Hydrogen’s Role in the UAE and Saudi Arabia’s Energy Sector
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Hydrogen’s Role in the UAE and Saudi Arabia’s Energy Sector
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By Naam Chakravorty, Gulf Region Analyst, Botho Emerging Markets Group
June 10, 2021
As countries around the world embark on ambitious net-zero emissions plans, hydrogen is playing a major role in their strategies. In the near future, hydrogen could likely serve as the primary fuel for transportation, industry, and energy generation. This is a significant shift in the usage of the element, which has historically been plagued with development challenges. And, until recently, hydrogen technology was too expensive to be commercially viable, because its production leads to high transportation, storage, and logistical costs. Green hydrogen, which is produced from renewable energy rather than fossil fuels, has the potential to supply clean energy, with water as the only byproduct. Green hydrogen could meet up to 25% of the world's energy needs by 2050 and become a $10 trillion addressable market. For Gulf nations like Saudi Arabia and the UAE, hydrogen is both a threat and an opportunity. While hydrogen could cannibalize oil demand, it could also support national energy diversification strategies that have become a priority for all of the region’s governments.
Although the use of hydrogen as an energy source appears to be gaining traction now, it has taken roughly 200 years to refine its production and supply chain management. The element is versatile; it can be in either liquid or gaseous form, and it can be utilized as a source of electricity or fuel without the emission of carbon dioxide However, hydrogen does not exist naturally in its pure form and, thus, must be extracted from organic material, such as biomass, fossil fuel, and water, which adds to the complexity of its production. Furthermore, because of its high diffusivity and flammability, owing to its smaller molecular size and lower liquefaction temperature, transporting hydrogen is more expensive and challenging than transporting natural gas. Today, a number of technologies for producing hydrogen are in use, but grey, blue, and green hydrogen production processes are at the forefront.
The most prevalent form of hydrogen available today is grey hydrogen, which is produced from fossil fuels (natural gas, coal, and oil) and generates carbon emissions. Given this negative environmental impact, blue hydrogen technologies, which capture and store carbon instead of releasing it into the atmosphere, are becoming an increasingly popular alternative. Green hydrogen, on the other hand, is the most coveted as it is produced using renewable energy sources such as solar and wind power, as well as electrolysis to split water, making it the cleanest source of hydrogen. Despite the fact that green hydrogen is five times more expensive than grey hydrogen, experts believe that the economic viability of green hydrogen will increase by lowering the cost of electricity, which accounts for 80% of the cost of operations. Green hydrogen has now come back into the spotlight, as the cost of renewable energy has progressively decreased over the last decade.
Gulf countries, particularly Saudi Arabia and the UAE, are particularly well-positioned to meet global hydrogen demand, owing to their vast oil and gas reserves that can be used for grey and blue hydrogen production, and growing renewable energy supply, which can generate green hydrogen. Both countries are among the cheapest producers of solar energy production in the world, providing them a competitive advantage in the production of green hydrogen. Furthermore, their strategic location at a logistical crossroads between Africa, Europe, and Asia allows them to serve a broad market, and they are well-versed in the mechanics of moving combustible products like natural gas.
Currently, hydrogen production in the UAE and Saudi Arabia is limited to internal consumption. However, both countries would stand to benefit from including hydrogen in their diversification strategies, similar to how they have grown their market share in oil and natural gas. To capitalize on this potential, Saudi Arabia and the UAE must continue to develop dedicated policies around hydrogen production while ramping up installed renewable capacity, which currently stands at less than 3 Gigawatts (GW), combined with approximately 20GW under construction and late-stage development. This would also mean addressing the cost of blue hydrogen production, as the limited utility of carbon capture technology has skewed the process's commercial feasibility in the past.
The UAE has had many firsts in the hydrogen revolution - from the development of world-class facilities to major policy commitments - but it lacks a streamlined approach towards becoming an emergent hydrogen economy. In 2017, Dubai inaugurated the first hydrogen filling station in the Middle East. This milestone was soon followed in 2019 by the launch of the Middle East's first solar-based hydrogen production facility, a collaboration between Dubai Electricity and Water Authority, Expo2020, and Siemens. Continuing on its path of firsts, the country is looking into the manufacturing of hydrogen production equipment. Additionally, the UAE plans to use its expertise in carbon capture, utilization, and storage towards the production of blue hydrogen. To build on this remarkable list of accomplishments, the country is working towards an integrated strategy rather than its previously siloed approach. The country’s 2050 energy policy will be reviewed in 2022 and hydrogen is expected to play a significant role in the new plan. Furthermore, as part of the UAE's ongoing energy diversification efforts, Abu Dhabi National Oil Company, Mubadala, and ADQ signed an agreement in January 2021 to create a hydrogen alliance focused on low-carbon green and blue hydrogen. The alliance intends to speed up the adoption and usage of hydrogen in the UAE across major sectors, including utilities, mobility, and industry. By testing the usage, production, and logistics of hydrogen internally, the country can emerge as a leader in guiding other markets’ hydrogen adaptation.
Meanwhile, Saudi Arabia is building on its strengths of having abundant natural gas resources, industrial hydrogen production capabilities, and carbon storage capacity towards producing and supplying cost-competitive clean hydrogen. However, the country must address a few bottlenecks, such as increasing the installed renewable capacity, which is currently below 1GW with 10GW under construction, to increase the production of green hydrogen. Whereas the economic feasibility of blue hydrogen production is contingent on an increase in the commercial usefulness of captured carbons. The country has built a steady stream of long-term partnerships to expand its technological know-how and production capacity. Since 2017, Saudi Aramco and Abu Dhabi National Oil Company (ADNOC) have collaborated to unlock the carbon management technology and, together, have the largest carbon capture and storage facilities in the Middle East. Saudi Arabia's smart city, Neom, which is still under construction, will be the testing ground for green hydrogen production. The country announced the world’s largest green hydrogen project (4GW), jointly owned by Air Products, Saudi Arabia's ACWA Power, and Neom, to be powered by solar and wind energy. Additionally, the governments of Saudi Arabia and Germany signed an MoU earlier this year to work closely on the production and transportation of green hydrogen. Saudi Arabia has ample resources and finance to scale up blue and green hydrogen production, but the government has yet to streamline the production process and costs for both types, which these new partnerships may help to resolve.
Both the UAE and Saudi Arabia have emerged as leading innovators in hydrogen production and possess the capital, business environment, and logistics infrastructure to capture the global market. In order to maximize their competitive advantage, both countries must prioritize policies around hydrogen production, adequately market the benefits of hydrogen as an energy source, and address inconsistencies in production and supply. As a result, the UAE and Saudi Arabia may be able to deliver considerable volumes in the future, securing long-term distribution contracts. The Saudi Arabian Neom project and the UAE's commitment to using hydrogen-fueled vehicles at Expo 2020 could accelerate the adoption of hydrogen technology by educating the global market on the long-term advantages of hydrogen adoption while also showcasing their own production and logistical capabilities.
By Naam Chakravorty, Gulf Region Analyst at Botho Emerging Markets Group