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Analysis: Hydrogen in heating. Our goal is to support the decarbonization of district heating in an efficient and cost-effective manner

We are developing a hydrogen boiler characterized by eliminating COx, NOx, SOx, and dust emissions. Our technology will support the decarbonization of the heating industry, for which Poland lacks a long-term modernization strategy. In today’s article, Bartosz Ostrowski, an Analyst at SES Hydrogen Energy, looks at the state of the sector and the key question of the viability of implementing hydrogen as a heat source for investment projects.

Author: Bartosz Ostrowski, Data Miner

SES Hydrogen Energy’s hydrogen boiler is being developed primarily for medium-scale applications – in district heating, industry, and distributed energy – as a source of heat in local heating nodes for commercial buildings and residential estates. The innovation compared to solutions available on the market is that it uses hydrogen and pure oxygen in the closed-cycle combustion process, not a mixture or atmospheric air, thus eliminating potential emissions associated with heat generation. The products of combustion are only energy and steam/water.

Why are we betting on hydrogen heat?

Hydrogen is mentioned in the energy and climate strategies of European countries as an important tool for decarbonization and increasing the share of RES in energy mixes. However, projects in Poland are at a very early stage of development. Particularly challenging is the district heating sector, where, for the most part, no significant modernization efforts have been undertaken for years.

Indeed, Poland is characterized by one of the largest system heat markets in Europe and at the same time significant consumption of conventional fuels, especially hard coal, which accounts for about 66% of the country’s total heat generation (2022).

EU goals related to the diversification of energy sources, increasing the share of RES, and creating efficient heating and cooling systems make it necessary for the sector to focus on modernization and the use of modern, alternative heat sources that will be efficient while guaranteeing energy security and real emission reductions. Ad hoc measures are no longer sufficient in light of the challenges of decarbonization, as well as the energy market crisis we have faced in recent years.

We must remember that it is the long-term operational stability of district heating companies and the liquidity of fuel supplies that have a direct impact on the security and economics of heat supply to individual and commercial consumers, as well as the development of Poland’s medium- and large-scale industry. These can guarantee hydrogen, which produced by electrolysis using RES, creates a kind of self-sufficient energy ecosystem, independent of imports and fuel market fluctuations in the long-term horizon.

District heating in the EU and Poland – situation of the sector

The main difference in the popularity of district heating in the European Union is due to climatic and socio-administrative differences between regions. The relatively warm climate, short heating season, and low population density favor the use of individual means of heating. Larger concentrations of human settlements and a cooler climate translate into intensified demand for district heating for households, and commercial and industrial buildings.

The environmental cleanliness of district heating in individual European Union countries, and thus its impact on the environment, depends on the fuels used by district heating operators and geographic and resource conditions. An example is Iceland, where the country’s favorable geothermal potential has been successfully implemented into the district heating system, covering up to 100% of the network’s demand. However, the purity of heat generation varies considerably from country to country, which has to do with the current dominance of conventional fuels in the total structure of network heat generation in the EU.

Network heat demand in Europe as recently as 2020 was about 599 TWh. Nearly 20% of this was met by coal fuels and almost 37% by natural gas. In the same year, the key to the EU’s goals was the relatively high share of renewables in total heat production in the EU at almost 32%.

The situation was less favorable in Poland, where, according to Eurostat data, in 2020 coal fuels met more than 75% of the total demand exceeding 79 TWh. Renewable sources were expected to account for just over 7%.

Referring to the URE data, in 2022 we could see a reduction in the share of coal fuels and an increase in the share of RES to over 15%. However, it should be noted that the dominant source here is biomass, the combustion of which also involves some emissions. Other renewable energy sources account for only a fraction of the district heating generated in Poland.

Transformation of the heating industry

To meet the challenge of decarbonization and energy transition, several practices and measures are proposed at the technical level, as well as at the regulatory level. These solutions include:

  • reducing the economic risks associated with rising fuel prices by moving away from conventional technologies that dictate high import requirements for energy resources.

The current situation in the energy and fuel market is stable, but we have already seen prices as high as 6 times the current level. In 2021-2022, we faced an energy crisis because of Russia’s aggression against Ukraine and the need to cut off existing imports of energy resources from Russia. As a result, over the 52nd week, the price of MWh of natural gas oscillated between EUR 23.13 and as high as EUR 220.54. Newcastle Coal Futures saw a jump from $124/ton to $445/ton.

Simulation of natural gas price changes – EU Natural Gas Dutch TTF (2019- Q1 2023)

Simulation of natural gas price changes - EU Natural Gas Dutch TTF (2019- Q1 2023)
Source: Investing.com

Simulation of changes in the price of hard coal – Newcastle Coal Futures (2019- Q1 2023)

Simulation of changes in the price of hard coal - Newcastle Coal Futures (2019- Q1 2023)
Source: Investing.com

The sudden and dynamic increase in fuel prices translated directly into an increase in heat prices and contributed to the consolidation of the negative profitability of district heating companies in Poland, which was particularly evident in the case of cogeneration sources, due to the simplified regulatory model. Further price fluctuations are very possible due to the EU’s pro-climate policy.

Even more so because an important factor influencing the future pricing of heat is the emission allowances under the EU-ETS system, which covers all conventional CHP plants in Poland with a capacity of more than 20 MW.

Since 2021, we have seen a dynamic increase in the price of allowances. For example, the weighted average price of CO2 emission allowance units (EUAs) for the 21 trading days of July 2023 was €86.05 per ton, while back in February it exceeded €100 per ton for the first time. This increase is extremely dynamic, as back in 2020 it was hovering around €15. Moreover, experts predict that in 2024 it could even exceed €150.

Simulation of price changes for EU-ETS allowances (2019- Q1 2023)

Simulation of price changes for EU-ETS allowances (2019- Q1 2023)

According to experts, the share of expenses for their purchase in the cost of heat production at many companies may already exceed 40%. With further intensification of reduction efforts, the ceiling of allowances available for circulation will gradually decrease, which will translate into further price increases.

  • generational replacement of old conventional units, whose adaptation to modern technologies for reducing and capturing emissions, pollutants, and toxins is often uneconomic due to the amount of money required or the impending end of their technical capabilities.

Hydrogen boilers dedicated to the district heating and industry mitigate the indicated risks, as they ensure complete independence from fossil fuels and increase energy use from RES sources, meeting regulatory targets (EED Directive). They also make it possible to replace old equipment without significant interference with the transmission infrastructure, reducing investment costs and time.

In addition, among the proposed practices are:

  • the use of energy stored in waste, such as energy recovery from municipal and industrial waste.
  • reducing losses of energy stored in fuel through cogeneration of electricity and heat.
  • reducing thermal energy losses by upgrading transmission networks.
  • reducing thermal energy demand by placing high technical requirements on newly constructed and renovated buildings (EPBD Directive) and individual heating equipment.

Will heat production using hydrogen be profitable?

This is the basic question being asked by investors considering the implementation of hydrogen and hydrogen boiler technology as an alternative to conventional fuels and boilers in centralized and distributed thermal power and industry.

Despite the current stabilization of energy commodity prices, the European economy is not free from speculation and pricing strategies of exporting countries. In addition, the planned gradual reduction in the pool of available allowances, in the absence of decisive modernization measures, will lead to further significant financial burdens on companies.

Electrolytic, low- and zero-carbon hydrogen, despite its currently higher price, remains insensitive to the fluctuating cost of fossil fuels and external factors, making it a guarantor of a stable heat price in the long term. At the same time, it is an energy carrier with the potential for long-term storage, so it can serve as a tool for balancing the electricity grid.

For electrolytic hydrogen to be an economically viable alternative to other fuels, it is important to keep in mind the optimization of how it is produced, matching the expected usage profile. The interconnection of several sources of green electricity, including the possible purchase of certified green energy from the grid, improves the stability of hydrogen generation infrastructure operation. Increased utilization of installed capacity, both RES and hydrogen generator, leads to an economically competitive and environmentally friendly fuel with high energy density and long-term storage capacity.

As SES Hydrogen Energy’s analysis shows, assuming electrolytic hydrogen generation near the point of use (heating hydrogen hubs) and launching large-scale hydrogen generator capacity projects and feeding the electrolysis process in an optimized manner, the cost of obtaining hydrogen can already fall below $5/kg (140 PLN/GJ) today.

To compete on price with conventional fuels, hydrogen should reach a ceiling of around $2.50/kg. Along with economies of scale, the unit price of hydrogen generation in the European Union is forecast to fall within a decade to a ceiling of $2-4/kg, depending on latitude (57 – 114 PLN/GJ). Given that many generating units are already in need of modernization or approaching the limit, and the fact that electrolytic green hydrogen will reach the required technological maturity and economic viability, the choice of hydrogen technologies as a target source of heat and process steam becomes a natural step for many district heating and industrial companies.

Bartosz Ostrowski

Data Miner in the Analysis Department of SES Hydrogen Energy

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