A price premium for products made using green hydrogen could be a more effective form of financial aid for supporting capacity construction than a high carbon price or subsidies, Emmanouil Kakaras, executive vice president at Mitsubishi Heavy Industries said during a recent S&P Global Asia Energy Transition conference.

Green hydrogen’s potential to decarbonise hard-to-abate sectors such as steelmaking, cement and aluminium has raised the prospect of future products such as green steel and green aluminium. A higher price in the market for these products could motivate companies in the sectors to adopt green hydrogen in their industrial processes.

Adding hydrogen to a production process requires certainty that there is value added to the end product.

“We, as Europeans, thought that carbon pricing is a one-size-fits-all mechanism. And obviously, it’s not like that. So we will need to see green product premium in order to accommodate the additional costs that will be created by carbon-free hydrogen,” he says.

“We have to see some green product premiums, rather than asking [for] subsidies. I’m not a big fan of subsidies—subsidies are helping, but you have to have a market mechanism to make sustainable growth if you need to shift the culture and the investment pattern.”

Growing pipeline

The project pipeline for green and blue hydrogen grew rapidly last year on the back of more net-zero targets, new policy support and technology advancements. More than 42mn t/yr of production capacity had been announced by the end of 2021, either in the active, post-feasibility, or feasibility stage, according to consultancy Globaldata.

42mn t/yr – Announced green and blue hydrogen production capacity

Grey and brown hydrogen—derived from natural gas reforming and coal gasification respectively—comprise the majority of global production today. With cheap coal and gas readily available, the production cost of grey hydrogen has been historically cheaper than its low-carbon alternatives.

But the recent surge in European gas and carbon prices following the continent’s winter gas crunch and the Russia-Ukraine conflict has significantly narrowed this cost gap.

The cost of grey hydrogen in Europe in early February based on regional spot prices for gas and carbon allowances at the time stood at €5.41/kg ($5.89/kg), up from around €2/kg a year earlier, according to research and brokerage firm Bernstein Research. The cost of blue hydrogen over the same period climbed from around €2.60/kg to €6.06/kg.

But green hydrogen output from a hypothetical project powered by the third phase of the Dogger Bank offshore wind farm—which reached financial close last December—would come in at just €4.71/kg, based on the phase’s strike price. Hydrogen produced via solar power in Spain would cost €4.46/kg, while onshore wind in Spain would generate the cheapest fuel at just €3.35/kg, based on the results of Spain’s last renewable energy auction in October, Bernstein Research’s data shows.

Lack of policy direction

Kakaras adds that a lack of clear regulatory policy is slowing efforts in various countries and sectors to bridging the funding gap for low-carbon hydrogen projects.

To date, blue and green hydrogen projects have largely been funded via state-sponsored research and development budgets and equity financing. But industry experts have said this cannot sustain a robust level of growth in the sector and project finance will have to play a larger role moving forward. Both green and blue hydrogen projects face difficulties in accessing the latter, with few project finance deals completed to date.

“As long as there is no clear strategy, announcements and a roadmap for that, the final investment decision will not be enabled,” says Kakaras.

“Already now…in Europe…we are seeing signs of a slight delay on the first announcement of projects, which were based on [the EU’s climate package] ‘Fit for 55’. And now, because we see these delays on putting the policy bits and pieces into context, we see some delays… even in what I’m calling the low-hanging fruits of hydrogen introduction—for instance, to substitute grey hydrogen in refineries and steel mills.”

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Author: Shi Weijun