EU's 2030 target for GHG emissions reduction:40%
EU's 2030 target for the share of renewables in its energy mix:32%
Can hydrogen save Russia’s energy exports to the EU?June 11, 2021
As a leading exporter of hydrocarbons, declining demand could put Russia at economic risk. Although hydrogen could be the answer to Russian vulnerability, the current rents coming from fossil fuel exports are making Russian leadership complacent. To overcome this stagnation and embrace hydrogen technology, Russia should focus on developing a national hydrogen plan that would allow the country to have a comprehensive approach towards and readiness for hydrogen exports.
The following analysis was written by Jon Amilibia Piqué.
The role of Russia as an energy and resources exporter is unquestionable. Still, times are changing. With more awareness around anthropogenic climate change, fossil fuels are increasingly targeted by the EU as a risk for humanity and the planet. The implications of a transition to a green economy or decarbonisation of different sectors could have devastating consequences for Russia. As previously stated, the Russian economy is highly dependent on energy exports, and “from 2015 to 2017, the oil and natural gas industry in Russia generated up to 40% of federal budget revenues, peaking in 2018 at more than 46%.” Excessive reliance on energy rents creates a vulnerability if the primary costumer of energy products gets decarbonised. Russia’s main exports and sources of revenue could shrink and drive the country to economic stagnation or crisis. Still, there is hope in such a dark future.
In the last several years, there has been a steady push for hydrogen technology. This technology is appealing as it can replace most of the liquid fossil fuels, minimise the impact of greenhouse gas (GHG) emissions and allow a steady continuation of economic activity. Hydrogen technology, although in a very early stage, could amount to a revolution for the Russian energy sector. Several countries have already established their strategies and goals for a transition to the hydrogen economy. These countries, Japan, South Korea, Germany and France, mainly developed and many of them European, are setting ambitious goals to decarbonise the economy. The problem for Russia is that these European countries planning a transition to hydrogen are currently the leading markets for Russian energy exports.
Yet, Russia does not appear to be paying sufficient attention to the development of hydrogen technology. As Mitrova, Melnikov and Chugunov note in The Hydrogen Economy – a path towards low carbon development, “Up until now Russia has, with the exception of a few standalone projects, stood apart from the international communities and partnerships which develop hydrogen technologies.” Myopia for new technology could lead to severe vulnerability for the Russian state in the future. In this article, I will analyse the steps necessary for Russia to catch up with other “pro-hydrogen” countries, the prospects for Russian hydrogen generation and export and the challenges Moscow could face if Russian leadership decides to develop a strong hydrogen economy.
THE ROLE OF RUSSIAN ENERGY EXPORTS IN EUROPE: Russia is one of the biggest energy suppliers in the EU. The relationship between the EU and Russia has been somewhat problematic in the last eight years. Still, energy trade flows have not been altered. This is a clear signal that depicts how relevant Russia is for European energy. Yet, in the last twenty years, many European states and the EU itself have tried to diversify their energy imports in order to limit reliance on Russian natural gas. From Moscow’s perspective, Russia has been able to modernise and revitalise the economy thanks to the significant and steady rents of oil and gas exports. Although diversification for Russian gas is a topic on the agenda for Russian leaders, we observe an interdependence between the EU and Russia regarding energy.
In 2019, Russia exported 149.7 bcm of natural gas to the EU, roughly 39% of all natural gas imports in the bloc. The revenues for Russia from these exports represented USD 110 billion. “The emerging hydrogen market will likely compete with hydrocarbon markets, where Russia’s position now seems unshakable – and in this sense, a strategy of ignoring or even opposing the new technology may seem attractive in the short term,” according to Mitrova et al. But in the longer term, the picture could radically change.
According to the EU’s green deal, by 2030 the EU aims to reduce 40% of its GHG emissions, have a 32% of renewables in the primary energy mix and improve the energy efficiency by 32.5%. All these measures would reduce energy imports of the EU by one-third. The goals are even more ambitious for the year 2050, by which time, in accordance with the Paris Climate Accord, the EU plans to be a net-zero GHG emitter. All these measures mean that oil and coal in the EU could be phased out by the year 2030 and natural gas could be phased out by 2040.
Although these are long term goals, the truth is that a decrease in the relevance of fossil fuels is expected for the European energy mix. This is bad news for Russia, as diversifying energy exports away from Europe could be costly and inefficient. Still, hydrogen could help mitigate the adverse effects of European green transition on Russian rents.
Gazprom, the biggest gas company in the world, projected last year that the hydrogen market in the EU would be valued at EUR 153 billion by the year 2050. This means that for the year 2050, Russia could be providing hydrogen instead of natural gas to the EU. The value of the market in 30 years from now would surpass the current value of the European natural gas market at EUR 110 billion.
RUSSIAN POSSIBILITIES FOR HYDROGEN EXPORTS TO EUROPE: The possibilities for hydrogen in Russia are immense. Indeed, Russia, due to particular circumstances elaborated below, could become a production hub for blue and yellow hydrogen.
Russia has a relatively low carbon content per kWh of electricity. This is due to the specific mix for electricity generation. Russia relies on natural gas-powered thermal power plants (48%), nuclear power plants (18%), hydroelectric power plants (17%) and coal-fired thermal power plants (16%). This electricity generation mix could prove to be a perfect source of “low” polluting energy sources for the generation of hydrogen. Although the European Union mentions the green hydrogen on the 2020-2050 energy strategy, the production of this type of hydrogen could not meet the required demand, as renewable energy sources are still scarce. Therefore, yellow and blue hydrogen could significantly gain relevance in the European market.
Another advantage regarding the possible export of hydrogen to the European market is the availability of already constructed infrastructure. As Figure 2 shows, the pipelines crossing Europe were laid decades ago, and others are still being built (see the examples of NordStream 1 & 2). These pipelines could be used for the export of hydrogen from Russia to European countries. The existing infrastructure is a significant incentive for possible Russian hydrogen exports to Europe, as relatively few investments would be required to export this Gas.
Although existing infrastructure is a significant advantage for Russia, it is already possible to export hydrogen mixed with ammonia, several technical difficulties would have to be addressed. First, the pressure at which hydrogen must be pumped in the pipelines is significatively high, as hydrogen requires higher pressure than natural gas for its transportation. Therefore, the pumping stations must be adapted to the new requirements.
Second, both Russia (upstream) and the hydrogen importers (downstream) would be required to invest in storage units. One metric tonne of hydrogen takes seven times the space of one metric tonne of natural gas. Therefore, the existing storage capacity must be increased. This should be addressed primarily downstream as the consumers need to have enough capacity to store the required amounts of hydrogen. As the EU has large LNG regasification capacity, these facilities could also be used for importing hydrogen. Although this process is unlikely to happen as the liquefaction temperature for hydrogen is significantly lower than for natural gas, which requires more energy. Therefore, this process could make liquefied hydrogen not cost-effective for its export.
Apart from the opportunities mentioned above for hydrogen export, Russia has proven to be a relatively stable and reliable natural gas supplier for European countries. Hydrogen could mean a next step in energy relations between the EU and Russia. Still, some steps are necessary before Russia is ready to export hydrogen to Europe.
CHALLENGES FOR HYDROGEN TECHNOLOGY IN RUSSIA: Russia, as a fossil fuel-rich country, has not been very active in the transition to green energy, although this inexistent transition could have profound implications for the Russian economy. The abundance of fossil fuels is likely the reason behind this low interest for decarbonisation of the economy in Russia. Many scholars have analysed the effects of the so-called “resource curse.”
One of the main results of this curse is that the rents of energy exports create myopia among ruling elites that is difficult to evade. This myopia drives rulers to act with a short-term mindset. Ross an expert in the field of economics explains, that “resource rents make state officials both myopic and risk-averse: upon receiving large windfalls, he suggests, governments grow irrationally optimistic about future revenues and “devote the greater part of their resources to jealously guarding the status quo instead of promoting development.” This is a possible answer to why Russia is slow to adopt new technologies such as hydrogen technology and embrace renewables.
For hydrogen to prosper in Russia, three conditions must first be met. These are the three prerequisites that Frontier Economics outlines for the development of the hydrogen industry in any given country.
First, there must be a market for the desired good. If there is no market, there is no incentive to develop a product. As mentioned before, the projections of Gazprom for the hydrogen market in the EU for the year 2050 are of EUR 153 billion. Exploiting this market could be extremely beneficial for the Russian economy, especially considering a possible natural gas phase-out in the mid-term.
Second, there should be technological development of the hydrogen industry. Russia should start preparing plans for the possible production of hydrogen. In particular, Russia could start developing pilot projects in hydrogen export. To create an influential industry, Russia could form sectoral clusters or hydrogen clusters in the national market.
The creation of clusters could be critical to the future development of the industry and the capabilities for export. Russia should also invest in developing a national hydrogen plan and connecting different research centres in order to attract experts on hydrogen energy. The lack of a hydrogen plan in Russia is one of the most significant obstacles for the development of the technology, according to Mitrova, an expert on the Russian energy sector, “in Russia, not only is there no national hydrogen programme, but there is not even any apparent coordination of various research groups and interested parties.”
Third, Russia should try to attract international investors to the hydrogen industry. This could bring technological development together with the capital needed to develop the necessary infrastructure (production sites, storage capacity, etc.).
THE HYDROGEN FUTURE: The future of Russian energy exports to the EU could shift from predominantly exporting fossil fuels to exporting renewable fuels such as hydrogen. This is a picture we could see in the medium-term if the EU continues to pursue its ambitious climatic objectives. The decarbonisation of the economy is becoming a hot topic increasingly relevant in the European Union, and the consequences could be translated to Russia. The possible phase-out of coal, oil and natural gas by the biggest market for Russian energy exports could force Russia to consider exporting hydrogen. Indeed, if the prospects for hydrogen are confirmed, Russia could remain as the leading energy provider of the European Union.
Still, there are several issues to face on the Russian side. The abundance of resources could exert a negative effect on the long-term strategy of Russian leadership. Action must be taken, such as the development of a Russian national hydrogen plan. If plans and actions are delayed, Russia could lag behind in a new world and lose a share of its much-needed energy rents.
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