It's a gas: with Saudi Arabia, Japan and China pivoting to clean hydrogen, should Hong Kong be next?
Saudi Arabia has been looking to diversify its economy ever since its reliance on the stability of high crude-oil prices exposed a glaring weakness in its long-term financial planning. The problem is that Saudi Arabia does very little other than pump oil. As long as consumers around the world are gluttonous consumers of oil at high prices, everything is fine, and the demand side of the pricing equation remains strong. But as people become more frugal or something, say a global pandemic, disrupts travel and economic activity, the house of Saud's family finances come under strain. According to the International Monetary Fund, Saudi Arabia needs oil to trade at US$66 per barrel just to balance the budget this year.
On the supply side of the pricing equation, US shale oil exploration and extraction presents another problem for Middle Eastern oil economies. Historically, it was both expensive and difficult to extract shale oil, and it took a long time to develop techniques that lowered the cost enough to make it worthwhile. For the United States, fracking technology was the fix that allowed pumps to be profitably switched on when the price of oil is over US$50 a barrel. Lower than that, and the pumps can be switched off. This suggests the longer-term price of oil will be capped even if demand returns to some pre-Covid-19 normal.
At the same time, global energy generation has started to shift away from fossil fuels towards greener technologies. In seeking to diversify and reduce its dependence on oil, Saudi Arabia is aiming for another energy source currently in very limited supply - hydrogen - and is spending US$5 billion by 2025 just to get started.
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I WAS SCHOOLED ...
Hydrogen is arguably the ultimate fuel, able to store and release large amounts of energy without pollution. We all know hydrogen from school. Chemistry experiments include electrolysing water and then igniting a tube of gas to get a "squeaky pop", or using it to fill floating balloons that can explode and take your hair off when you light them with a match.
The International Monetary Fund estimates that Saudi Arabia needs oil to trade at US$66 per barrel just to balance the budget this year. Photo: AFP
That propensity to violently and rapidly expand - or explode - makes it difficult and expensive to store large amounts safely. And while hydrogen can be made simply and cleanly using electrolysis, the process is hugely energy intensive. Making "green hydrogen" requires an ample supply of non-stop renewable energy. Few places are as suited to making green hydrogen as Saudi Arabia, with its vast tracts of unused land for solar or wind farms, and with seawater on both sides to electrolyse.
Production, storage, and transport - which have been the major hurdles to making the fuel a commercial reality - have to a large extent been overcome by the Japanese, which were eager to show off the technology during the 2020 Olympics, and now China plans to showcase the technology at the 2022 Winter Olympics.
Now, why would the Japanese take a dangerous technology with explosive applications both intentional and unintentional - from rocket fuel to buoyancy in Zeppelin rigid airships - and apply it to fuel cells in small cars that need to "pee" water, such as the Toyota Mirai? It has drawn the criticism of innovators such as Elon Musk, who colorfully described the technology as "bull***t". And plans for a renewable energy plant in California that extracts hydrogen from the methane in cow manure is proving him kind of right.
With few natural resources, Japan relies almost totally on imported energy - mostly electricity, generated and transmitted by an awful mishmash of systems, a legacy from GE and Siemens in the late 1800s. Japan has no national grid, just a collection of local power suppliers relying on a hodgepodge of power station types. Although the entire country runs on a tepid 100 volts, two halves of the country operate on different phases, split somewhere between Tokyo and Osaka. It's a miracle it works as well as it does.
When I first moved to Tokyo, properties were generally very poorly insulated. Many of the suburban buildings were wooden or steel framed with plywood walls, but poured rebar concrete - the common construction method in Hong Kong - was also becoming popular as it lasted longer. In both cases the thermal characteristics were as awful as the electricity bills.
BUT IT'S ALL RIGHT NOW
Over the following 30 years, multiple significant natural disasters wrecked the country's power supply and raised questions not just about Japan's energy security, but also about the integrity of its distribution systems. Big changes were made to the design and construction of Japanese buildings, particularly single homes and apartment blocks, to make them more energy efficient and less reliant on a 24/7 supply of huge amounts of energy from the power grids.
The following has happened since I was shivering in Tokyo all those years ago:
" Buildings have become significantly more energy efficient, both mandated by law and encouraged through government subsidies and grants, which meant builders had to do a better job and owners had a responsibility to reduce power consumption.
" Subsidies to homeowners encourage them to build or refurbish using the most up-to-date technology, including efficient double- or even triple-glazed windows, and thick wall and roof insulation that keeps the heat in and the cold out - and vice versa in the summer.
"The installation of alternative energy sources such as solar cells, lithium batteries and hydrogen fuel cells is now possible because their output exceeds the now-reduced energy needed to keep the household running. This means that a building can go off-grid or reduce its gas consumption to a large degree. Fortunately, even though Japanese winters can get very chilly, it's often sunny.
IN FACT, IT'S A GAS
In the effort to distribute and localise small-scale power generation, domestic fuel cells using hydrogen is actually the perfect transitional technology as they can use widely distributed natural gas by first reforming it into hydrogen.
Japanese buildings have become more energy efficient in recent years. Photo: AFP
Japan has led the charge in hydrogen technology, and it has been a lonely one so far. However, China, South Korea and Germany formalised their hydrogen strategies last year as they started to realise that they too needed to make the same considerations of energy security and carbon emissions. Facing the prospect of losing customers in the European Union (Germany in particular), China and Japan - all big oil clients with an interest in rolling out hydrogen - Saudi Arabia decided to react swiftly and beat other potential competitors, such as Australia, to the market.
But is hydrogen really for everyone? The Japanese believe it is, and want to push it hard and are offering home fuel cells overseas already. Me, I'm not so sure. Take Hong Kong for example; we definitely need to reduce transport emissions both for the sake of the climate and our own airways, and Tesla cars have evidently been embraced wholeheartedly - they're as common as ants at a picnic even if electric buses are rare. But is it possible to shift to solar, hydrogen and fuel cells in homes like the Japanese?
Theoretically, yes. Practically, no. But the question I want everyone to consider is: why not? Quite simply, we missed out on - or refused to pay for - the revolution in energy efficiency that would be needed for a switchover to something this modern. The Japanese had no choice but to do it.
Undoubtedly, we have been spoiled by a cheap and stable electricity supply from HK Electric and CLP. Yes, our bills are high, but as the government is all too keen to remind us, the per-kilowatt charge in London, Tokyo, New York or Sydney is more than double that in Hong Kong. And yet, when I compare the cost of winter heating in my seven-year-old Hong Kong flat to the cost for one of a similar size and age in Tokyo, I am paying 2.7 times more to keep warm. And in the summer, it costs 1.8 times more to keep me cool. Adopting some of Japan's best practices for insulating new or refitted homes would leave everyone a little happier when the power bill comes.
I must admit I did not foresee the Saudis moving into hydrogen, believing it was destined to be a niche technology. This pivot is quite revealing, as they clearly see a huge potential market - not just in powering a few green buses. If hydrogen does become widely available and is adopted as a successful alternative to fossil fuels, then in the longer term it may be the way forward for Hong Kong too. At the very least, it's a good reason to do a complete rethink on the rate we burn energy.
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.
