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PREFACE...... i ...... ii EXECUTIVE SUMMARY...... iii ...... ix

1 INTRODUCTION...... 1

1.1 Background ...... 1 1.2 The Goal of the IC/LRC Project in this Phase ...... 2 1.3 Specific Objectives in This Phase ...... 2 1.4 Structure of the Report ...... 3

2 SUMMARY OF PHASE 1...... 4

2.1 FY1994 ...... 4 2.2 FY1995 ...... 5 2.2.1 The Reference Scenario...... 6 2.2.2 The Hythane Scenario...... 7 2.2.3 The "Niche markets " Scenario...... 7 2.2.4 Conclusions...... 7 2.3 FY1996 ...... 7 2.3.1 Conclusions...... 8 2.3.2 Tentative Observations on Infrastructure Development...... 9 2.4 FY1997 ...... 9 2.4.1 Conclusions...... 10 2.4.2 Observations on Infrastructure Development...... 11

3 RE EVALUATING LONDON AND RESULTS FOR TOKYO...... 13

3.1 Similarities between results and the importance of the reference scenario ...... 13 3.2 Final results for London and Tokyo ...... 13 3.3 The meaning of the results...... 16

4 OTHER CONTRIBUTORY MATERIAL...... 18

4.1 Summary...... 19

5 TRANSFERABILITY OF METHODOLOGY...... 20

5.1 Factors affecting real project viability ...... 20 5.1.1 Costs...... 20 5.1.2 Benefits...... 20 5.1.3 Legislation and policy 21 5.1.4 Public acceptance ...... 22 5.1.5 Champions ...... 22 5.1.6 Future opportunities... 22

6 TRANSITIONAL STRATEGY OPTIONS AND DEVELOPMENT 24

6.1 Factors affecting strategy development ...... 24 6.1.1 Economics...... 25 6.1.2 Disruption to existing infrastructure...... 25 6.1.3 Existence of suitable sites...... 25 6.1.4 Demand potential...... 26 6.1.5 Development of demonstration projects...... 26 6.1.6 Existing andfuture legislation...... 27 6.1.7 Comparisons between fuels...... 27 6.1.8 Potential for increased coverage of area andfor network development...... 28 6.1.9 Potential for alteration pending future analysis ...... 28 6.1.10 Ability to meet the intended goal of 10% energy use as hydrogen in 2015...... 28 6.1.11 Linking to other urban/rural areas ...... 29 6.2 Summary...... 29

7 FINAL TRANSITIONAL STRATEGY...... 30

7.1 Key points in transitional strategy...... 30 7.2 Developing the transitional strategy...... 30 7.3 Target markets...... 31 7.4 Transitional strategy...... 34

8 CONCLUSIONS...... 38

8.1 Methodological conclusions ...... 38 8.2 Other conclusions ...... 38

9 BIBLIOGRAPHY AND REFERENCES 41 Preface

The Japanese Government is concerned about the long-term availability and cost of fossil fuels, as well as the environmental consequences of their use. As a result, over the past 20 years, it has played an active part in the development of new energy sources. Hydrogen could be a significant energy source for Japan in the future. In 1992 the Agency of Industrial Science and Technology in the Ministry of International Trade and Industry (MITI) drew up proposals for the International Clean Energy Network Using Hydrogen Conversion (WE-NET: World Energy Network) project as part of the New Sunshine Project. The WE-NET project aims at the efficient utilisation of energy from renewable resources. These resources are not evenly distributed around the world. The project seeks to establish the technologies necessary for the construction of a world-wide hydrogen energy network. The system will include the use of renewable energy resources to produce hydrogen from water, the conversion of the hydrogen into a form suitable for transportation, and the distribution of hydrogen for use as a fuel in cities, to industry and for power generation. The world-wide diffusion of hydrogen-related technologies would contribute to reductions in carbon dioxide emissions, help to meet international energy demand, create opportunities for additional energy production, and provide those countries which have ample renewable energy resources with a means of exporting them. During 1994 the New Energy and Industrial Technology Development Organisation (NEDO) invited the Imperial College of Science, Technology and Medicine and the London Research Centre in the United Kingdom to participate in the programme of research. The focus of this research is on Subtask 3: Conceptual Design of the Total System. This is the fifth annual report of results. Imperial College and the London Research Centre have been assisted in their studies by the Fuji Research Institute Corporation in Tokyo.

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The Purpose of the Project

This phase of the project completes the analytical work carried out in previous years of the research and finalises the comparison carried out between London and Tokyo. It extends the results of the mathematical analysis to produce transitional strategies based on the goal of introducing hydrogen as an energy carrier into Tokyo. These transitional strategies are also influenced by developments in hydrogen energy in other countries and by other factors, for example specific existing low-emission vehicle strategies within Tokyo. It has become clear as this project has progressed that the speed of change of technology, within the fuel cell field in particular, has been much faster than anticipated in FY1994, when the project started. In addition to this, the rapidity of commercialisation has made information on technical progress more difficult to obtain. This combination of circumstances has made some of the absolute values within the modelling less certain, whilst reinforcing the direction that the model results point to in transforming the existing energy and transport fuel markets. It has also reduced the timeframe for meaningful short-term transitional strategies. It is with these facts in mind that the following must be considered.

Conclusions

1. The results of the modelling within Tokyo and London enable broadly similar conclusions to be drawn for the two cities; something that looked unlikely in previous versions of the model. However, the rapid pace of change within fuel cell technology; in particular the rate of cost reduction, has led the conclusions away from those in the previous reports. In both London and Tokyo the introduction of pure hydrogen is expected to be most cost-effective in the transportation sector in the short term. There is some merit to be derived from mixing hydrogen with the natural gas in existing pipelines to form hythane, for reduction of both local regulated pollutant emissions and CO2. Revised data suggests that the natural gas provision within Tokyo is almost comparable to London in its range but much smaller in the volume of gas available. 2. Within the transport sector it can be seen that fleet vehicles, particularly buses, offer the best opportunities for pure hydrogen refuelling. They have high capital costs and are therefore insensitive to incremental additional costs in comparison with private cars; they also operate typically for much longer continuous periods. This means that

IV reductions in operation and maintenance cost are more important for the public than the private owner. In addition, emissions regulations in this sector tend to be stringent and closely monitored, and there are existing programmes investigating alternative fuels such as CNG. J. Worldwide trends suggest that the first fuel cell vehicles to be mass-produced will appear around 2004, or within Phase II of the WE-NET project. Buses and some other fleet vehicles are appearing sooner in many test sites. It is therefore imperative for the credibility of the project to embrace this rapid change and ensure that transitional strategies include the potential for use of these vehicles. This is a complex problem, as the fuel of choice for fuel cell cars does not appear to have been decided, though for buses hydrogen has been used almost exclusively. However, regulation and standardisation are key components of a strategy. 4. It has become clear that there is some difference between the Japanese Government ’s forward-looking attitude in funding the WE-NET hydrogen project and some existing country legislation. A key example is that at present it is not legal to run hydrogen-fuelled vehicles on Japanese public roads, and testing of the hydrogen cars that do exist has to take place only on private roads. If important demonstrations and eventual vehicle introductions are to take place the legislation must be amended. In addition, other alternative vehicle programmes and organisations within Japan seem to have limited interest in fuel cell or hydrogen vehicles, concentrating instead on CNG or LPG, for example. Again, this is an area that should be investigated with a view to providing additional strength to the WE- NET programme by using low-emissions vehicle programmes. 5. A number of existing alternative fuelled vehicle sites already exist within Tokyo. Both bus depots and the large LPG-fuelled taxi fleet feature strongly, though the latter is currently over-supplied and unlikely to be able to invest in new technology. For the purposes of a transitional strategy it is suggested that the most benefit in the short term could be derived from adapting one or more of these existing alternative fuel sites to provide hydrogen. These sites also tend to be associated with buses, already identified as one of the key transitional and future markets for hydrogen vehicles. 6. In the long term it is almost certain that a variety of feedstocks will be used to produce hydrogen, whether in Japan or elsewhere. In the short term it is important to understand how these feedstocks compare on cost, efficiency, emissions and other characteristics. Within the range of uncertainty of the modelling this has been difficult to achieve, and it is therefore suggested that the transitional phase also includes hydrogen brought in by tanker in its pure state; hydrogen from natural gas

v produced on-site and hydrogen from methanol produced on-site. This will enable real comparisons to be made.

Transitional strategies:

Several transitional strategies were examined for the timeframe to 2025. Each aimed to build on an increasing variety of sources of hydrogen, primarily imported but also produced from the limited resources available within Japan. Transport is the key initial market as it traditionally uses more costly expensive energy sources than stationary power, though with rapid developments in domestic scale fuel cell systems these may be an important component of a future strategy. Deregulation of the Japanese energy market must also be considered. An outline of the ‘optimum ’ transitional strategy based on information currently available is given below.

1. Existing CNG bus stations in Tokyo are fitted with small-scale steam reforming technology. This is based on, for example, the ONSIPC25 fuel processor, at potentially much lower cost than existing equipment. The natural gas is reformed on-site to produce hydrogen, which is compressed and used to fuel a small fleet of buses. These buses could be powered by internal combustion engines in the short term as they are likely to be cheaper than fuel cell technology. However, this is felt to be sub-optimal as the fuel cell will certainly come down in cost rapidly over the first phase of the trials, and fuel cell buses are already in test operation elsewhere. 2. At the same time, a selection of other bus depots should be fitted with methanol tanks (some already exist) and methanol processing equipment. The methanol is processed to provide compressed hydrogen once more, and used in the same way as previously. 3. In a third parallel set of tests liquid hydrogen is transported from overseas. This is only feasible in the short-term if some of the speculation regarding potential cheap LH2 from Canada, for example, is proven true. This hydrogen is then also used in refuelling buses, but stored directly as LH2 in the depot. 4. As the tests proceed, the real economics of each alternative will become clearer. This will enable some rationalisation if required, though it may also be possible to maintain the flexibility of using a variety of primary feedstocks until renewable hydrogen sources (the ultimate goal) become established in the long term. These time-based strategies will also depend on rapid changes in regulation allowing the use of hydrogen as a vehicle fuel. 5. As the number of fuelling stations providing hydrogen increases, these should also be opened to the public for private vehicle refuelling. This will enable more efficient

vi use of the resources and ensure that private motorists are not dissuaded from buying hydrogen vehicles because of a lack of infrastructure. At the same time it will be possible to link some of the fuelling stations by gaseous hydrogen pipeline. This will also enable better management of the hydrogen production facilities and will form an initial network on which to build. 6. During this time - the first five-ten years of the strategy - small-scale fuel cell systems are envisaged to come into commercial production and potentially into widespread use. These will probably run on natural gas initially, but if there is a hydrogen refuelling facility close by it will be possible to use a feed from that to increase the efficiency of the fuel cell system and reduce emissions associated with its use. In a truly integrated design it might be possible to use the electricity from the fuel cell to compress the hydrogen, for example, when demand elsewhere is low. This may also depend upon deregulation of the electricity market. 7. Although Japan has limited energy resources, it is important that development of a strategy towards a hydrogen economy is not solely dependent upon imported hydrogen or primary fuels from which it can be made. While Tokyo may not be an ideal place to produce renewable hydrogen, there are areas of Japan that have strong winds, geothermal energy and high levels of insolation, and each of these merits further investigation. 8. As the depots are increasingly linked by hydrogen pipelines, the need for reforming facilities at the depot is reduced. While economies of mass-manufacture made the initial introduction of many small reformers appealing, economies of scale make it frequently more economic to use larger facilities. The landing points for TNG and methanol would be ideal points at which to situate a large-scale hydrogen production facility. Some of the Japanese refinery capability in, for example, Yokohama, will also produce hydrogen. The pipelines connecting the refuelling depots can then be extended gradually as the small-scale reformers are phased out, with pure hydrogen transported around the urban area. This will be an ongoing process to be undertaken between years ten and twenty, as the infrastructure widens to meet demand. Large- scale hydrogen production facilities would also enable CO2 to be sequestered from the plant, as commitments to reduce greenhouse gas emissions begin to be honoured. 9. At the same time, as the fleet depots are linked by pipeline, the smaller passenger car filling stations can be connected to the hydrogen grid by spurs. This will enable them to provide hydrogen to their customers, who can then avoid having to find a local bus depot. 10. It is equally important to ensure that, after the very early stages of the project, equivalent developments are taking place in other urban areas. This will allow consumers to travel between these sites and once again ensures that they are

Vll prepared to buy vehicles that run on a fuel that is less readily available than conventional ones. 11. Although transport is seen as the key to introducing hydrogen into the urban area, it is important to link developments in fuel supply with developments in power supply. Fuel cells from the domestic scale (2-7kW) to much larger cogeneration schemes (2- 1OMW) will require fuelling, and while natural gas offers immediate benefits, optimal performance comes with the use of hydrogen. Therefore, as the pipelines linking fuelling stations are built, they must also be designed to allow for the fuel requirements of stationary equipment. Mixing hydrogen with natural gas in existing pipelines will allow higher efficiencies and reduced emissions in the short term, and should be done. However, pure hydrogen will require a change in the equipment capable of using the fuel. It is felt that developing a secondary fuelling network is more efficient than trying to convert existing supply systems to carry pure hydrogen, as newer equipment can thus be connected as necessary. Of course, the space available is limited and costs will be high; these issues have not been investigated in detail as the situation in Tokyo changes rapidly and costs are highly dependent upon local geography. 12. As time develops the strategy will probably require changing. However, the results to date suggest that fuel cell vehicles offer the most rapid potential for introducing pure hydrogen into the fuel mix in the short term. Japan ’s unique position in being almost entirely energy-import dependent acts in its favour, as it is possible to compare a variety of primary feedstocks for the production of hydrogen, and to use them all in tandem with imports of pure hydrogen in the future. It is likely that a variety of feedstocks will continue to be used to provide hydrogen for some time to come.

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Final Report for Fiscal 1998

1 Introduction

SUMMIT

This report describes work undertaken within a research contract placed with Imperial College and the London Research Centre under the WE-NET Project (Phase I) - International Clean Energy Network Using Hydrogen Conversion. The overall goal of the work reported here is to produce a transitional strategy for the period 2000-2015 to enable 10% of the energy supply into Tokyo at the end of the period to come from hydrogen. The strategy is built upon earlier economic cost-benefit analysis of hydrogen introduction into both London and Tokyo, but also on inputs frommany other sources. Pure hydrogen in the transport sector is seen as the key area to enable the transitional strategy to begin, and in order to ensure a penetrationof 10% by 2015 the introduction of pure hydrogen into fuel cells in commercial and domestic applications is seen as a significant further portion of the strategy. The introduction ofhythane, though cost- effective in the short-term, makes the further transition to purehydrogen (required for a or eater nenetration than 10% in the future) more difficult

1.1 Background This report describes work undertaken within a research contract awarded to the London Research Centre and IC Consultants under the WE-NET Project (Phase I) - International Clean Energy Network Using Hydrogen Conversion. The contract relates to Sub task 3 - Conceptual Design of the Total System. This work is based on the complementary experience of Imperial College in the assessment of energy technologies and the London Research Centre on urban energy studies. It is supported in Japan by the Fuji Research Institute Corporation.

1 The overall objectives of Subtask 3 are: • development of a conceptual design encompassing the total system, including electricity generation using renewable energy, hydrogen production, transportation, storage and utilisation, and technological and economic evaluation. • estimation of the effects of the introduction of hydrogen energy on long-term energy supply and demand, both from a global viewpoint and from the viewpoint of each country. • development of safety measures and evaluation technologies.

1.2 The Goal of the IC/LRC Project in this Phase The goal of the project in this phase is to produce a final transitional strategy for the introduction of hydrogen energy into the urban area of Tokyo, using scenario analysis already carried out and information from other sources and experts. In particular this strategy is intended to clarify: • Which sectors should be targeted for full or partial conversion to hydrogen use; • What proportion of those sectors is expected to be convertible by 2015; • What proportion of the required 10% of energy provision those sectors can be expected to provide; • What timings should be associated with the conversion; • Which developments are particularly important.

The work uses a basic methodology built around the case of London, applying specific data from the city of Tokyo. These data include energy use, transport movements and environmental emissions values.

1.3 Specific Objectives in This Phase Achievement of the goals detailed in Section 1.2 depends upon the achievement of the following specific objectives: • Understanding of the potential for conversion to an alternative energy carrier within the Tokyo energy supply infrastructure • Understanding the costs and benefits associated with the introduction of hydrogen into different sectors of the economy • Assessing the non-economic feasibility of particular strategies in the context of introducing hydrogen into Tokyo

2 • Identifying areas of legislation that may affect the introduction of hydrogen in the short and longer term

1.4 Structure of the Report

The structure of this report follows closely the arrangement of the detailed objectives specified in Section 1.3. Section 2 summarises the background calculations carried out throughout the first four financial years of the study, highlighting trends and identifying conclusions of importance. Section 3 brings the analysis of London and Tokyo up to date, providing some of the background figures from which the transitional strategy has been produced. Section 4 examines in more detail the other factors that have had a bearing on the transitional strategy development, highlighting those which have had the most influence. This section is of some importance as a strictly economic decision, based on essentially static calculations, has not been felt to be optimal in terms of the strategy in the longer term. Section 5 considers other factors that have a bearing on the project from the perspective of transferring the methodology between London and Tokyo. Section 6 specifies the particular areas that have been considered as the transitional strategy has been developed. Although these are broadly outlined in previous chapters it was felt useful to evaluate in more detail the effects of particular local conditions with respect to the situation in Tokyo. Section 7 details the final transitional strategy that has been selected for the Tokyo market, outlining the timeline that is suggested and the areas of particular importance. Conclusions are then drawn in Section 8.

3 2 Summary of Phase I

As this is the final report in Phase I of the WE-NET Project, it brings together not only the work carried out during FY98 but also the conclusions drawn from earlier modelling stages conducted from FY94-97. The earlier work has provided a strong platform for development, although the results of the first modelling exercises have changed significantly in the light of improved data or rapid developments. Some of the models have been re-run for FY98 and the results thus derived used in the final analysis. However, this report for FY98 is also based upon strategic developments within potential world markets for fuel cells and hydrogen, with the emphasis on understanding the requirements for a transitional strategy for introducing hydrogen into Japan, and more specifically Tokyo. It is therefore a combination of numerical analysis and policy understanding. One important point is that the field of hydrogen and fuel cells has begun to change much more rapidly than had been envisaged in the early part of the project, and therefore it is likely that the speed of change will continue to be high. Transitional strategies will require constant management and potential revision if they are to remain current. This section is intended to draw together the four years of work that are concluded at the end of this FY1998 report. The full details are in the individual reports for each year.

2.1 FY1994 The work carried out by IC and LRC in Phase I began in 1994. The initial intention was for a model to be constructed that could interface with the Green and Markal models being used in other areas of the WE-NET assessment. To this end FY94 was spent in both conducting a review of existing European hydrogen projects and in developing the HY-RES model, a model based on a reference energy system. The model included not only the energy provision within the reference energy system, but also technology costs and a sector in which environmental implications of the various systems could be examined. ' iI ncUa icici dive energy system approach allows a model of a reference city to be included in the analysis, from which such figures as energy balance (supply and demand for the city), infrastructure cost, unit capital cost and emissions can be deduced. The FY94 analysis compared two broad concepts for hydrogen distribution - centralised and dispersed. Initially, the analysis also examined two forms of energy transmission vector - direct hydrogen and electricity. However, the electrical transmission vector was not pursued as it was felt to have limited relevance. The centralised and dispersed concepts were found to be broadly similar in terms of total costs, they differed somewhat in the volume of hydrogen delivered, thermal efficiencies and infrastructure requirements, and in cost of energy delivered. The Reference City was first introduced within this analysis. Rather than attempt to model an entire city and all of the relevant energy flows, the decision was made to use areas of a real city as proxies for areas of a composite city. Nine 1 x 1 km grid squares of London were chosen and the energy use analysed in detail for these. Commercial, Industrial and domestic sector analyses were made and transport activity was also included. In FY94 an area of London was chosen for analysis; in subsequent years different areas of London were chosen but also areas of Tokyo.

2.2 FY1995 In 1995 the work defined under the original parameters was expanded to become a detailed analysis of three areas of London. This was felt to be a reasonable starting point as significant and detailed data for London ’s energy use and emissions was available from the London Research Centre. The three areas of London were chosen on an arbitrary basis to represent typical energy use and behaviour for Central, Inner and Outer parts of the city. The Centre was primarily commercial and domestic, with significant traffic congestion; the Inner area also contained small amounts of industry with traffic patterns primarily along major arterial roads; and the Outer London area was significantly residential with lower population density and better optimised traffic flows. Each section was represented by a square of nine 1 x 1 km grid squares as in FY94. Infrastructure development in providing a 9km 2 area with hydrogen was assumed to be directly relevant and scalable for the whole of a city, with the exception of primary hydrogen feeds. A number of options were explored, including direct gaseous hydrogen provision, gaseous hydrogen delivered by tanker truck, and liquid hydrogen delivered in the same fashion. Technologies for the use of hydrogen - either fuel cells or modified burners and internal combustion engines - within the 9km 2 area were also considered to be representative of the city as a whole. During FY95 the concept of environmental externality costing was introduced. Environmental external costs have only recently been widely recognised as an important component of cost-benefit studies. They are important because they represent the value of real benefits to society, such as health and environmental cleanliness, which otherwise are neglected in the appraisal and selection of investments. An externality is an ‘external effect" which arises from the production or consumption of a good or service, the costs of which are not included among the costs of production. Consequently the costs of the effect are not valued in the market price of the good or service. However, in order to make fair comparisons between different but similar goods, externalities should be taken into consideration. In the case of power generation or transport, the two areas which have been considered in detail, principal externalities include noise, damage from exhaust emissions and property blight. Externality costing was used to provide a framework for evaluating the benefits of introducing hydrogen - a low-polluting fuel - into the urban area. Without this balancing part of the equation only costs would have been considered. In order to evaluate those costs and benefits in a comparable framework, it was decided to set up a number of scenarios based upon expected technology penetration and on future costs. The city of 2015 (an arbitrary date at which it was expected that reasonable hydrogen technology penetration could be assumed) was given a reference scenario to set the baseline against which each other scenario could be compared. This was to ensure that comparisons were fair. For FY95 three scenarios were introduced: a ‘hythane ’ scenario, a pure hydrogen ‘niche market’ scenario, and a combination scenario using both options. Hythane is the name given to a mixture of natural gas and hydrogen, which can be burned in internal combustion engines though with significantly reduced emissions. The basic calculation of the value of hydrogen was carried out as a form of cost- benefit analysis, in which the additional costs attributed to the introduction of hydrogen (technology and infrastructure costs) were balanced against the amount of emissions reduction that resulted from the use of hydrogen, valued in cost per unit energy, or $/GJ H]. The value obtained was assigned to the hydrogen as a ‘premium ’ on its use as a fuel. A positive premium indicated that the benefits of using hydrogen outweighed the costs of its introduction; a negative number the reverse. The use of the premium was required because the hydrogen was assumed to be supplied pure at the boundaries of the city - part of the requirement for the project was that the methods of hydrogen production and transmission from the point of production would be considered elsewhere. Although this enabled considerable focus on the local project objectives it did not enable optimum decisions to be made regarding the hydrogen pathways, nor did it enable costs of hydrogen to be considered. A wide range of costs can be envisaged depending upon the primary hydrogen feedstock material and methods of distribution, and these costs could then be subtracted from the ‘premium ’ to give a cost of hydrogen at the point of use. A description of the scenarios is given below.

2.2.1 The Reference Scenario Energy using activities are taken to be the same in the future as they are now. This will clearly not be true, but the deviation from reality will not much affect the main choices we are interested in, i.e. between "hythane" and "niche markets" scenarios and between the various niche markets.

6 2.2.2 The Hythane Scenario The hythane scenario assumes that hydrogen is added to the gas supply outside the city at the pressure reduction stations from the high to medium pressure systems. It is therefore supplied indiscriminately to all consumers in the city. The fact that the distributed gas is hythane rather than methane is assumed not to affect the technical choices made by the consumers, so the difference between the "hythane" and reference scenarios is easily assessed in principal.

2.2.3 The ’’Niche markets” Scenario In this scenario some of the end use technologies are selectively replaced by hydrogen using technologies. The applications are targeted to give the most cost- effective employment of hydrogen taking into account the infrastructure costs and the environmental and performance benefits. The natural gas displaced by the introduction of the hydrogen is valued in the discounted cash flow analysis.

2.2.4 Conclusions The conclusions made in FY95 can be summarised as follows: the reduction in environmental damage brought about by use of hydrogen can be very significant and can amount to a substantial premium on its value as a fuel, with the premium greatest in city centres. The estimates of the costs of environmental impacts vary over a wide range and correspondingly the calculated premium for hydrogen varies also, but the substantial effects on emissions from vehicles of a small concentration of hydrogen distributed in natural gas (hythane) appear to make this the most cost-effective initial use of hydrogen. The next best use of hydrogen as a fuel is as pure hydrogen for decentralised power generation in gas turbines in the centre of cities, though the value of the hydrogen is better maintained by extending the hythane scenario to the outer areas of the city than by directing more hydrogen to specific applications.

2.3 FY1996 The analysis carried out during FY96 led directly from that produced in FY95, with some refinement. A database of emissions factors and externality costs was introduced to enable added transparency to be brought to the calculations of the previous years. It also showed in detail both the wide range of cost estimates arising from different methodologies and also from different geographical locations for the studies. The scenarios developed in FY95 were further refined to allow comparisons to be made with other alternatives, though the same methodology was used throughout. Instead of distributing hythane indiscriminately to all users - a cheap option but one that

7 resulted in relatively low overall benefit, the decision was taken to target that hythane provision to areas in which emissions could be reduced the most, but at a low cost. This was primarily in the area of transport. In addition, some analysis was carried out into the value of hydrogen as an additive to liquid fuels such as petrol. Finally, in order to provide some basis for comparison, the existing and potential costs and benefits of catalytic converters were analysed. Conclusions were then drawn on the scenarios themselves and thus on the implications for infrastructure provision. The tentative conclusions at that stage of the study can be summarised as follows:

2.3.1 Conclusions Benefits similar to those outlined above for distributed hythane have been identified both for hythane targeted to transport applications and for the use of hydrogen as an additive to gasoline internal combustion engines. In all these cases the value of the hydrogen was assessed by a direct valuation of the reduction it brought about in external environmental costs. In all cases there can be circumstances in which the value of hydrogen so assessed is large compared to its likely cost of production. Work in the earlier phase showed that the environmental benefits of hydrogen in applications other than transport were substantially less. The use of hydrogen for urban transport therefore appears to be the most effective way of introducing hydrogen into the energy supply structure. The work in this phase has also made an alternative assessment of the value of hydrogen as a transport fuel by calculating the costs avoided in alternative means of emission control. The alternative studied was catalytic conversion because this is the most commonly adopted technique for reducing emissions from transport. The study shows that the cost-benefit performance of the various technologies for reducing environmental impact (distributed hythane, targeted hythane, hydrogen-gasoline, catalytic conversion) is very sensitive to assumptions made about the costs of environmental impacts. The different technologies depend differently on these assumptions. Under the assumptions adopted for this study there is no single preferred technology for environmental improvement. The optimal choice is a function of both the damage costs assumed for the environmental impacts and whether the technology is to be used in central, inner or outer areas of the city. The assumption made in the analysis are quite severe and the conclusions must be treated with caution, but the calculations suggest that for high value of environmental damage costs, targeted hythane is superior. Catalytic conversion is only the technology of choice when high damage costs are assumed and the calculations are made for Outer London. These conclusions are very tentative.

8 Taking the analysis as a whole, while recognising the sensitivity of the conclusions to the assumptions, there does appear to be a strong case for suggesting that the use of hythane in vehicles could be the most cost-effective initial application of hydrogen and the most appropriate market to develop first.

2.3.2 Tentative Observations on Infrastructure Development Some tentative observations can be made concerning the implications of this finding for infrastructure development and transitional strategies. If transport applications of hythane are to be envisaged as the initial market for hydrogen, then the infrastructure for the distribution of hythane needs to be designed and developed in a manner which will also facilitate the availability of pure hydrogen for pure hydrogen using technologies. This suggests that the hydrogen should be added to the natural gas within the city; not at the boundaries as we have assumed in our calculations thus far. This in turn implies that the supplementary infrastructure should be designed for distributing hydrogen, not hythane. A somewhat different cost structure will need to be considered in further analysis. It is also important to note that once targeted hythane has been introduced by mixing hydrogen natural gas within the city, distributed hythane is unlikely to be cost-effective as an intermediate step to pure hydrogen. This is because the major value of distributed hythane - reducing emissions in the transport sector - has already been obtained. A mechanism for targeting hythane would be to deliver hydrogen to hythane refuelling stations for large fleet users, e.g. buses. The hydrogen would be added to natural gas at site. Pure hydrogen could then be available for other technologies as they become cost- effective. These might include fuel cells for power generation. Such an approach would lead to an “island ” development of hydrogen centres. The least cost, low risk manner of providing hydrogen to these centres would initially be by vehicle. As demands for hydrogen increase at these centres it may be cost effective to develop pipeline delivery to the larger centres, displacing hydrogen-carrying vehicles which can be used to supply new, small centres. As different hydrogen using technologies became cost-effective it may not be necessary to rely on transport applications for the initial load. Large commercial centres might adopt hydrogen fuel cells for power and thermal conditioning.

2.4 FY1997 In FY97 there was a change of emphasis required for the project. After a significant amount of work a dataset for Tokyo ’s energy and emissions similar to the one held for London by the LRC was located at the Institute of Behavioural Sciences (IBS). The LRC was kind enough to purchase the data required to complete the analysis of Tokyo,

9 though this took some time and it was not possible to produce more than preliminary conclusions from the Tokyo data prior to FY98. At the same time data were sought on environmental externality costs specific to Japan. Again, it proved difficult to locate any and in the end it became apparent that the same data as used for the London study would have to be applied. However, the wide range of figures indicated in the London data were to felt likely to include figures that would be representative of Tokyo. A screening of technologies for use in the Tokyo scenarios was carried out on broadly the same range of technologies as used in the London analysis. However, it became apparent that the pace of development, particularly in the fuel cell area, had been much more rapid than originally anticipated, and some substantial revision of cost and performance targets was initiated. The technologies and scenarios eventually chosen were basically the same as for the original London analysis but the base assumptions had changed. This necessitated the re-running of the London scenarios to ensure the robustness of the results and to provide an accurate basis for comparison with Tokyo. One of the primary reasons for this was to develop an understanding of the transferability of the methodology between cities with different characteristics. One of the areas that required considerable thought was the comparison between energy use and existing infrastructure in London and Tokyo. Initial discussions suggested that the natural gas infrastructure in Tokyo, in particular, was inferior to that in London. However, it was later discovered that this was not the case in terms of coverage - almost 100% of Tokyo has access to the gas grid - but merely in terms of the amount of gas supplied and used. Comparing energy use in general in the two cities was revealing, showing that Tokyo ’s peak energy demand comes in the summer - the hottest period - and is for electrical power for air conditioning. In London the peak is in winter and is for gas for central heating - not traditionally a part of Japanese infrastructure. Although this difference does not appear major, it may have significant impacts on the application of a methodology designed in an alternative city. Tokyo ’s high electricity demand (and high electricity pricing) make the use of fuel cells for cogeneration of power and cooling load more economic than in London. However, the capacity to supply those fuel cells with natural gas or hydrogen is limited by the existing infrastructure. Basic conclusions drawn from the study in FY97 are given below. These have been somewhat revised in FY98, as have many of the earlier results.

2.4.1 Conclusions The emphasis put on hythane as potentially the most cost-effective strategy for hydrogen introduction in previous reports may require revision for the analysis of

10 Tokyo. This is partly due to recent changes in the costs of fuel cells that have been forecast, but the fact that Tokyo has a comparatively low capacity natural gas infrastructure also plays a role, with infrastructure costs likely to play a key part in a hydrogen or hythane energy system. The differences in energy use and infrastructure cost between London and Tokyo are significant, though the emissions from transport in Tokyo are just as important as those in London, and it is clear that the introduction of hydrogen in transportation will be a key area to consider. In all cases there can be circumstances in which the value of hydrogen assessed is large compared to its likely cost of production. Work in the earlier phase showed that the environmental benefits of hydrogen in applications other than transport were substantially less. The use of hydrogen for urban transport therefore appears to be the most effective way of introducing hydrogen into the energy supply structure in Tokyo as well as in London. The value of pure hydrogen in buses in Tokyo when high externality costs are considered is large enough that this market may be an ideal introductory market for hydrogen. A transitional strategy can then be devised around this introductory market. The value of hydrogen in niche markets does not seem to be as high as in the hythane scenarios if the externality costs are median or low. Therefore, in order to use these scenarios as a guide to introducing hydrogen into distinct areas it is important to understand externality costing and the likely values to adopt.

2.4.2 Observations on Infrastructure Development

The limited infrastructure development associated with the introduction of hydrogen- fuelled SPFC buses would be worthwhile according to the outcome of the scenario modelling. These buses, while also accounting for a relatively small amount of the energy use of the city, would allow pure hydrogen to be available for further developments of fleet vehicles or private cars with a limited range of operation (for refuelling purposes). This would reduce the ‘chicken and egg’ situation common to the introduction of alternative fuelled vehicles, where the fuel infrastructure must be available for the vehicles to become popular, to be avoided. Other studies have suggested that the use of pure hydrogen in fuel cells is the most energy-efficient fuel cell introduction strategy, more efficient than reforming an alternative hydrocarbon such as methanol or gasoline on board the vehicle. The use of ‘island ’ developments would enable that philosophy to be followed. The proportion of energy use within the city would still be below the 10% limit if all the buses were to be converted to hydrogen SPFC. However, if some fleet vehicles such as post office vans and refuse collection vehicles could be included then the emissions

11 reductions would be proportionately higher and the value of the hydrogen would be increased. This might enable some of the marginal vehicles to be converted and bring the energy contribution back towards the expected target. The use of hydrogen-fuelled fuel cells for local heat and power generation would be cost-effective if higher externality values were considered, but the construction of an infrastructure enabling hydrogen to be supplied to apartment blocks and offices would be a large undertaking. However, additional credits for distributed generation, such as reduced capital projects for major power stations and reduced grid costs, have not been taken into account. These may further sway the balance towards embedded generation. The ‘island ’ approach towards developing hydrogen centres may be particularly relevant for the Tokyo-based scenario. The energy supply system already allows for significant amounts of local gas delivery in the form of LPG in tankers, so changing this to hydrogen might not pose major problems. As the percentage of hydrogen in the energy infrastructure approaches 10%, a large proportion of the vehicles will run on hydrogen. This prevalence of hydrogen in the transport sector should allow the further development of stationary fuel cell power and heat plants in a cost-effective manner. 3 Re-evaluating London and results for Tokyo

3.1 Similarities between results and the importance of the reference scenario As has been mentioned in previous reports, the pace of development of hydrogen using technologies, particularly fuel cells, has necessitated a recalculation of results from previous analysis to ensure comparable baseline data are available for comparisons between London and Tokyo. Costs of fuel cell systems are already very low and predicted to become competitive with conventional technologies within the timeframe to 2005. This suggests that the penetration of the technology in 2015 and 2025, for example, will be rapid and may outstrip that predicted in the early reports. The tables below give indicative results from the two cities based on calculations carried out using the original methodology. This has been successfully transferred between cities and produced similar results. Although actual costs, energy use and emissions are different in the two major urban areas, the assumptions made regarding what could usefully be considered to be the reference scenario (described in detail in previous reports) have levelled the playing field somewhat. However, introducing a reference scenario in the comparatively arbitrary way that was done, although essential for the development of the models, leaves open questions regarding the actual results. It is likely that the reference scenario in Tokyo would actually have to be different from that in London to ensure that real local conditions were represented. This would make the comparison of the two model outcomes considerably less clear. While it would have been an advantage to have had a definitive reference scenario for Tokyo it was not felt to be necessary for the development of a sensible transitional strategy, as the latter is dependent upon many other areas.

3.2 Final results for London and Tokyo

The tables below show the final values assigned to the ‘premium ’ on hydrogen for London and Tokyo, in the ‘niche markets’ scenario. Results for Tokyo only are presented for the ‘distributed hythane ’ scenario, as the London results remain unchanged. The ‘targeted hythane ’ scenario, although promising under early investigation, was found to be too restrictive in terms of future development and in terms of the amount of hydrogen that could realistically be placed in the market. It has not been included here. In general terms, the values for London are higher than the comparable ones for Tokyo. This is primarily because the building of new infrastructure in London is

13 marginally cheaper than in Tokyo, but in terms of local pricing the values are comparable. The distribution of the results is the same in each city, suggesting that the methodology is consistent between the two areas. This is in contrast to the results for FY96 and FY97, where there was some suggestion that the results would be different. However, the updating of all the databases to the most current values has eradicated the majority of the differences, leaving only those due to local circumstances.

Table 1: The value of hydrogen in niche markets in Tokyo and London Premium on hydrogen: Summary for Niche Markets in Tokyo Premium on fuel* by externality cost Original technology Replacement technology Low Median High Fuel Natural gas turbine Hydrogen turbine $ 2.10 $ 2.32 $ 12.26 h2 Natural gas PAFC Hydrogen PAFC $ 0.64 $ 0.78 $ 3.27 h2 Natural gas turbine Hydrogen PAFC $ 3.96 $ 4.22 $ 14.64 h2 Natural gas turbine Natural gas PAFC $ 3.09 $ 3.20 $ 10.58 NG Diesel bus Hydrogen SPFC bus $ -2.31 $ 6.85 $ 71.90 h2 Diesel bus Natural gas bus $ -3.92 $ 2.25 $ 45.53 NG Natural gas bus Hydrogen SPFC bus $ 0.09 $ 1.98 $ 16.05 h2

*NB Natural gas valuation is provided as a comparison

Premium on hydrogen: Summary for Niche Markets in London Premium on fuel* by externality cost Original technology Replacement technology Low Median High Fuel Natural gas turbine Hydrogen turbine $ 3.30 $ 3.51 $ 14.20 h2 Natural gas PAFC Hydrogen PAFC $ 1.10 $ 1.80 $ 4.08 h2 Natural gas turbine Hydrogen PAFC $ 4.68 $ 4.98 $ 16.10 h2 Natural gas turbine Natural gas PAFC $ 3.85 $ 4.08 $ 12.23 NG Diesel bus Hydrogen SPFC bus $ 0.51 $ 8.42 $ 83.11 h2 Diesel bus Natural gas bus $ -1.01 $ 3.43 $ 52.18 NG Natural gas bus Hydrogen SPFC bus $ 1.53 $ 2.61 $ 19.06 h2

*NB Natural gas valuation is provided as a comparison

As can be seen in Table 1 above, the value of hydrogen when used in niche market applications in London and Tokyo is not dissimilar. The value in London tends to be slightly higher because building an infrastructure in London is marginally cheaper than in Tokyo. At present, however, the stationary fuel cell (here a PAFC has been used in the analysis but in the near term it will also be possible to include other types such as SPFC and perhaps SOFC) seems a good technology in stationary markets, with the hydrogen fuel cell bus an excellent solution in the transport arena. Table 2: value of hydrogen in hythane in Tokyo, using high externality costs Central Tokyo (high externalities)

Scenario Energy (GJ) Hydrogen (GJ) Electricity (GJ) Electricity ($) Emissions ($) Value ($/GJ)*

Status Quo 12,948,048 4,760,043 105,778,742 1,573,971,239 Reference 13,464,072 2,256,983 50,155,172 1,073,775,421 Hythane 13,375,729 422,038 2,168,639 48,191,987 991,484,693 152 Difference 88,343 422,038 88,343 1,963,185 82,290,728 Proportion 0.01 1.09 0.04 0.04 0.09

Inner Tokyo