(Editor's Note: This article is part of a series following "How Hydrogen Can Fuel The Energy Transition," published Nov. 19, 2020.)
Key Takeaways
- We expect hydrogen to play a limited role in decarbonizing global light-vehicle mobility this decade and it is unlikely to influence auto manufacturers' credit quality.
- Despite concerns about their range and durability, battery electric vehicles currently offer far superior energy efficiency than hydrogen fuel cell vehicles.
- Beyond 2030, the phase-out of combustion engines, scarcity of materials for battery manufacture, and government policies could support hydrogen as an alternative decarbonization technology for light vehicles.
- Hydrogen may, however, have prospects for heavy trucks and commercial vehicles this decade given weight and range considerations and tightening CO2 emission targets in the EU from 2025. Some manufacturers have cautiously established exploratory joint ventures and partnerships.
Skeptics who said electric vehicles (EV) would never be widely accepted have been proved wrong. With a balanced cocktail of punitive environmental regulation and generous public incentives, authorities have shown it is possible to stimulate strong demand. In Europe alone, EVs already increased to more than 10% of total passenger vehicles sold in 2020, compared to less than 4% just the year before.
However, the strategy to decarbonize mobility seems to be centered on electric battery technology rather than fuel cell electric vehicles (FCEV), powered by hydrogen. Even though fuel cell technology addresses some of the main deterrents to mass adoption of EVs, namely range anxiety, length of recharge, and low battery durability, it still does not appear to be the preferred technology.
Why is this? Arguably, fuel cell technology is expensive. But so is EV battery technology. For years, detractors of electric mobility have pointed to the high cost of EV batteries as a major obstacle to their mass adoption. Yet, the current EV uptake shows that pricing is a manageable risk in a transition phase, before economies of scale from much higher sales volumes kick in--especially against the background of ever-tightening CO2 regulations that are pushing up prices for traditional internal combustion engine (ICE) vehicles.
A strong argument in favor of batteries over hydrogen fuel cells for vehicles lies in well-to-wheel efficiency. Battery EV technology trumps both FCEV and ICE-powered vehicles in terms of efficient energy use, offering 70%-80% efficiency saving compared to just 20%-30% for green hydrogen-based fuel cells (see chart). From a sustainability perspective, therefore, a mobility decarbonization strategy based on battery electric vehicles offers a better payoff.
Despite Regional Differences, EV Battery Technology Seems Well Ahead
As part of the EU Green Deal, the European Commission targets putting 30 million zero-emission cars on EU roads by 2030—equivalent to 12.5% of the 240 million passenger cars registered in the region today, according to the European Automobile Manufacturers Association (ACEA). To achieve this target, it could revise the CO2 standard for cars and vans by June 2021. We believe this timetable doesn't leave room for an alternative to EV battery technology for passenger cars for Europe's key auto manufacturers.
The Japanese government targets a 100% share of electrified passenger cars in new sales by the mid-2030s at the latest. This target will likely be reached predominantly by high-voltage (HV) vehicles and EV, rather than hydrogen-powered FCEV. The Japanese government does, nevertheless, plan to support FCEV, targeting 200,000 such vehicles by 2025 and 800,000 by 2030. However, this is a fairly small proportion compared with expected demand for mainstream technologies. The Chinese government is also giving some strategic importance to FCEV, although the demand is currently limited. It is offering government subsidies for companies developing core FCEV technologies in China. This nevertheless compares to China's overall much more ambitious target to reach 20% of car sales from EVs by 2025.
Auto Manufacturers And Power Grid Energy Mix May Also Influence Technology Choices
Unlike utilities, which were well remunerated to develop renewables capacity and shielded from market risk, the auto industry has so far fully borne the brunt of the transition to environmentally sustainable mobility. So, it is no surprise that the decarbonization method of choice is very much dependent on the strategy of vehicle producers. The two global leaders in passenger car production, Volkswagen and Toyota, could not have more different strategies. While Volkswagen has committed billions of euros to the deployment of EV battery vehicles and sees little room for alternatives, even at its commercial vehicles arm Traton, Toyota Motor's electrification strategy is "omnidirectional". It gives fuel cells strategic importance as one key technology, and is pursuing a long-term strategy to improve product performance and cost competitiveness of fuel cell vehicles.
Can these auto manufacturers determine the future standard? We think they probably can, given that few other organizations have the firepower to invest in these technologies and develop a market-ready product the way automakers can. We therefore expect Volkswagen will shape mobility decarbonization in Europe, while Toyota will likely influence Asia.
Volkswagen's and Toyota's technology strategies are clearly consistent with the energy footprint in their respective areas of influence. Germany targets a mix of 65% of renewable energy by 2030, and France is relying on a mix of nuclear and renewable energy generation. In Italy and Spain, the energy mix also has a high component of renewable generation. The investment plan in green energy generation in Europe is far more advanced than ambitions to expand and develop green hydrogen. For mobility, at least, green hydrogen appears to be a green field in Europe, judging by the state of infrastructure development. Meanwhile, in Japan, and Asia more generally, a substantial share of energy generation continues to rely heavily on gas, thus limiting the benefits of decarbonizing mobility via mass adoption of EV battery vehicles. Still, even in Asia, there is not yet any established leadership of fuel cell technology.
What Stands In The Way Of Hydrogen For Light Vehicles So Far
We see a combination of supply-and-demand factors that will limit the use of hydrogen light vehicles over the next 10 years.
- The majority of global manufacturers' investment budgets are directly engaged in battery technology-equipped products, less so in fuel cells. Faced with rising cost pressures, we expect they will allocate capital mainly to one technology.
- Moreover, we could see further technological progress, notably in the field of solid state batteries developed by, for example, terawatt Technology in California, Prologium in Taiwan, and Panasonic in partnership with Toyota in Japan. If successful, this would be a major breakthrough and set battery technology further ahead, as it would significantly increase energy density over Li-ion batteries, offering about 50% more per unit mass and about 2x per unit volume, faster charging times, increased range, lower fire risk, and longer life.
- As of this year, the global auto market will be flooded with new second- and third-generation hybrid and battery vehicles with increased range and better performance, providing the market with a very ample choice in every vehicle segment. Meanwhile, the current offer of fuel cell vehicles is fairly limited--to the Toyota Mirai 2015, Honda Motor's Clarity Fuel Cell 2016, and Hyundai's Nexo 2018. These are not competitive with the "battery offensive". The new Toyota Mirai coming onto the market in 2021, for example, will have a 650-kilometer range at a base price of €64,000 in Germany.
- While the development of the electric-charging infrastructure lags the pace of rising demand for battery vehicles, hydrogen charging infrastructure is even less developed. There is currently no countrywide network of hydrogen filling stations. What's more, from a consumer perspective, the advantage that battery vehicles offer for charging at home could ultimately be a smart distinguishing factor.
- Safety considerations might also deter consumers from hydrogen. Fuel cell vehicles carry tanks of inflammable gas, which could result in restrictions for drivers, such as in underground parking. While batteries are not without risks, such as from overheating triggering fires, the perception of the risk is lower. Furthermore, solid state batteries would address the overheating risk.
Further Out, Hydrogen May Still Have A Future In Light Vehicle Markets
The potential long-term shortage of key metals for electric battery manufacture, such as lithium, cobalt, nickel, and manganese--combined with concern over questionable practices applicable to the their extraction--could well open up opportunities for fuel cell technology for light vehicles in the longer run. We see this as a realistic prospect, but only for the next decade, once green mobility becomes mainstream and traditional ICE combustion engines are gradually phased out.
Given the long-term horizon for the development of fuel cell technology, we consider the payoff is too far off to play a role in our credit assessments for now. Added to this, almost all hydrogen and fuel cell technology initiatives so far are run as partnerships. This not only demonstrates the technology's lack of maturity, it also currently complicates our assessment of the economic impact on credit metrics, particularly with regard to research and development and capital expenditure. We do not envisage a material credit impact for light vehicle manufacturers during this decade.
Heavy Duty Truck Manufacturers Have Stronger Incentives To Invest In Hydrogen Technology
Unlike for light vehicles, battery EVs are not currently a viable prospect for commercial road transport, owing to their heavy weight and long charging times. Fuel cell technology is therefore the most credible alternative to diesel for heavy trucks and buses at present. Manufacturers have so far taken a cautious approach through joint ventures and partnerships, and there is not yet an established economic case. But momentum may build given that the EU targets a 15% reduction in CO2 for heavy-duty vehicles from 2025 compared to the June 2019-June 2020 reference period, and further reductions of 30% targeted by 2030.
Toyota has placed the biggest bet on hydrogen fuel cells, teaming up with five large Chinese companies to develop possibilities. The group aims to offer its fuel cell system for commercial vehicles in China. In the U.S., General Motors (GM) and Honda plan to build fuel cell stacks jointly. As part of its strategy to become a carbon-neutral company with an "all-electric future" in 20 years, GM has announced it will supply fuel cells to U.S. commercial vehicle manufacturer Navistar. We believe GM will aim for the Class-7 truck market, a segment in which this may be realistically feasible, in our view. This is because these trucks travel long distances and truck makers expect to be able to travel between 500 and 1,200 miles between 15-30-minute fuel fill-ups. Range depends mainly on how many hydrogen tanks are in the truck. The U.S.-based Nikola Motor Company, a pioneer in zero-emission trucks, is also partnering with GM, which will supply it with hydrogen technology developed as part of its joint venture with Honda—an example of how most automakers are looking to spread costs and leverage combined scale. The Volvo Group and Daimler Truck AG have created the joint venture Cellcentric to develop, produce, and commercialize fuel cell systems for use in heavy duty trucks and other applications with the goal of starting tests in three years' time and commence production in the second half of this decade .
Related Research
- The Hydrogen Economy: Industrial Gas Companies Are In Pole Position, April 22, 2021
- The Hydrogen Economy: Steel Producers Have A Long Way To Go, April 22, 2021
- The Hydrogen Economy: Green Hydrogen May Transform The Fertilizer Industry, April 22, 2021
- The Hydrogen Economy: Green H2 Offers Energy And Process Technology Majors A Long-Term Growth Opportunity, April 22, 2021
- The Hydrogen Economy: Can Natural Gas And H2 Have A Symbiotic Relationship?, April 22, 2021
- The Hydrogen Economy: Storage Is Paramount For Utilities In The Long Term, April 22, 2021
- How Hydrogen Can Fuel The Energy Transition, Nov. 19, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | Vittoria Ferraris, Milan + 390272111207; vittoria.ferraris@spglobal.com |
| Secondary Contacts: | Karl Nietvelt, Paris + 33 14 420 6751; karl.nietvelt@spglobal.com |
| Massimo Schiavo, Paris + 33 14 420 6718; Massimo.Schiavo@spglobal.com |
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