strategy& The dawn of green hydrogen

Transport fuelVehicles powered by internal combustion engines face growing competition from electric vehicles(EVs) that are more environmentally sustainable. Power for EVs can be provided by plugging thevehicle into the electricity network to charge a battery or by filling the vehicle’s tank with hydrogenand converting it to electricity through fuel cells (see “The advantages of fuel cells”). Our analysisindicates that fuel-cell EVs could be a more cost-effective alternative to hydrocarbons, and tobattery-powered EVs in countries with high electricity prices (see Exhibit 4). Also, many studieshave shown that for long-haul heavy duty transportation, fuel-cell EVs are more cost-effective thanbattery-powered EVs.EXHIBIT 4Fuel cell electric vehicles can be more cost-effective than those dependent on hydrocarbonsCost-effectiveness1 2050Electricity price (US cents/kWh)30H2 landed cost2Fuel cell electric vehicle more cost-effective25JapanGermany20151110South KoreaChina35GCC3Electric vehicle more hydrogen price (US /kg)Excluding infrastructure cost for electric vehicles and fuel cell electric vehicles. 2 Including cost for hydrogen conversion into ammonia, transmission, distribution, and reconversion(conservative case). 3 Including cost for domestic hydrogen distribution in a pipeline (100 tons per day) over 500 kilometers.Source: “Global EV Outlook 2019: Scaling-up the transition to electric mobility,” International Energy Agency 2019; Energy Information Administration, Annual Energy Outlook, 2020;Strategy& analysis1The advantages of fuel cellsA fuel cell uses an electrochemical reaction to combineoxygen and hydrogen to generate electricity and heat(along with water as a by-product). Because oxygen isreadily available in the atmosphere, a fuel cell needsonly to be supplied with hydrogen. Fuel cells offermany advantages when compared to other powergeneration sources:Cleaner fuel: Fuel cells powered by green hydrogendo not need conventional fuels such as oil or gas.They can therefore reduce a country’s dependence onhydrocarbon imports.Higher efficiency: Internal combustion enginesoperate at about 25 percent efficiency. Combinedcycle gas turbines operate at a thermal efficiency ofabout 65 percent. By contrast, fuel cells are generallyheld to run at efficiency levels of 80 to 90 percent.3Faster refills: The hydrogen tank of a fuel cell can befilled in less than five minutes, compared to batteriesthat require 30 minutes to several or more hours for afull charge.Quieter operation: Fuel cells have no moving parts,which allows them to operate with almost no noise.3 International Energy Agency, “The Future of Hydrogen: Seizing today’s opportunities,” June 2019 n).Strategy& The dawn of green hydrogen7

THE RIGHT TO WIN THE GREEN HYDROGEN PRIZEBarriers to entry in the green hydrogen production business are relatively low, given that thetechnology is easily accessible. However, only a handful of countries have the comparativeadvantages to become market leaders, with GCC countries at the top of the list. Theserequirements include:High-yield renewable resourcesGreen hydrogen production demands a streamlined supply of low-cost, sustainable energythroughout the year. GCC countries have some of the highest solar exposures in the world.Solar power plants in the region can expect 1,750 to 1,930 hours of full-load operation per year,almost double the exposure of solar power plants in Central Europe. In addition, certain regionsin the GCC have wind speeds above seven meters per second, ideal for utility-scale wind powerplants. Countries in the region have already established ambitious renewable energy programs,enabling project developers to build large scale renewable power plants that deliver the world’slowest LCOEs of under 2 cents/kWh.Large areas of barren, flat landCountries will need to build large-scale renewable capacity to meet part of the 2050 globaldemand for green hydrogen. We estimate that 4,700 gigawatts of new capacity will beneeded, nearly five times existing installed capacity worldwide. GCC countries have ampleland that can be used to construct large-scale capacity of renewable energy and electrolysisplants. Indeed, all the renewable energy and electrolysis infrastructure that will be needed tomeet 2050 global export demand for green hydrogen could be built on just one-fifth of SaudiArabia’s barren land area.WaterWe estimate that meeting green hydrogen demand in 2050 will require around 5.6 trillion liters ofdeionized water. For this, the GCC countries have ready access to sea water.Low domestic consumptionCountries such as Brazil, China, India, and the U.S. meet the criteria for large-scale andrelatively low-cost green hydrogen production. However, their export potential is limitedas domestic demand will absorb most of their own production. By contrast, Argentina,Australia, Canada, and Saudi Arabia can export most of their green hydrogen production,because electricity and gas are cheaper than hydrogen for these countries’ domestic energyrequirements (see Exhibit 5).8Strategy& The dawn of green hydrogen

EXHIBIT 5GCC countries have great export potentialGreen hydrogen production, domestic consumption, and export hinaCanadaProduction potentialChileIndiaBrazilU.S.ArgentinaNorwayNew ZealandFranceGermanyU.K.ItalyJapanSouth KoreaLowImportersLimited potentialLowDomestic consumptionHighSource: Strategy&Strategy& The dawn of green hydrogen9

THE SIZE OF THE PRIZEProducers can adopt various transport modes, such as compressed or liquefied hydrogen,hydrogen in the form of ammonia, or through an organic carrier molecule. For distances thatfall below about 1,800 kilometers, transporting hydrogen through pipelines is the lowest-costoption. For longer distances, ammonia ships are the most economic solution.We estimate that the investments required to meet green hydrogen export demand in 2050 arearound 2.1 trillion. Of this total, 1 trillion is needed to build the dedicated renewable energycapacity, 900 billion to set up the hydrogen conversion and export facilities, and 200 billion todevelop the water electrolysis facilities.Other countries already have plans for their hydrogen economies and could leave GCCcountries behind. Australia is planning to increase hydrogen production sharply to supply itsdomestic heating, transportation, electricity, and industrial sectors. Under a high hydrogenscenario, Australia could potentially export more than 3 Mt each year starting in 2040. Theexport effort could earn about 9 billion per year.4 The province of British Columbia in Canadais developing plans to produce approximately 1.5 Mt of blue and green hydrogen by 2050 andgenerate export revenues of 15 billion.5 China aims to establish hydrogen clusters that wouldincrease local demand to 60 Mt by 2050 in the transportation, alternative feedstocks, buildingheat and power, and industrial sectors.64 “Opportunities for Australia from Hydrogen Exports,” ACIL Allen Consulting for ARENA, August 2018 -for-australia-from-hydrogen-exports.pdf).5 Zen and the Art of Clean Energy Solutions, the Institute for Breakthrough Energy and Emission Technologies, and G&S Budd Consulting Services,“The British Columbia Hydrogen Study,” 2019 v6.pdf).6 Louis Brasington, “Hydrogen in China,” CleanTech, September 24, 2019 trategy& The dawn of green hydrogen

HOW TO CAPTURE THE PRIZEGiven the dual shock of the global COVID-19 pandemic and steep decline in oil prices, GCCcountries need to act boldly now to catch up and overtake these countries. GCC governmentsmust act fast to implement a three-phase green hydrogen plan.1. Piloting (2 to 4 years)To kick-off the green hydrogen program, GCC governments should partner with a leadingelectrolysis operating company to develop a commercial-scale pilot project. This shouldincorporate a renewable energy plant, an electrolysis facility, and a single domestic source ofdemand such as an ammonia plant. The pilot project will help policymakers develop domestictechnical capabilities, identify local environmental challenges, and initiate R&D activities todevelop potential mitigation measures — all in the context of real-world applications rather thantheoretical scenarios.In addition to establishing technical aspects, the project can help governments begin to craftpolicies and regulations. A single unit should lead these activities. That unit should be hostedwithin an existing entity, taking advantage of existing infrastructure where possible, and incoordination with the relevant ministry.2. Developing national policies to support domestic consumption (5 to 15 years)Once the pilot has resolved all its critical challenges and has proven that its technology iscommercially viable, the government should develop a comprehensive green hydrogen policy.This should: set ambitious and realistic capacity targets that take into account domestic and global markettrends define the sector’s governance and institutional framework identify key regulations that the government should develop (e.g., technical codes and safetystandards) to properly integrate hydrogen into the energy system outline the funding model and requirementsStrategy& The dawn of green hydrogen11

Implementing this policy will enable governments to scale up renewable and electrolysiscapacity to serve a larger domestic demand base, while taking into account key design andinfrastructure modifications required for the domestic environment. As capacity grows andapplications increase, GCC governments can consider setting up a green hydrogen company.This enterprise would house all the key capabilities acquired over the years.3. Export competition (16-plus years)Once the domestic green hydrogen industry is fully operational, economies of scale andtechnological advances will further reduce production costs — a critical step to unlockglobal export opportunities. Initially exports of green hydrogen will be in the form ofgreen finished industrial products (e.g., green steel, green polymers) and energy-intensiveintermediate products (e.g., green methanol, green direct reduced iron). Over time,exporting countries can shift to direct energy exports. Eventually, the green hydrogencompany should take the lead in signing supply agreements with key green hydrogen exportmarkets. These should be based on an understanding of regional imbalances in hydrogenand which export markets are most accessible from the GCC compared to other exporters.With the right markets established, governments can then build the export terminal andinfrastructure for shipping and pipeline channels.12Strategy& The dawn of green hydrogen

CONCLUSIONAlthough many countries have ambitious plans for green hydrogen, the GCC states have uniqueadvantages that could allow them to lead the hydrogen economy. They also have an incentiveto move away from fossil fuels. By seizing the green hydrogen opportunity, GCC countries canlay the foundation for economic growth in a decarbonized world and ensure their continuedinfluence in the energy market.Strategy& The dawn of green hydrogen13

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pure hydrogen and CO 2. These are well-established processes, but they generate significant CO 2 emissions, which is why the resulting element is termed “gray hydrogen.” Blue hydrogen. The second-most-common process, blue hydrogen, relies on the same basic processes as gray hydrogen, but it traps up to 90 percent of the