Professor Stefan Reichelstein | Economics of clean hydrogen

In this episode, we learn from Professor Stefan Reichelstein, Emeritus Professor at the Stanford Graduate School of Business and Professor at the Department of Business Administration at the University of Mannheim. Internationally known for his research in economics, Professor Reichelstein demystifies what it will take to get to cost-effective clean hydrogen.

Professor Stefan Reichelstein is the William R. Timken Professor in the Graduate School of Business, Emeritus and Professor at the Department of Business Administration at the University of Mannheim

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This article is part of the series: Hydrogen Innovators Podcast

Transcript

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[00:00:03.02] Stefan Reichelstein: This time around, when it comes to hydrogen, there is such broad commitment by governments and major corporations around the world. And you, literally, can go around the globe nowadays in terms of new projects and new manufacturers for electrolyzers coming in that I would say this train has really left the station.

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[00:00:34.58] Karen Baert: Dear listeners, welcome to this week's episode of Hydrogen Innovators, a podcast series is produced by the Stanford Hydrogen Initiative, spotlighting bold innovators in hydrogen, all the way from academia to industry. You can find our podcast series, Hydrogen Innovators, on Spotify and Apple Podcasts.

[00:00:51.87] I'm Karen Baert, recent Stanford MBA graduate, entrepreneur, and innovation strategist at the Initiative. And I'm thrilled to be your host this week. Today, we have the privilege to welcome Professor Stefan Reichelstein

[00:01:04.08] He's an emeritus professor at the Stanford Graduate School of Business and professor at the Department of Business Administration at the University of Mannheim. Professor Reichelstein, welcome to the Hydrogen Innovators podcast. We're so excited to talk to you today.

[00:01:17.84] Stefan Reichelstein: Glad to be here.

[00:01:18.92] Karen Baert: So Professor Reichelstein received his PhD from the Kellogg School of Management at Northwestern University. And prior to that, he completed his undergraduate studies in economics at the University of Bonn in Germany. And over the past couple of decades, Professor Reichelstein served on faculties of the Haas School of Business at UC Berkeley, University of Vienna in Austria, and the Stanford Graduate School of Business.

[00:01:45.20] He is internationally known for his research on the interface between management, accounting, and economics. In recent years, and that's exactly why we're here today, Professor Reichelstein has also studied the cost competitiveness of low-carbon energy solutions, with a particular focus on solar PV and carbon capture and, more recently, hydrogen. Professor Reichelstein, let's get started.

[00:02:09.85] In a recent article, you mentioned your work over the last decade has been focused on the economics of decarbonization, in general. We'd love to hear more. Can you elaborate?

[00:02:20.22] Stefan Reichelstein: Sure. So in these studies, the typical question is whether a traditional energy solution, usually based on fossil fuels, how does it compare to a decarbonized energy solution? And when we look at the economics, we're typically interested in the unit economics, say, the cost per kilowatt hour or the cost per kilogram of hydrogen. Those are the kinds of comparisons we do.

[00:02:48.76] And as you would expect, the outcome of these studies always depends on both the location of where the technology is supposed to operate and the regulatory framework of the country and the jurisdiction that it's supposed to operate in.

[00:03:06.03] Karen Baert: Let's talk about clean hydrogen. Our listeners have a good understanding of the different colors of hydrogen. We've talked to many technical experts who explained the difference between blue, turquoise, green, et cetera.

[00:03:19.62] Now, as an economics professor, you're very well positioned to describe the cost competitiveness of the different alternatives. Can you elaborate?

[00:03:29.70] Stefan Reichelstein: So there are lots of ways you could slice a question or a study on the cost competitiveness of different colors of hydrogen. Perhaps, the simplest way to approach this is to ask, if we have as our benchmark, as our incumbent traditional gray hydrogen obtained through the process of steam methane reforming, how does that compare, say, to what people frequently refer to it as green hydrogen, if it's electrolytic hydrogen that is fed by either entirely renewable power or a mix of renewable power and grid power?

[00:04:10.65] So there, I would say, for the longest time, traditional gray hydrogen has had the lower cost, but that is changing rapidly in many jurisdictions around the world. In particular, say, if you look at Europe now, where the price of natural gas has gone up quite a bit, green hydrogen is actually becoming increasingly competitive and has closed the gap in recent years.

[00:04:39.24] Karen Baert: Fantastic. That's exciting. So we talked about gray and green. How would you compare that to the cost competitiveness of some of the other green hydrogen alternatives?

[00:04:50.16] Stefan Reichelstein: There, we have, of course, a little bit the difficulty that we haven't seen that many deployments yet. So I think the observations and data that we have aren't conclusive yet. There's a lot of talk about blue hydrogen, of course, but, again, the number of projects that have actually been brought to fruition and are operating in a new steady state is still pretty limited.

[00:05:14.72] And what I just said about blue hydrogen applies even more strongly to turquoise hydrogen, where you basically try to avoid the emissions in the first place. Those things are, to the best of my knowledge, are just beginning to enter the commercialization stage. So we don't really have any good observations yet to make a definitive call on that.

[00:05:38.03] Karen Baert: Mm-hmm. That's still to be figured out in the years to come. Great. In one of our previous episodes, we learned from Sunita Satyapal, the Director of the Department of Energy, Hydrogen and Fuel Cell Office about the hydrogen [? short ?] goal. Their goal to get to $1 a kilogram of clean hydrogen in a decade. You mentioned green hydrogen is becoming more and more cost effective, but how realistic is this $1 kilogram goal?

[00:06:06.37] Stefan Reichelstein: So when the Department of Energy came out with that a couple of years ago now, I think it raised some eyebrows because it was considered very ambitious. On the other hand, I think what we have also seen in the interim is a lot of companies, a lot of different countries making a commitment to producing hydrogen.

[00:06:29.60] So our recent studies that we did, that I did with colleagues, basically suggest that by 2030, a goal of $1 per kilogram is ambitious, but I wouldn't call it far-fetched. So to make this a little more precise, I would say our numbers end us up somewhere in the range of $1.30 to $1.40 per kilogram.

[00:06:59.22] Again, that would be without a subsidy. So that would just be the so-called life-cycle cost of producing hydrogen by electrolytic means in 2030.

[00:07:10.10] Karen Baert: That comes very close, indeed. And that's 2030, yeah?

[00:07:12.95] Stefan Reichelstein: Yeah.

[00:07:13.29] Karen Baert: Wow. Fantastic. Now, if we look at that cost of production, we could say there's different levers. For cost production, you have the Opex side of things, where electricity cost plays a big role, and then the efficiency of your electrolyzer. And then, the CapEx side, you have your stack cost and then balance of plants. Across all of these levers, where do you see the biggest cost reductions, historically and projected for the future?

[00:07:40.70] Stefan Reichelstein: So in the studies that we did recently, I mentioned, in response to your last question, we're seeing considerable cost reductions on the electrolyzers themselves. That is the upfront capital investment that's required. We're also seeing some movements on the conversion efficiencies of these electrolyzers. But you're absolutely right, the operating expenditure, i.e. the cost of electricity, is also going to play a major role. There, the studies that I mentioned, have only assumed relatively modest improvements. So if you're looking at changes, we're seeing the largest change in our forecasts really in the cost of electrolyzers themselves.

[00:08:34.47] Karen Baert: We'd love to deep dive on CapEx. And you have published great work on this. The electrolyzer CapEx experience curve will help us make green hydrogen cost effective. Now, if we draw a parallel with other clean energy technologies, which are a bit further advanced, we could look at solar as a great example, I think.

[00:08:55.97] 1970, we were at around $100 a watt. And now, we are at below $1 a watt. Will we see something similar with electrolyzers? Where are we today, and where do you believe we will go?

[00:09:13.61] Stefan Reichelstein: $1 per watt, roughly, is the number that people kick around for solar PV for at least industrial scale projects there. But, yes, I think there is good reason to believe that we're going to see similar learning or experience curves at work here, which basically says you need to deploy. You need to build these systems in order to experience the cost reductions.

[00:09:41.70] Our study, that I mentioned a moment ago, does not quite put the rate of cost reduction as high as we saw with solar at some point, for reasons that we can talk about. On the other hand, this is still a very young technology. All electrolyzers, in particular, PEM and solid oxide cells as the two recent additions to this technology.

[00:10:11.95] So what this means, even if you have, say, only a 15% learning curve, which is what we are estimating at the moment, which would mean that with every doubling, the cost would decrease by 15%. That's a little lower than what we have seen with solar and wind over the decades.

[00:10:31.99] On the other hand, because the technology is so young, if you think about what's the time to doubling, how much calendar time needs to elapse before you get to that doubling effect, that's much shorter. So that's what makes me ultimately, then, still optimistic that by 2030, we're going to end up close to $1 at least.

[00:10:52.26] Karen Baert: Right. Because it's still such a nascent industry, even a 15% experience curve can get us down really fast.

[00:10:59.01] Stefan Reichelstein: If the time to doubling is around a year, that makes a big difference.

[00:11:02.95] Karen Baert: Yeah. Which is kind of the case in electrolyzers since there's not that many electrolyzers deployed.

[00:11:09.19] Stefan Reichelstein: Up until recently.

[00:11:10.21] Karen Baert: Yes Yeah. Fantastic. Really interesting. So besides technology development and getting down that experience curve or CapEx, what else do we need to do to make clean hydrogen cost competitive?

[00:11:22.48] In one of your papers, you talk about the impact of corporate pledges. How does that impact the cost effectiveness of different technologies? And what role does industry and policy play in all of this?

[00:11:36.48] Stefan Reichelstein: I think these net zero pledges are becoming increasingly important. They are certainly becoming increasingly common. And if these pledges are also accompanied not just by a goal to achieve net zero in 30 years, but to also have a tangible reduction goal, say, by 2030, they effectively entail a commitment by the companies to make investments now or very soon. Otherwise, you won't get there by 2030 in seven or eight years.

[00:12:10.93] So those types of pledges are important because frequently they mean that companies in a number of industries, be it steel, or cement, or other manufacturing industries, have to really invest in these decarbonized technologies today. And that can include, then, also the adoption of electrolyzers on site to use the hydrogen in whatever production process we're talking about.

[00:12:36.60] Karen Baert: Interesting. You studied a wide range of clean energy technologies, renewables, storage, Now, you're looking at hydrogen. Many of these have gone through similar evolutions as the hydrogen industry is going through today in some way.

[00:12:50.92] Let's learn from the past as we prepare for the future. What can and should we in the hydrogen industry learn from past wins and challenges in clean energy as a whole?

[00:13:01.66] Stefan Reichelstein: My sense is that the path forward is going to be a bit smoother and steadier for hydrogen than it was, say, for renewables a couple of decades ago. And I base that optimism largely on the fact that this time around, when it comes to hydrogen, there is such broad commitment by governments and major corporations around the world. And you, literally, can go around the globe nowadays in terms of new projects and new manufacturers for electrolyzers coming in that I would say this train has really left the station.

[00:13:41.11] While with renewables, if you go back, there were a couple of starts in individual countries, jurisdictions. And it took some time for this to really gain steam and universal acceptance. I think, from that perspective, hydrogen is in a better place.

[00:13:58.37] Karen Baert: Exciting. So you're saying there's a global consensus. And we're all moving forward.

[00:14:04.06] Stefan Reichelstein: You would almost be hard pressed to find a government or an economic association of countries, nowadays, that has not made an essential commitment to having hydrogen be a significant part of the future energy economy. How large that is, we can debate. But hardly anybody would say, no, this is not for us.

[00:14:24.68] Karen Baert: Yeah, exactly. You touched upon it briefly earlier. You talked about how incentives impact the cost effectiveness of hydrogen. You talked about the recent increase of natural gas prices and the impact there for gray hydrogen.

[00:14:38.74] Can you elaborate a bit more on how the impacts of the Inflation Reduction Act, European Green Deal, and also the recent developments in Ukraine plays out for hydrogen?

[00:14:50.45] Stefan Reichelstein: Mm-hmm. I would say the Inflation Reduction Act, of course, was a major step forward for the United States. And I think it has gotten also players outside the United States to think whether they possibly want to move their operations to the US in order to be eligible for the investment tax credits that the Inflation Reduction Act promises.

[00:15:16.64] I mean, the numbers that were dominating the headlines was the $3 per kilogram in the best possible case. Though, we have to be also, I think, a little bit careful there in terms of how easy or difficult will it be for companies, indeed, to qualify for that incentive. Because one of the things that really was not finalized with this legislation is the notion of how to measure the carbon intensity of hydrogen, which would have to be in a certain range or would have to be measured in a particular way in order to be eligible for the maximum subsidy there.

[00:15:54.44] The European Union, in terms of the New Green Deal, I think is still struggling a little bit with the notion of what type of hydrogen to support. And I think the way I read it at the moment, the discussion goes on classifying something as green hydrogen and, if so, it would be eligible for support, policy support and subsidies. But how exactly to define green hydrogen is, in particular, could blue hydrogen be green hydrogen, is something that hasn't been finalized yet.

[00:16:30.06] The Ukraine war, as difficult as that situation is for the European countries at the moment, I think is also going to accelerate the transition away from natural gas as a feedstock for hydrogen production. That, combined with the higher prices for allowances under the EU ETS, I think, is going to, even in the medium term, going to have a significant impact in terms of accelerating the move away from natural gas as a feedstock.

[00:17:01.91] Karen Baert: So it seems like there's a lot of different tailwinds for the hydrogen industry today.

[00:17:06.12] Stefan Reichelstein: All three goals. Inflation Reduction Act was, undoubtedly, a big deal.

[00:17:12.32] Karen Baert: Yeah. But it seems like, what I'm hearing, is that despite the fact that the Inflation Reduction Act is a major step forward, there's still quite some details we need to figure out to exactly how the hydrogen credit will play out. Yeah.

[00:17:25.91] Stefan Reichelstein: That brings us back to the whole question of, how do you measure the carbon intensity of a product?

[00:17:31.74] Karen Baert: Yeah. We'd love to take a step back and talk a bit more about your impressive academic career across the globe, I would say. You've been hopping around between Germany and the US, Bonn, Mannheim, Stanford, Berkeley across your career doing research, teaching, and advising.

[00:17:51.73] What have you seen as the biggest difference between maybe Germany and the Bay area in academics or climate research? And if there is one thing Germany could learn from the Bay Area and vice versa, what would that be for you?

[00:18:04.86] Stefan Reichelstein: So I think I'd separate out the academic part from the climate tech part. Academically, of course, the biggest contrast for me is, when I'm in Germany and work for a German University, as I do right now, it is a public university. And a public universities have their constraints in contrast, say, to a private university like Stanford. That's very clear.

[00:18:34.23] If I look at the whole discussion interest preoccupation with the topic of climate change, I think there are a lot of parallels between Germany and, say, California, in particular. I think both jurisdictions have been pioneers in the whole decarbonization process. Germany has long taken this very serious. There's a lot of hand-wringing about missing the climate goals and not being able to deliver on the Paris goals.

[00:19:08.01] At the same time, I would say California remains to be admired for its openness, willingness, and ability to change quickly. In Germany, while there is a general sense how urgent this problem is, things simply don't move that quickly. And that, at times, can be a little frustrating.

[00:19:31.98] Karen Baert: And I love how you're bridging these roles in many ways. And I think we need many more people to do that. We'd love to move to a couple more personal questions.

[00:19:42.34] Stefan Reichelstein: OK.

[00:19:43.32] Karen Baert: A few months ago, I had the luck to meet your daughter. She's a bright investor and entrepreneur in climates. And you wrote a paper together. The paper is called "Transparency on the Path to Net Zero."

[00:19:56.24] And I see very much that you're both devoting your careers to the fight against climate change. I'm curious to hear whether this impacts your motivation or, in some way, it affects the father-daughter relationship.

[00:20:10.15] Stefan Reichelstein: It certainly makes for lively family dinner conversations. No question about that. So actually, both of my daughters are passionate about sustainability issues. My younger daughter, Julia, whom you just mentioned, came to all of this because she developed an early interest in the voluntary carbon markets.

[00:20:32.53] She also has a particular interest in the subject of carbon removal. And, as you know, in the current environment, carbon removal can only be competitive and profitable for a business if you access the voluntary carbon markets. So that's how we got talking and then also writing this paper together that deals with the whole issue of how these voluntary carbon markets work and how difficult or easy it would be for a company to offer certain types of offsets in the voluntary carbon markets.

[00:21:08.41] Karen Baert: And does having two daughters or having two daughters working on climate impact your motivation on working in this space.

[00:21:17.32] Stefan Reichelstein: It's certainly great fun to look at this with your children, from my perspective. As you would expect, I uphold the academic side. I know the literature. They know a lot more about what's going on in the field, in particular, my younger daughter who actually works on it professionally, full-time. So yeah, it's a win-win situation as far as I'm concerned.

[00:21:43.68] Karen Baert: Professor Reichelstein, I'd love to end with a question that we actually ask every guest on our podcast. I have this strong belief that we all stand on the shoulders of the giants who came before us. And to use Isaac Newton's words, it's standing on their shoulders what makes us see further. In that context, who inspires you most and why?

[00:22:04.51] Stefan Reichelstein: If I can answer the question in terms of inspired me most, I would probably mention the economist Kenneth Arrow, who, until a number of years ago, served in the economics department here at Stanford. Arrow was one of the most foremost economists of the 20th century. And all throughout his life, he was focused on the problem of externalities and how societies and economies can deal with the problem of internalizing external costs in a market economy.

[00:22:42.71] And, of course, Arrow saw very early that climate change was just about the mother of all externalities. And I remember a couple of conversations with him some 15 years ago from which I walked away fully motivated to work on this problem.

[00:23:01.98] Karen Baert: Mm-hmm. Thank you so much for the great conversation today. Thank you for all your incredible work and the impact you've had in Germany and the US and, hence, globally on the economics and climate ecosystems. And it was a privilege to learn from you today.

[00:23:18.45] Stefan Reichelstein: Well, good to be here. And I wish you all the success with the hydrogen initiative here.

[00:23:23.76] Karen Baert: Thank you so much.

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