Hydrogen is unlikely to be a cost-competitive option for reducing emissions from heavy industry – even at carbon prices of more than $100 a tonne, government officials say.

Multiple trials are under way in New Zealand to test the viability of developing hydrogen as a low-emission fuel, particularly for long-distance transport but also potentially for power generation and industry.

But work by the Energy Efficiency & Conservation Authority and the Ministry of Business, Innovation and Employment suggests its application in the process heat sector – which accounts for about 11 percent of the country’s emissions – may be limited.

The two organisations are part of a yet-to-be-completed joint research project investigating the potential to make and use hydrogen in New Zealand.

“Preliminary results indicate that hydrogen produced via either electrolysis or steam methane reforming is unlikely to be cost competitive compared with other process heat sources – namely coal, gas, electricity and biomass – even with carbon prices in excess of $100 per tonne,” the pair say in a consultation paper looking at potential barriers to emission reduction by industry.

“This analysis may need to be revisited in the event of very high carbon prices or major changes in the cost of electricity or carbon capture and storage technologies.”

The finding reinforces the challenge the country faces reducing emissions from our largest, high-heat plants – most of which are fueled with coal or gas. While electricity and biomass are already good alternatives for smaller plants and lower-heat applications, gas is likely to remain a key industrial fuel and a potential alternative to coal for much of the North Island.

In December, London-based Vivid Economics warned that trying to reduce emissions from the country’s heavy industry without using gas or coal-biomass blends – relying instead on forestry planting to absorb them – could raise energy costs by more than $3.8 billion a year.

EECA has spent several years working with the country’s meat and dairy processors to try and reduce their emissions. It co-funded studies for the electrode boiler Synlait Milk has commissioned at its Dunsandel plant and the wood-coal conversion Fonterra has made at its Brightwater plant.

EECA and MBIE are canvassing industry to understand the barriers firms face reducing emissions from their operations.

They acknowledge the limited fuel choices processors have in the South Island, where there are no reticulated gas supplies and there is little geothermal development. They also note firms with high-heat needs – typically over 300 degrees Celsius – have “very few viable short-term” abatement options.

Nor, they say, are price signals from the emissions trading scheme, even with planned changes, likely by themselves to influence a change in behaviour.

Officials also wonder whether the capital required for energy-related projects can compete with other core business investments, and whether investment decisions are being hampered by unreasonable fears of hidden costs or under-counted potential co-benefits.

The 29-page paper suggests the complexity of electrification as an alternative, and the lack of local example projects, means some developing technologies are perceived as “experimental and risky”.

But it also observes that the inability to lock in a long-term power price, the cost of any required transmission upgrade, and supply risks, may also be obstacles to greater electrification.

Biomass is well-understood and – through its use in the wood processing sector – provides almost as much process heat as gas and substantially more than coal.

But the report says its availability at volume, and hence its economics, are location-specific and complicated. Supply chains are not fully developed and some regional air quality plans may prohibit some fuels with higher moisture content.

MBIE and EECA note that gas is relatively cheap and produces fewer emissions than coal or diesel. In overseas countries with developed natural gas networks substituting gas for coal is “one of the most cost-effective ways for reducing emissions.”

But the paper observes that conversion is capital intensive, and that piped gas supplies aren’t available in the South Island. While some firms have indicated an interest in any gas discoveries made there, the costs to develop pipeline infrastructure are “unlikely to be justified by the potential demand.”

The Labour-led government last year banned South Island exploration, along with any new offshore exploration.

MBIE and EECA observed that security of supply may be a concern for North Island firms potentially looking to switch from coal to gas.

Gas storage is expensive and the sector has suffered periodic outages and disruptions in recent years.

Two unscheduled curtailments at the offshore Pohokura field reduced supply and the capacity of some players to meet the large swings in their seasonal demand, they said.

“Because New Zealand has a small number of gas fields, an outage at a large field such as Pohokura will impact a wide range of gas users.”


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