Over the past year, a wave of hydrogen projects has been announced in the wake of growing government support and pressure on industrial companies to decarbonise their operations. But the sheer scale of hydrogen production needed to secure offtake deals presents significant risks to those financing projects, warns Cristian Carraretto, head of sustainable business and infrastructure, energy transition, at the European Bank of Reconstruction and Development (EBRD), in an interview with Hydrogen Economist.

“The challenge is, the nature of this market calls for large scale. Producers need to have big pockets and a big appetite for risk as a first, early mover,” Carraretto says.

Offtakers require large volumes of hydrogen from the outset owing to potential technical or contractual complications from switching, he adds. “If you are only supplying 1pc of their demand, why should they bother?”

“To produce enough hydrogen to meet end-users’ demand, you need a lot of installed renewables and electrolyser capacity—and that means you need to invest $1–2bn,” says Carraretto.

“The nature of this market calls for large scale” Carraretto, EBRD

There is little room for small-scale commercial hydrogen projects, he says. “It is not like with solar 20 years ago, where we started with 1–5MW projects that maybe required $5–10mn investment. That was manageable, since even if you got some project details wrong, it was still possible to hedge risk,” he adds.

Carraretto says the development of hydrogen demand has been neglected. “What we see as a big issue is an overemphasis on production—finding the right place where you can produce the cheapest green hydrogen—but little focus on end-use. There seems to be a belief that offtake will eventually materialise,” he says.

“We need to push more on creating the demand from end-users rather than only finding solutions for producing cheap hydrogen,” Carraretto argues.

He notes that eastern Europe’s exposure to the EU emissions trading system and product exporter nations’ exposure to the carbon border adjustment mechanism provide incentives for industrial emitters to decarbonise, including via hydrogen. “Before the war, there was a lot of focus on Ukraine too—it is connected to Europe, with heavy industry, a lot of obvious offtakers for hydrogen,” he adds.

Technical feasibility will dictate which sectors are likely to become anchor offtakers for large hydrogen projects. Carraretto notes that the steel industry in particular—often discussed as a potential large offtaker—is unlikely to commit to offtake agreements until hydrogen-derived steel is proven at full commercial scale. The steel industry “is waiting for early movers to prove that the technology is viable, so we are not talking about an immediate switch—we are talking about the late 2020s at best,” he says. “Even if they are subject to the same taxes and market pressures, they are going to lag behind fertilisers and refining, which can make that switch immediately.”

Security of supply

However, companies are extremely cautious about security of supply. “We finance companies in several industrial sectors that could be obvious offtakers and do push them toward using green hydrogen. And a lot of them say they are willing to buy, but there are no sellers who can provide sufficient guarantee that they can supply hydrogen feedstock 24/7 at sufficient quality and quantity,” Carraretto says. Sectors such as refining and fertilisers are particularly wary in the wake of the spike in natural gas prices last year, which led some companies to temporarily pause operations, he adds.

Many projects that have taken FID—such as Shell’s Holland Hydrogen I in the Netherlands or the Neom project in Saudi Arabia—have embedded offtake either within the company or from an offtaker taking a share in the development. However, Carraretto anticipates that, as projects come online, there will gradually be less need for embedded offtake and a wider pool of demand from the market.

Development of hydrogen demand has been neglected

He notes that the cost of transportation “is small in proportion to the total cost of hydrogen” and can be managed in bulk. While it is likely that regions with cheap wind and solar will attract industrial users to explore setting up new facilities co-located with large-scale green hydrogen production, Carraretto disputes this will necessarily lead to total relocation of industries to production centres.

“It is a capital-intensive process. Companies with a global footprint might reconsider location, but for incumbent companies that have already invested in manufacturing in one location, they will keep being an end-user long-distance.”

However, the potential to attract industries to green hydrogen production centres could add extra incentives for governments to facilitate largescale projects. “Why stop at producing hydrogen and exporting it as a commodity, when you can attract industry to country, create more wealth, expand the value chain and export the final product?”

North Africa

While the EBRD would consider supporting hydrogen production, transportation and end-use in every country it covers, “pragmatically, we see a strong focus on north Africa at the moment”, where economics and land availability would suggest early progression of major production and transportation projects, Carraretto says.

The EBRD has agreed a $80mn loan to the 100MW Egypt Green project, developed by a consortium including embedded offtaker Fertiglobe, Norway’s Scatec, engineering and construction company Orascom and Egypt’s sovereign wealth fund. The bank is also working with companies planning to develop hydrogen infrastructure throughout the Mena region.

“It is very important that governments are clear with potential investors on the process, to be transparent with how land is allocated, how electricity infrastructure or port facilities are accessed, how developers can get approvals and how fees are applied,” Carraretto cautions. “We need clarity on how specific steps work—these projects are complicated and capital-intensive, and if there is regulatory uncertainty, nobody moves.”

Delegated acts

The recent EU delegated acts defining renewable hydrogen and lifecycle emissions “seem clear to me—there is the argument that it is too much too early, but it is definitely clear”, Carraretto says, adding there is sufficient room for countries without a one-to-one equivalent for concepts such as bidding zones to still qualify for the criteria. However, he notes that, in conversations with companies seeking to develop export-oriented projects in north Africa, “there is some confusion around how they interpret it, and their interpretations do not match up word-for-word what is in the acts”.

“The acts are not going to cover all possible situations… We need to see how the first wave of projects go through the process—how many pass, how many fail, how many need to readjust. It is important to have robust certification systems in place, to provide confidence for the new system, but we do not expect very few projects to meet the current criteria,” Carraretto says, although he notes the criteria might be improved in future “if it looks like the EU will be short on its import targets”.

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Author: Polly Martin