A prospective study

Developing Hydrogen for the French Economy

This memo was prepared to inform the 2018 Multiannual Energy Program and as input into the French Hydrogen roadmap requested by the Minister for Ecological and Solidary Transition.

AFHYPAC, Air Liquide S.A., Alstom, CEA, EDF, Engie S.A., Faurecia, Groupe Michelin, Hyundai Motor Company France, Plastic Omnium, SNCF, Total S.A., and Toyota Motor Europe, French Office participated in this prospective study.

McKinsey & Company provided analytical support.

Decarbonized hydrogen and fuel cell technologies could be a core contributor to achieving France’s ambitious decarbonization targets and offer green growth perspectives for

France’s industry. In this perspective on the potential of hydrogen in France, we lay out this ambitious, yet realis-tic vision that was developed with the participation of 10 companies active along the whole Hydrogen value chain, AFHYPAC, the French Association for Hydrogen and Fuel Cells and the research organization CEA.

Hydrogen demand could amount to 20% of final ener-gy demand in 2050 and reduce annual CO2 emissions by ~55 Million tons. This is equivalent to about a third of the additional CO2 abatement needed between France’s decarbonization objectives (Plan Climat) and the current reference scenario.

Hydrogen and fuel cells could also create an industry with EUR 8,5bn in revenues and 40,000 jobs in 2030, countering the risk of job losses that currently faces the automotive industries. In 2050, it could reach EUR ~40bn in revenues and 150,000+ jobs by 2050.

Executive Summary

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Implementing this vision would place France in the small group of countries already active in the development of hydrogen and fuel cells and would provide new econo-mic opportunities on the expanding hydrogen markets (Europe, China, Japan, Korea, etc). With France’s strength in hydrogen production, equipment manufactu-ring and specialized materials and components, hy-drogen could open export opportunities in Hydrogen new markets in the order of EUR ~6,5bn by 2030.

To achieve this ambitious vision, however, industry and government would need to step up efforts to deploy hydrogen at scale. The next 10 years, could generate an investment potential of EUR ~8 billion across the value chain (~800 million per year, about 2.5% of France’s to-tal investments for decarbonization1). This investment could unlock deployment to achieve the following miles-tones in the next 10 years (2028):• In the transport sector, 400 hydrogen refueling

stations of different sizes and 200,000 fuel cell electric vehicles; with early deployment particularly in public transport (e.g., city buses and trains), taxis and commercial fleets.

• In the building sector, production hydrogen for blending into the natural gas network equivalent to 0.5-1% of the gas demand of this sector.

• In the industry sector, first use of decarbonized hydrogen in large-scale demonstration projects for industry heat and feedstock uses (in the chemicals and steel industry).

• Expansion of electrolysis capacity to 0.8-1 GW.

To achieve this vision, a fair and appropriate regulato-ry framework and long term public policies are re-quired including coordination between industrials stakeholders, public policy representatives, financial sector and research institutes. Decarbonized hy-drogen has a significant potential and requires proper support to scale up and compete, just as other tech-nologies have.

This prospective study has in no way the ambition to consider hydrogen as the only solution to achieve the energy transition, but rather as a key element of the portfolio of low-carbon technologies that could help to decarbonize France while enabling significant pers-pectives of growth for the French economy.

Executive Summary

1/France’s investments into decarbonization were EUR ~32 billion in 2016, including e.g. investments into energy efficiency, development of renewable energies and construction of sustainable infrastructure in transport and network, based on an estimate by I4CE - Institute for Climate Economics.

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Hydrogen is an important pillar to achieve the French energy transition

France has committed to the Paris agreement to limit global warming to at most 2° degrees above pre-industrial levels. In this context, France has set itself

the target to reduce its CO2 emissions from ~310 Mt in 2015 to ~90 Mt in 2050. This can be achieved by taking advantage from its assets: the French power mix is already relatively low carbon, contributing only 7% of total CO2 emissions compared to 30% EU average, increasing energy efficiency, already large investments in Research & Development in very promising sectors such as biofuels or capture and storage or recycling of CO2 emissions. These assets will insure decarbonization of end uses which are presently emitting CO2.

A range of technologies is required to achieve such a massive transition of the energy system. Hydrogen production can be decarbonized, e.g., through the combination of steam methane reforming and carbon capture and storage or through water electrolysis powered with decarbonized electricity. Hydrogen is renewable if it is produced through water electrolysis with renewable electricity. Hydrogen’s versatile, clean, and safe characteristics can contribute to this transition across the whole energy value chain.

It can be used to decarbonize end uses in the transportation, building and industrial sectors, where it will co-exist with other technologies such as electricity from the grid and from batteries as well as biogas. It can be combined with captured CO2 emissions into renewable feedstock for the chemicals industry and therefore provide a viable pathway to carbon recycling. Finally, it can contribute to the deployment of renewable energy by converting and storing renewable electricity, distributing it nationally and internationally, and providing a strategic reserve.

The energy transition also creates challenges for French industry. French automotive and automotive supplier companies account a turnover of almost EUR 100 billion and employ some 225,000 people today. The development of the hydrogen society can be at the origin of creating new mobilities in line with an energy mix which would comply with the challenges of a French decarbonized society. Developing hydrogen equipment for the national and international markets could help sustain value creation and employment in this sector. French companies are already leading in the development of specialized materials and components for fuel cell vehicles, in hydrogen production and distribution, and in the development of equipment for hydrogen production and distribution.

context

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Exhibit 1: hydrogen can play 7 roles in the energy transition

This study presents an ambitious, yet realistic vision for the role of hydrogen in the French energy system. It is based on technologies whose functionality has already been demonstrated in practice and considers their deployment at scale. It recognizes that hydrogenis not the only decarbonized energy vector, but considers hydrogen technologies as an unavoidable part of the portfolio of low-carbon technologies in certain sectors for France to achieve its decarbonization objectives.

However, it requires that all actors—including the private and public sector—step up their efforts in advancing the energy transition and accelerate the deployment of competitive hydrogen solutions at scale.

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Exhibit 1: hydrogen can play 7 roles in the energy transition

3/Fuell Cell Electric Vehicle

context

METHODOLOGYTo achieve a comprehensive and quantified vision for France, the resent study used three main sources:

• A model of energy system based on ADEME and RTE scenarios consistent with France’s decarbonization objectives (Plan Climat – two-degree scenario) complemented with data from SoeS, STATISTA, IHS, BP, CEPS, World Steel and AFHYPAC.

• Hydrogen and fuel cells adoption rates from Hydrogen Council roadmap. The Hydrogen Council, a consortium of 18 leading companies active along the hydrogen value chain, achieved a comprehensive study of hydrogen’s potential in each sector at world level. Its members submitted their perspective on hydrogen adoption in each segment including transportation, industry buildings and energy , in line with the 2°C scenario.

A neutral party aggregated the results after trimming the top and the bottom quartile and led an alignment process towards reaching a consensus among members. From the long-term vision, the 2030 figures were calculated as realistic and required milestones on the way to 2050.

• A survey realized among the study partners and AFHYPAC’s members. 25 companies submitted their data that served to adjust assumptions concerning employment impact, forecast investments and macroeconomic multipliers. These data and macroeconomic data from Eurostat, form the basis of the assessments for calculation of revenues, employment and export opportunities in this report.

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vision

Hydrogen could contribute 20% of final energy demand in France by 2050

France is well suited to deploy decarbonized hydrogen as an economically and environmentally attractive lever in the energy transition:

Industry landscape

French companies are among the biggest hydrogen producers and distributors worldwide and are leading in the development of production and distribution. French industry is also a major consumer of hydrogen, with some 920,000 tons used in refining, chemicals, fertilizer and metallurgy each year. While French auto OEMs have not yet announced plans to commercialize FCEVs at scale, France has strong players in materials and components for fuel cell systems, including some automotive supplier companies and a sizeable number of SMEs.

Power sector

France has a low-carbon and relatively low-cost electricity mix today (~50g/kWh, compared to ~560g/kWh in Germany). This supports the clean and affordable production of hydrogen through electrolysis in competition with other production sources such as steam methane reforming

coupled with carbon capture and storage. France also has ambitious plans to expand renewables capacity, which could create additional opportunities for hydrogen which allow to absorb and store these additional capacities. Lastly, France encompasses more than 100 inhabited islands where hydrogen could enable a fully decarbonized and autonomous energy system.

Decarbonization targets in transportation

France is taking a leadership role for decarbonization, with strict regulations on pollution expected in all sectors (e.g. the ban on diesel and petrol car sales from 2040 and the strategy for clean mobility put forward in the “Loi de Transtion Energétique pour la Croissance Verte”). French cities are also leading in initiatives to reduce local emissions (e.g. Paris’ ambition to ban diesel cars already from 2023 and petrol cars from 2030). Reaching these far-reaching targets requires the deployment of a range of clean technologies, including hydrogen as one of the key components.

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Exhibit 2: Annual hydrogen demand could increase to ~790 PJ ( 220 TWh ) by 2050

Decarbonizing end uses

In our vision, in which governments, industry and investors take initiatives to limit global warming to 2 degrees, hydrogen demand could increase from 0.9 Mt – the current demand– to 5.5 Mt in 2050 across seven areas of application. Overall, hydrogen use could amount to ~790 PJ (=~220 TWh) worth of energy, or ~20% of final energy demand (~15% if feedstock uses are excluded).

The potential of hydrogen differs by application: by 2050, hydrogen could provide as much as ~18% of the passenger and freight transport fleet, account for ~12% of heat and power demand for households and fulfil a ~10% share of the demand for heat and power in industry. Hydrogen could also be combined with CO2 to provide renewable feedstock for the production of more than 2 million tons of chemicals, and could be used in the decarbonized production of 1.5 million tons of steel.

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Transport

In the transportation sector, hydrogen-powered fuel cell electric vehicles (FCEVs) would need to be de-ployed alongside battery electric vehicles (BEVs) and other low-emission vehicles such as hybrids to decarbonize the different segments of the transport sector and meet the government target of zero new diesel- or petrol-powered cars by 2040. The diffe-rent technologies will be complementary, if cost competitiveness can be achieved through scaling. The range, short refueling time and weight characte-ristics make FCEVs particularly suitable for heavier vehicles with lower downtime, including taxis, light commercial vehicles and city buses (30+% of the fleet by 2050). For buses and trucks, we estimate that around one in four buses and one in five trucks could be powered by hydrogen by 2050. In privately used cars, FCEVs will complement BEVs to meet different customer preferences (~20% of fleet by 2050), with most likely uptake in areas with very high and very low population densities.

Building heat and power

In the building sector, hydrogen adoption could be driven by blending into the natural gas network. The French Energy Code targets a 10% renewable gas share by 2030; some French utilities envision a higher share of up to 30% by 2030 and 100% by 2050. By 2050 hydrogen (pure or as synthetic natural gas) could contribute around a third of the gas mix and around 12% of building energy demand.

Industry energy and feedstock

Hydrogen constitutes an option to decarbonize processes that are hard to electrify directly, such as high-grade heat for industry. In our vision, hydrogen can constitute around 10% of industry energy by 2050. Clean hydrogen could also be used to decarbonize existing feedstock uses in the refining and chemicals industry through a combination of hydrogen and captured carbon (using 2.5-3 Mt CO2 and 0.5 Mt hydrogen by 2050 to produce more than

Exhibit 3: Hydrogen adoption rates and total potential in 2050 differ by sector and segment

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vision

2 Mt of methanol, olefins and other chemicals). Hydrogen could also serve as a reducing agent for carbon-free steelmaking processes, and could be used in the production of more than 1.5 Mt of steel.

Renewables integration and power generation

Hydrogen is versatile energy carrier enabling large-scale renewable energy integration in the energy system. It represents one means to solve the issue of intermittency of renewable . As such, it can contri-bute to the deployment of renewables by converting and storing renewable electricity, and offering flexibi-lity to infrastructures.

The French government has ambitious targets on renewables production (40% by 2030), with a va-riable renewable energy (VRE) share of up to 70%2. This scenario would require long-term energy sto-rage and/or sector coupling of up to 8% of total power generation (i.e., conversion of up to ~35 TWh into hydrogen). While only a share of the hydrogen foreseen in our vision, this would provide a very af-fordable source of hydrogen.

Besides providing long-term storage and sector coupling, hydrogen could also be used to provide decarbonized dispatchable power. By 2050, we think that a significant share of gas power plants could run on hydrogen, either using SMR+CCS3 on-site or hydrogen from dedicated pipelines.

Buffering

Currently, the energy system has a buffering capa-city of ~20% of the final natural gas demand. As a way to store power for extended periods of time, a hydrogen buffer could serve to build up a reserve for the renewable energy system. Hydrogen can be stored in underground caverns, similar to natural gas today. An hydrogen buffer for the variable re-newable electricity system would require an annual buffering buildup of ~0.3 -0.5 PJ (1,5-2,5 TWh/year).

Distribution and transportation of energy

While hydrogen can and must be produced from lo-cally generated electricity, hydrogen or hydrogen-rich fuels could also be used to transport renewable electricity internationally. For instance, if competitive, it could be used to transport solar power from North Africa into Europe.

Hydrogen production

Hydrogen can be produced from various sources. Today, the majority of hydrogen used as industry feedstock is produced through steam methane re-forming from natural gas, or as a byproduct in industry.

In our vision, hydrogen production is rapidly decar-bonized. New hydrogen demand will mostly be met by hydrogen from decarbonized and cost-efficient production methods. Existing feedstock users will gradually transition to clean production methods. By 2030, 90% of hydrogen for transport, buildings and industry energy would be produced from carbon-free sources, either with central and distributed electroly-sis or with SMR using biogas or natural gas with carbon capture.

2/Solar, wind, and run-of-river hydro power; Estimated from ADEME Vision 2035-2050 scenarios – 3/ Steam Methane Reforming + Carbon Capture and Storage

Hydrogen could also contribute to the energy transition by reinforcing the renewable energy system.

ENABLING THE RENEWABLE ENERGY SYSTEM

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Scale up needs to start now to achieve the 2050 vision

milestones

To achieve this ambitious vision for 2050, France would need to rapidly start the deployment of decarbonized hydrogen solutions

at scale. A significant step-up all along the value chain and large-scale projects would be required to increase availability of decarbonized hydrogen, lower the costs of hydrogen and hydrogen solutions, and launch the market.

The current regional pilots of hydrogen solutions could provide a starting base for this scale-up, but a national, fair, incentive, long term framework, which would be shared by all players, is required in order to ensure deployment coherence and visibility to investors.

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Scale up needs to start now to achieve the 2050 vision

Transport

In the transport sector, we see a ramp-up to ~10,000 FCEVs4 in 2023 and ~200,000 FCEVs in 2028. These numbers include hybrid models (batteries and fuel cells) which are particularly relevant for the ramp-up in the van segment. In key segments of captive fleets such as taxis, one in 50 cars sold could be an FCEV by 2023 and one in 10 by 2028. Public transport, notably public buses and trains, could also be leading segments in hydrogen adoption.

Four critical factors that determine the FCEV ramp-up are: the speed of infrastructure roll-out, the develop-ment of costs for FCEVs and other technologies, the uptake of hydrogen solutions from commercial and public fleets, as well as interest by French OEMs.

• For infrastructure, our model assumes a scale-up from ~20 presently to ~400 refueling stations within the next 10 years. It is essential that infrastructure and FCEVs are deployed simultaneously in order to avoid a situation where refueling stations are underutilized, and hence overly costly, or refueling stations remain scarce, and hence inconvenient for FCEV customers.

• Costs for FCEVs and competing technologies will evolve over time and depending on the realized cost improvements, technologies will be able to achieve different market shares.

• Commercial and public fleets are also play a key role in our model, with an accelerated ramp-up for taxis, city buses and van fleets compared to passenger cars. The latter are particularly important, as France’s large number of light commercial vehicles and heavy vehicles in France (including 7 million vans, or more than twice as many as in Germany) lends itself to the adoption of fuel cell technologies in fleets.

• The fourth factor, the involvement of French OEMs on the French market, is subject to significant uncertainties. French OEMs have not been part of the first wave of OEMs adopting fuel cell vehicles. This is already considered in the roadmap scenario. However multiplication of BEV in French OEMs roadmaps will be a great springboard for FCEV development as, to reach the decarbonization objectives in transportation, BEV and FCEV technologies are complementary and both will be necessary.

Apart from road traffic, the next 10 years could see hydrogen adoption in rail and ships. Already today, some hydrogen-powered trains, ferries and boats are being deployed. Once authorized on French tracks, first fuel cell trains (which are already produced by one French manufacturer) could be expected to run by 2028.

Exhibit 4: many hydrogen technologies are getting ready for deployment at scale

4/Includes passenger cars and vans/LCVs

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Hydrogen-propelled ships would completely elimi-nate local emissions and noise in harbours, rivers and lakes. First projects have been launched for fer-ries in France, and river or ocean cruisers would create significant demand (1-10 tons of hydrogen per day), hence supporting the development of the hydrogen supply chain.

Building heat and power

In the building sector, we believe in demonstra-tion-scale projects in the next 5 years and 1-2 TWh injected in the natural gas network by 2028. Study of hydrogen blending into the natural gas network has started with first demonstration-scale power-to-gas projects, such as the GRHYD project in Dun-kerque or Jupiter 1000 in Fos-sur-Mer. Next steps would be to launch bigger projects to test high level of injection in transport and distribution networks. 1-2 TWh of hydrogen blended with natural gas by 2028 could constitute between 0,5 and 1% of the energy delivered to the buildings by the natural gas network. At these concentrations, no modifications are necessary to infrastructure or equipment.

Since such modifications have a planning horizon of about 10 years, however, steps should be taken since 2030 to plan the integration of larger amounts of hydrogen towards 2040 (dedicated networks or methanation).

Industry energy and feedstock

In the industry sector, the use of hydrogen for heat is unlikely to experience significant uptake in the next 10 years, given the cost sensitivity of industrial pro-duction. First large-scale demonstration projects could, however, pioneer the use of hydrogen for high-grade heat, for instance in industries that pro-duce hydrogen as byproduct.

We also see new uses of clean hydrogen as feedstock develop in the chemicals and steel indus-try. By 2028, more than 300,000 tons of CO2 could be converted to methanol and other chemicals. At the same time, first large-scale demonstration pro-jects could produce steel using a hydrogen-based direct iron reduction process.

Exhibit 5: Short- and medium-term milestones consistent with the long-term vision

Exhibit 5: Short- and medium-term milestones consistent with the long-term vision

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impactimpact

Hydrogen will enable the energy transition, improve air quality and strengthen the French economy

Decarbonization and local emissions

Hydrogen could reduce CO2 emissions by ~55 Mt in 2050. This would close roughly one third of the gap between the emissions in the EU refe-rence technology scenario (which includes only current policies) and the level implied by France’s commitments in the Paris Agreement (“Plan Climat”).

Hydrogen would also significantly improve air qua-lity in cities: fuel cell applications, both in transport and others, emit no particulates, no NOx/SOx and make almost no noise. By 2050, the proposed fuel cell vehicle ramp-up could reduce air pollutants by more than 70 thousand tons NOx and 60 thousand tons CO per year.

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Impact on the French economy

Our vision for 2050 would create a hydrogen industry with a market worth more than EUR 20-25 billion and employment of some 150,000 people in France. This reflects both macroecono-mic modelling as well as a survey among 25 com-panies that are active today in France along the whole value chain. While the respondents see strong growth in hydrogen in a business-as-usual scenario, they see a 3-fold increase in revenue and employment growth in a scenario in which fa-vorable policies for hydrogen are implemented; leading to a more than 20-fold increase of the industry size over ten years.

The French industry has the potential to be a world-leading supplier of hydrogen technology. While French OEMs have so far not announced any FCEVs, French automotive suppliers are among the leaders in hydrogen and fuel cell materials and components. A second area of strength is the development and manufacturing of equipment for hydrogen production, distribution, storage and retail. In those two segments, companies expect to export a vast majority of their output, leading to a total potential of ~15 bn EUR exports by 2050.

Exhibit 6: France’s industry is well positioned to compete internationally, particularly in the market for equipment, materials and components

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Exhibit 6: France’s industry is well positioned to compete internationally, particularly in the market for equipment, materials and components

Exhibit 7: The French industry could exceed the domestic market size in 2030, driven by exports of equipment and components

2030 MILESTONES

Significant benefits can already be realized by 2030:

• ~EUR 8-9 billion annual revenue potential from hydrogen and applications in the French market

• ~EUR 12 billion annual revenue potential for the French industry, including 6-7 billion in potential exports of equipment, components and specialized materials

• ~45,000+ jobs sustained in the industry

• ~10-12 million tons fewer CO2 emissions

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Actions

~5-10 billion investments in infrastructure, cost reductions and a long-term and fair regulatory framework

Hydrogen could benefit French citizens, the French environment and the French economy. Current efforts at scaling hydrogen,

however, are not enough to achieve this vision. To realize the described benefits, a major step-up by investors, policymakers and industry along the whole value chain would be required.

Industry: investments and cost reductions

We estimate that industry needs to invest roughly EUR 5-10 billion into new infrastructure, R&DD and to scale up manufacturing until 2030. These investments are necessary to increase availability and decrease costs of hydrogen and fuel cell technologies. Our investment estimates include EUR ~1.5 billion for the development and deployment of hydrogen production equipment; EUR ~4 for the development and deployment of hydrogen storage and distribution infrastructure (including EUR ~750 million for the construction of 600 hydrogen refueling stations), ~2 billion for the development and production of components and systems for end-use applications, and ~500 million for new business models such as hydrogen taxi fleets.

The total annual investment requirement of EUR ~650 million represents a step-up compared to today’s investment levels, but a small fraction of the total investment volume of the French energy, automotive and machinery industries. Our industry survey, conducted among 25 players along the French hydrogen value chain,

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indicates that they are ready for this step-up: given a fair, incentive and long-term regulatory framework, which would be shared by all players, the compa-nies expressed their readiness to step up their in-vestments to a joint EUR 1.5 billion per year by 2028. Under current policies, they showed a willingness to invest only a third of this amount.

The scale-up in investments and production is ne-cessary to decrease costs and render hydrogen solutions competitive with other low-carbon techno-logies. International studies suggest that cost reduc-tions of 60% are possible for hydrogen production, hydrogen infrastructure and fuel cells if production volumes are increased significantly.

Exhibit 8: Under favorable policies, industry players indicate readiness to scale up investments to required levels

POLICYMAKERS & REGULATORY SUPPORT

Using decarbonized hydrogen benefits for the whole energy system of a country, including transportation, industry and buildings, with substantial potential revenues, in condition of a coordination between industrials stakeholders, public policy representatives, financial sector and research institutes. This is what this study aims to demonstrate. To achieve this vision, it requires from policymakers:• a fair, stable and long-term regulatory framework, clear national action plans and

incentive public policies• foster large-scale deployment initiatives supported by a long-term policy framework

enabling cost reduction of hydrogen technologies• provide incentive for long-term private investments.

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AFHYPAC thanks its members for their participation in the survey

Informations

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