Hydrogen is one of the new energy carriers that is generating a great deal of interest and shows a lot of promise as a route to decarbonisation. Although many companies are offering solutions, few of them have roadmaps to achieve scale, which increases project risk and makes raising capital much harder.

The IEA’s World Energy Outlook forecasts hydrogen production around three scenarios: net zero, pledges, and rules and regulations. Depending on the scenario, electrolyser capacity ranges from 30GW to 100GW or even up to 300GW. Looking at planned capacity additions, the forecast shows there will be sufficient hydrogen production capacity to meet the demand between the net zero case and the pledges case—but is this reality?

Many companies are not scaling their electrolyser production capacity as they claim and are overestimating their scaling capability. This means there will be insufficient hydrogen production if we do not put steps in place to accelerate progress.

So, how can we overcome the difficulties in raising capital and knock down the obstacles to green hydrogen playing a major part in the future energy mix?

Technology, incentives and demand

The blueprint for advancing the hydrogen economy can be seen in the scale-up of renewable energies, principally wind and solar, which have achieved their current scale and economic parity with fossil fuel generation through extensive incentives and public/private partnerships. These incentives and partnerships are key to supplying the world with its ever-increasing demand for cheap, renewable energy. 

The blueprint for advancing the hydrogen economy can be seen in the scale-up of renewable energies

Technology for producing renewable power is maturing, and the industry is now actively working towards bridging the cost differentials between traditional fuels and green fuels (‘efuels’). On the supply side, developers have access to a variety of funding mechanisms depending on the location of the project. On the demand side, policy has not yet matured and remains reliant on indirect, market-based incentives (i.e., carbon credits) rather than direct incentives (i.e., carbon tax).

Each of these elements are needed to establish a market that incentivises technology developers to invest in R&D to achieve scale and attracts both equity and debt financiers with at-market returns and risk allocation. The scaling of a hydrogen economy will likely not track with historical, exponential uptake of renewable energy, but it still needs the same three fundamental elements: technology, incentives and demand creation.

Demand

The biggest difference between renewable power and green hydrogen is demand.

Renewable power puts electrons into existing network infrastructures and, as a result, benefits from billions of dollars of existing infrastructure. Once renewable power enters the grid, it can be easily monetised and utilised. Hydrogen requires substantial re-engineering in storage, transportation and end-use infrastructure as well as a reconfiguration of market constructs due to the non-dispatchable nature of renewable energy sources. 

To ensure continued progress, we must understand the near-term applications in mobility and broader industry that will benefit from hydrogen and thus strengthen demand. Closing the gap between grey and green hydrogen costs will not be enough on its own, or else people would have been using hydrogen for applications already.

The fastest change to green hydrogen or its derivatives—like e-methanol, e-ammonia and the like—will be seen in refineries and the fertiliser or chemicals industry, as they can use existing infrastructure to replace hydrogen and chemicals from fossil sources with sustainable molecules. The shipping industry is already on its way to decarbonisation by building vessels driven by e-methanol. Replacing fossil fuels with efuels in other mobility sectors will take longer, although areas such as aviation have a high need. In the steel industry, a change of technology is required for real decarbonisation.

Financial appeal

There is a lot of sentiment from the public and elected officials to seed the opportunity to grow the use of green hydrogen. Material growth in the utilisation of green hydrogen will occur only if projects are structured in a way that attracts equity and debt financiers. A key component of a bankable project structure lies in an offtake agreement that provides for a steady revenue stream and an at-market risk allocation between supplier and offtaker. Without such offtake agreements, there will be no progress beyond pilot plant production.

Green hydrogen offtake agreements can be expected to mirror many of the terms found in existing fuel supply arrangements, with changes being made to accommodate the non-dispatchable nature of renewable energy sources. Offtakers will come in the form of credit-worthy participants willing to contract for an extended period—more than ten years —at a price and volume that is economic both for their end use and for the green hydrogen supplier.

When it comes to green hydrogen, it is not whether we will get there, it is a question of how fast we want to get there

Without counterparties willing to commit for an extended period, at an economic price and for material green hydrogen production volumes, commercial-scale green hydrogen projects will not attract sufficient equity and debt financiers. The offtake contract is the key gating mechanism behind attracting at-market equity and debt financiers. Achieving parity with fossil fuels requires large offtakers with strong balance sheets to commit to projects under development and shepherd the technology along both the cost and scale curves for the benefit of subsequent green hydrogen projects.

Banks will struggle to balance the risks of a small company producing a substantial volume of hydrogen through a large and complex project. They need low-risk, fixed cashflow streams that provide for a defined return on investment and, while there may be some willingness to accept a lesser return to seed this developing market, they will still want appropriate risk allocation and long-term project viability in exchange for their capital.

This means that, if incentive schemes for capex or opex run for five years but the plant life and offtake agreement is 15 years, the incremental value will be lost after the initial period and that will not attract at-market investment terms. Therefore, incentive regimes are needed that are realistic and match the profile of offtake contracts and provide surety around investment horizons.

Banks will also ask if the technology selected for large hydrogen projects has been proven to work at scale. Having this confidence in the technology will promote the willingness of other stakeholders (offtakers, technology providers and the chemicals industry) to commit capital and banks will want to see this shared risk among all project stakeholders, at least for the first couple of projects. It is all a question of risk, but also delivery. Large projects require a lot of engineering hours and input. Does the project company have the experience to deliver within the timescales of the project?

Encouraging high volume production

Establishing a green hydrogen economy is expected to require investment in the hundreds of billions of euros over the coming decades and will need substantial amounts of both private and public financing.

In the hydrogen space, there has been funding for the development, technology and manufacturing of electrolysers and offshore wind, as well as tax credits to produce green hydrogen molecules. There are mechanisms in place to bridge the cost difference between grey hydrogen and green hydrogen, although these are clearly not yet sufficient given the disconnect between the number of announced projects and projects that have reached financial close.

Furthermore, a number of these mechanisms require further refinement to incentivise project structures and returns that are in line with established market precedents. 

Material growth in the utilisation of green hydrogen will only occur if projects are structured in a way that attracts equity and debt financiers

Important Project of Common European Interest funding has been applied for factory investment and production of hydrogen, looking at the gap between traditional production and the cost of green hydrogen. In Germany, funding for the H2Global scheme has increased to almost €4bn ($4.2bn), closing the price differential. In the US, the Inflation Reduction Act’s $3/kg incentive for low-carbon hydrogen makes green hydrogen cheaper and much more appealing to the market.

In the EU, the ‘Fit for 55’ package provides funding such as increased quotas for renewable fuels of non-biological origin and jet fuels, in addition to carbon pricing, to support demand creation for efuels in the mobility sector.

Pilot-scale projects remain an important step of the process as these projects allow teams to showcase the technology and they serve as a market reference for securing the necessary finance for commercial-scale projects. As we move down the maturity curve, the question looms regarding whether these pilot projects will scale to gigawatt production and find offtakers that have both the capacity and economic willingness to take higher volumes. Today, there is both opportunity and need for scalability in the technology and the ability to finance.

Powering the shipping industry

Refineries that already use grey hydrogen have an easy path to replace fossil molecules with green hydrogen. Alongside such industries, however, the shipping sector is a clear target for decarbonisation using hydrogen or e-methanol as an alternative to heavy fuel oil (HFO) or LNG. Vessels have a lifetime of 20 years, so it is important to start now. Companies such as the shipping giant Maersk have already committed to hydrogen offtake for e-methanol powered vessels, for example in Maersk’s project with renewable energy company European Energy in Kasso, Denmark using Siemens Energy’s electrolyser technology.

Maersk is one of the largest offtakers in the transportation sector. It recognises the ESG benefits and the need to shift its fleet from HFO to methanol. We need such large-scale stakeholders with substantial balance sheets moving to shift technology from pilot to full scale, investing in hydrogen production, and looking for partners, public subsidy and providers that can deliver. Having offtake agreements in place with these large players and with stakeholders sharing the risk alongside them, banks will relax some of their return expectations and we will get the ball rolling with scalability.

Adding to the need for energy security

Using hydrogen as an energy source is not limited by where resources are in the ground. Wind and solar can be anywhere, and so too, therefore, can be green hydrogen production. This means companies can pick locations where there is a safe supply, and this will change the landscape of energy security.

Not if, but how fast

Green hydrogen is an important part of the energy mix for decarbonisation and addressing the needs of applications that cannot be electrified. Not reliant on the resources of other countries, it also presents an opportunity to address the need for energy security. The technology is in place and progress is being made, but there are still obstacles to overcome.

When it comes to green hydrogen, it is not whether we will get there, it is a question of how fast we want to get there.

To move the green hydrogen economy forward requires technology, incentives and demand, along with partnership and shared risk across all stakeholders to support investment from banks. Banks and large offtakers will also need to be convinced the technology will work at scale, receive guarantees, and have confidence in the capability and experience of the technology provider.

While startups offer exciting possibilities for the future, this can only be achieved today with investment and commitment from large, established and experienced industrial players.

Stefano Innocenzi is senior vice-president of sustainable energy systems at Siemens Energy.

Richard Reisig is managing director, development and investment, at Siemens Energy.

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Author: Stefano Innocenzi, <BR> Richard C. Reisig