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Supply Side Constraints and Net Zero

Updated: Nov 29, 2022

It's hard to decarbonise when you can't get the zero carbon fuel

The International Energy Agency (IEA) estimates that the world will need 3,585 gigawatts of electrolyser capacity to meet the demand for green hydrogen in 2050, compared to 1 gigawatt of installed capacity today.

There is a huge supply side shortage to overcome if the world is successfully to transition from a hydrocarbon to a hydrogen based economy. It is debatable how long this supply side shortage will last, but as the technology to enable the transition is at the bottom of the S-curve, the answer is going to be measured in decades rather than years.

This is a big problem for shipping, which will have to compete with the rest of the economy for the hydrogen atoms required as fuel (in one form or another) to replace hydrocarbons.

The hydrogen supply situation is not unique. The global economy is experiencing structural changes which will last longer than the average business cycle. It is shifting the post-GFC situation characterised by a lack of demand, to a situation characterised by supply side constraints and permanently slower demand growth, due to demographic trends.

One might also add that the trend to deglobalisation – decoupling, club deals, demise of the WTO, reshoring, onshoring, friendshoring, and the alteration of just-in-time global supply chains to include a just-in-case local or regional option – will also affect ocean shipping demand growth. The rising cost of ocean shipping during the energy transition (imagine a $200 per tonne carbon tax adding $630 or so cost to a tonne of fuel oil) may also alter global logistics patterns with negative consequences for shipping demand.

The symptoms of the changing structure of the global economy are apparent in the decrepitude of its institutions.

The effective demise of the World Trade Organisation and the rise of bilateral and club trade deals is changing the way that nation states co-operate with each other and making it harder to reach global agreements on climate amelioration technology.

Russia’s war in Ukraine at once demonstrated the apparent weakness and underlying strength of NATO, while changing the balance of power in Eastern Europe, in Central Asia and in the Arab world, with China and Turkey benefiting at Europe and Russia’s expense in terms of regional influence. The war has shown that the UN is a political paper tiger, for all the good it does in social affairs (its sustainable Development Goals are the foundation of all ESG corporate policies and strategies).

The war has demonstrated the world’s continuing reliance on oil and natural gas. Governments have returned home from COP27 with their inability to come to substantive global agreement in clear view. The general public is losing faith with the COP system of meetings to manage the effects of climate change. After 27 meetings, there is still no agreement to phase out the use of fossil fuels, only to try to prevent temperature increases.

The end of quantitative easing and the return of interest rates to more ‘normal’ levels has yet to be matched by a return to fiscal rectitude. The ultra-loose fiscal libertarian experiment in the UK may only have lasted for eight weeks but its effects- higher interest rates, more government debt, austerity, a loss of credibility in world political and financial circles – will last for years. In the US, the Republican party may be divided over personalities, but it can rally around the position that Democrat spending on new climate technology, infrastructure and Ukraine amounts to fiscal irresponsibility.

A slow-down in the amount of cash being pumped into the economy is also having an effect on stock markets, where bubbles are deflating due to a lack of new money being pumped in under the TINA principle (There Is No Alternative). Housing markets in China, South Korea, the US, the UK and Europe, Australia, Argentina and Brazil, are all slowing or falling for basically the same reasons: higher interest rates and lower money supply growth.

All of this has two particular consequences.

Firstly there is a weakening of confidence in global institutions to make substantive change in the areas of trade, conflict and climate change. 80,000 delegates flew to Cairo to meet at COP27, to tell us to ride our bicycles to work. That lack of confidence is regularly heard from industry too. The Alliance of CEO’s recent open letter clearly thinks that governments are lagging industry and commerce in trying to make the energy transition happen.

That sentiment was echoed robustly at a Maritime Leaders’ Forum hosted by industry association Maritime UK in London on 21st November. A number of attendees repeatedly asked the governmental representatives to make clear and bold decisions for the long term on which fuels, what emission levels, which forms of transport, would be supported, taxed, banned or outlawed. The electoral cycle is getting in the way of long-term decision making; no wonder public trust in the democracies is waning and the number of democracies is falling.

Meanwhile, thinktank Transport & Environment has published a report in October this year claiming that shipping could effectively decarbonise without needing IMO mandates, if just the US, China and the EU could agree individually or in concert to decarbonise vessels calling at their ports. The development of green corridors, such as that between Shanghai and Los Angeles, points to how this could be achieved.

Secondly, as there is less money to go around than there was, investors and financiers are will look for opportunities with as little risk as possible but which still meet their own ESG policies, imposed on them by their investors – the pension funds and bond holders who own most of their equity and control their debt.

Secondly, as there is less money to go around than there was, investors and financiers are will look for opportunities with as little risk as possible but which still meet their own ESG policies, imposed on them by their investors – the pension funds and bond holders who own most of their equity and control their debt.

For long-distance ocean transport, the solution is still probably hydrogen or hydrogen carriers like ammonia, with their technical difficulties and supply constraints. While the IEA’s warning about electrolyser supply is clear, their own analysis from September this year suggests that ‘The realisation of all the projects in the pipeline could lead to an installed electrolyser capacity of 134-240 GW by 2030.’

If you are in government, please work on building long-term reneweable power generation; electrolysis needs all the renewable electricity it can get. If you are an investor, be bold and support hydrogen innovation. If you are a ship owner, continue lobby your flag state and industry associations to make more noise about regulatory certainty. Oh, and start to think about liquefied hydrogen tanker designs – just think how many ships will be needed to replace the world’s coal carriers, most oil tankers and a good proportion of the global fleet of methane tankers!

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