“Is there a pot of gold at the end of the hydrogen rainbow?” That was the question posed by opening keynote speaker Nicola De Blasio, senior fellow at the Harvard Kennedy School’s Belfer Center, at the recent World Hydrogen Congress. Judging by the discussions that followed, the industry’s answer might go something like this: Maybe, but let us not get ahead of ourselves, because the immediate challenges are significant.

The consensus is that the “pot of gold” for the nascent low-carbon hydrogen industry is a 10–15% share of the global energy mix by the second half of the century and, as a result, a significant role in the net-zero project.

That is a long way off. The industry’s immediate focus is on trying to overcome several fundamental challenges that have combined to create an impasse between developers of supply projects and the investment community.

The industry’s ambition is clear. There are about a thousand announced projects globally, representing potential investment of $320b, according to De Blasio. Of that total, about 10% are massive gigawatt-scale projects and about 50% are large scale. But the IEA reckons only about 4% of announced projects have reached FID. Ben Shorten, partner at London law firm Gibson Dunn, said the industry is facing a “$380b funding gap” through 2030.

“It took centuries to build the oil and gas infrastructure; hydrogen has three decades to do it” Vrins, Guidehouse

Investor caution in backing the sector means the 2030 production capacity targets set by net-zero driven governments around the world are already starting to look challenging at best, if not out of reach in some cases.

For perspective on the longer-term supply challenge, developing enough capacity just to replace current fossil-fuel based grey hydrogen demand of about 90mt/yr would require 400 projects of the size of the giant Neom complex in Saudi Arabia, which is the largest of its type in the world, said Andrew Doyle, director at Japanese bank Mitsubishi UFJ Financial Group.

For investors, the risks and challenges associated with the hydrogen sector are interlinked, added Devina Parasuraman, director of infrastructure investments at Australia-based Igneo Infrastructure Partners.

“There are a number of challenges to explain why hydrogen is not where we want it to be,” she told the congress. “Firstly, on the end-user and demand side there is not a lot of clarity; Secondly, across the supply chain, both in terms of cost and availability. And finally, around financial support mechanisms. That is also interlinked with a lack of infrastructure, both from a network and storage perspective, as well as the cost of capital, and availability of capital.”

She said investors are broadly looking for three things when considering projects: certainty of revenue; financial support mechanisms; and scalability. Effective policy and regulation can help with all three of these factors by supporting the supply side and the demand side, and by creating standardisation and certification.

Other delegates pointed to capital cost inflation and rising interest rates over the last 12–18 months as a further drag on investment.

Pipes and prices

Throughout the congress, two barriers to investment and growth cropped up repeatedly: lack of midstream infrastructure, and supply projects’ inability to secure long-term offtake deals from industrial users.

The need to develop infrastructure such as pipelines and import/export terminals is “by far the biggest challenge” for the industry, said Jan Vrins, partner at consultancy Guidehouse. “It took centuries to build the oil and gas infrastructure; hydrogen has three decades to do it,” he said.

Difficulty in securing offtake deals is arguably the biggest factor undermining the bankability of supply projects, preventing them from progressing to FID, numerous congress delegates said. This problem is twofold. Firstly, potential industrial offtakers worry that supplies of certifiably green hydrogen will not be reliable enough. And secondly, price remains key, with questions over who in the value chain ultimately pays the green premium. De Blasio identified cost,  along with scalability and public perception, as the biggest challenge for the industry. Green hydrogen is still more expensive than hydrogen produced from coal, even if the cost of CCS is added in, he said.

Policy on demand

Policymakers in the US and elsewhere have, in recent months, acknowledged the need to focus more closely on developing hydrogen demand, and not just supply, though questions remain over how governments should address the issue.

Mandating the use of low-carbon hydrogen would probably lead to end-consumers bearing the cost of the green premium, which is not necessarily a good outcome. “A lot of policies have been more production-focused. Offtake risk is there, it is real, but our approach would not be to control the market,” said Edward Rios, commercialisation executive in the office of technology transitions at the US Department of Energy (DOE).

US momentum

The impact of the US Inflation Reduction Act inevitably came under scrutiny at the congress. The generosity of tax credits for projects of up to $3/kg, depending on carbon intensity, has accelerated activity in the US. “Europe is still in the lead, but the US is catching up. The US is where the momentum is right now,” one delegate said.

That US momentum shifted up a gear as the congress drew to a close, with an announcement from the DOE that it is allocating $7bn of funding for the development of seven regional clean hydrogen hubs across the country. The hubs are expected to collectively produce 3mt/yr of hydrogen, nearly a third of the 2030 US production target.

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Author: Stuart Penson