An extract from an article with the same title by Yong-Liang Por, Financial Analyst, IEEFA Contributor
On July 8, 2020, the European Commission unveiled a ground-breaking strategy to scale up green hydrogen projects in the push for clean fuels and energy efficiency to meet the EU’s net-zero emissions goal by 2050. This EU Hydrogen Strategy calls for specific targets. In the first phase from 2020-24, hydrogen electrolyser installations of at least 6 GW are to be set up in the EU, with production of up to 1Mt of green hydrogen. In the second phase from 2025-30, hydrogen electrolyser installations of at least 40 GW with production of up to 10Mt of green hydrogen. From 2030 onwards, green hydrogen is to be deployed at large scale across all hard-to-decarbonise sectors.
Hydrogen Europe, which represents Europe’s hydrogen stakeholders, estimates that meeting these targets will require cumulative green hydrogen investment in Europe of up to €430bn by 2030 and expects legislative proposals to execute this strategy to be introduced in 2021. We believe this represents the most ambitious and purposeful energy transition policy to have been introduced, as we note that:
- The hydrogen roadmaps of South Korea and Japan anticipate combined hydrogen demand of 27Mt by 2050, less than half of the EU’s projected demand, and also assumes the use of a significant proportion of blue hydrogen.
- The EU’s hydrogen capex commitment far outweighs the commitment from Korea and Japan, reflecting the EU’s ambition to remodel its energy system and vertically integrate the hydrogen value chain with wind and solar power, electrolysis, distribution, and applications.
The EU’s targeted increase in hydrogen demand would transform the energy industry with hydrogen demand increasing from its current negligible level to 24% of total national energy demand by 2050.
Transport is expected to constitute the largest proportion of hydrogen demand in both the EU and South Korea by 2050, reflecting the conversion of the heavy vehicle and large passenger car fleet from diesel to hydrogen. Heating for buildings is expected to be the next-largest demand driver, supplanting fossil gas.
The EU’s hydrogen plan is critical to the growth of the global green hydrogen industry as it is the only plan with a focus on green hydrogen. We note, in contrast, that:
China has ambitious policy plans for hydrogen, with a 2019 hydrogen white paper calling for 2050 targets of hydrogen to account for 10% of China’s total energy (equivalent to 60 million tonnes a year of hydrogen) and the construction of 10,000 hydrogen fuelling stations. However, this plan is primarily based on grey hydrogen, which relies on fossil gas and coal-based feedstocks.
South Korea’s hydrogen roadmap assumes that blue hydrogen (hydrogen produced from fossil fuels with carbon capture) is to constitute the bulk of hydrogen supply as liquefied green hydrogen is not likely to be cost competitive before 2030.
Japan’s hydrogen roadmap has a modest target of developing commercial scale supply chains by 2030 to supply Japan with 300,000 tonnes a year of hydrogen and reduce the cost of hydrogen to JPY30/NM3 (USD3/kg). This plan is focused on a broad reduction in process costs and incorporates blue and grey hydrogen.
Economic reasons for supporting green hydrogen
We believe the EU aims to spearhead green hydrogen as a means towards creating a market to start up, scale up, and grow a competitive and innovative European hydrogen manufacturing industry. This can ensure a future for European industrial manufacturers, especially in electrolyser, fuel cell and other hydrogen equipment and manufacturing applications, as detailed in the table below.
The buildout of this new hydrogen economy in Europe will require a significant expansion of industrial capability – increasing EU electrolyser manufacturing capacity to 25 GW/year from the current capacity of about 1 GW/year; raising EU fuel cell manufacturing capacity to the 10-100 GW/year range, from the current very limited position; expanding EU manufacturing capacity for a wide range of hydrogen applications.
Hydrogen Europe has recommended the following steps and actions to support these proposals – EU should provide loans, mezzanine financing and equity and help to build domestic world-leading companies; EU needs policies to prevent takeovers from companies outside the EU; and EU needs to formulate and implement criteria in tender procedures, subsidy programmes and procurement that will allow European companies to get preferential treatment.
Supply outlook takes shape
We have compiled a database of 50 viable large-scale hydrogen projects announced so far, primarily in Asia, Europe, Australia. We estimate these projects to have a total hydrogen production capacity of 4Mtpa, renewable power capacity of 50 GW, electrolyser capacity of 11 GW and requiring a total investment of US$75bn.
Most of these 50 projects are at an early stage, with just 14 having started construction and 34 at a study or memorandum of understanding (MOU) stage. Only two plants are operational in Asia, and they are pilot plants with less than 1,000 tonnes a year of hydrogen production capacity. The biggest projects are being planned for Australia and the Middle East, as economies of scale are required for export-oriented plants.
We expect most of these projects will start in the middle of this decade, with largescale projects starting up in 2022-23 and 2025-26. There is a serious risk that some of these projects may not be undertaken because of still-unfavourable economics and/or a lack of financing. As a result, our risk-weighted analysis indicates that only 2.9 million tonnes a year of hydrogen capacity is likely to materialise by 2030, compared to a theoretical capacity of 4Mtpa.
Our analysis of these hydrogen projects concludes that:
Hydrogen projects in Europe enjoy a strong economic advantage versus imported hydrogen as they are poised to take advantage of falling wind power costs to produce green hydrogen on-site economically and transport it efficiently through the EU’s existing gas pipelines to meet local demand. Key stakeholders in the EU from oil, renewables, gas utilities and ports have formed 10 green hydrogen consortiums so far.
- Australia has the most ambitious hydrogen export plans and is well supported by government agencies. We note, however, that some initial projects are being initiated by new companies that may lack the resources to drive these projects, while the economics of a seaborne hydrogen trade may be unfavourable.
- South Korea is focusing on tapping hydrogen currently being produced at its large-scale petrochemical complexes, where hydrogen is produced as by-product.
- Japan is in the process of trialling green hydrogen imports from Brunei, having built the world’s first liquid hydrogen tanker and is participating in a pilot lignite-to-hydrogen project in Australia.
- China has only minor green hydrogen projects, as it mainly produces hydrogen from coal and petrochemicals and is more focused on building downstream hydrogen infrastructure such as storage, refuelling stations and fuel-cell vehicle fleets in Hebei, Shanghai and Guangdong.
- Saudi Arabia has begun to prepare for its energy transition from fossil fuels with the NEOM project, a pioneering world-scale green ammonia project located by the Red Sea and well suited to transport ammonia to Europe.
New projects are mushrooming
At present, we estimate that new hydrogen projects are insufficient to meet the EU’s ambitious targets, but we note that the rate of new project announcements is accelerating, and this is likely to materially narrow the gap. We estimate that a total of 655 megawatt (MW) of new electrolyser capacity was announced in July and August 2020, while Australia and Portugal moved ahead with plans for new large-scale hydrogen plants. PetroChina’s potential shift to renewables could be highly significant, although this could take time. We highlight key events during July and August as follows:
- On 4 July 2020, Nikola announced that it had ordered 85MW of alkaline electrolysers from Nel to support five of the world’s first 8 ton per day hydrogen fuelling stations, with the purchase order in excess of US$30m.
- On 7 July 2020, a consortium of Air Products, ACWA Power and NEOM (a new city planned near Saudi Arabia’s border with Egypt), announced plans to build a US$5bn green ammonia plant powered by 4GW of wind and solar power. The facility will produce 237,000 tonnes a year of green hydrogen to be shipped as ammonia to markets globally.
- On 20 July 2020, the Australian Renewable Energy Agency (ARENA announced that seven companies (including BHP Billiton and Woodside Petroleum) have been shortlisted and invited to submit a full application for the next stage of the Agency’s A$70m green hydrogen funding round. ARENA expects to select the preferred projects by mid-2021.Successful projects are expected to reach financial close by late 2021 and commence construction in 2022.
- On 24 July 2020, NextEra Energy announced that it was closing its last Florida coal-fired power unit and investing in its first green hydrogen facility. NextEra aims to invest US$65m in a 20MW electrolyser to produce solar-powered green hydrogen by 2023 for blending a gas-fired power plant.
- On 27 July 2020, PetroChina announced a potential pivot towards renewables, following the disposal of its gas pipeline assets. The details are not yet disclosed but we believe it could encompass solar, wind and hydrogen.
- On 27 July 2020, Iberdrola and Fertiberia of Spain announced a partnership to develop an integrated hydrogen plant with 100 MW of solar PV, a 20 MWh lithium-ion battery system and a 20 MW electrolyser for a total investment of €150m. This project is due to come onstream in 2021 and will have a production capacity of 200,000 tonnes per year (tpa) of green hydrogen.
- On 28 July 2020, Portugal’s environment ministry announced that it had received more than €30bn hydrogen project proposals, in preparation for Portugal’s application to Europe’s Important Project of Common European Interest scheme.
- On 28 July 2020, Hanwha Energy announced that it had completed the world’s first hydrogen fuel cell power plant in Daesan, South Korea with a capacity of 50MW utilising hydrogen from Hanwha Total’s chemical plant. The plant uses 144 units of 440-kilowatt fuel cells from Doosan Fuel Cell and is a joint venture between Hanwha Energy (49%), Korea East-West Power (35%), Doosan Fuel Cell (10%) and financial investors (6%).
- On 28 July 2020, Microsoft announced that hydrogen fuel cells had powered a row of its data centre servers for 48 consecutive hours, bringing the company one step closer to its goal of becoming carbon negative by 2030. Microsoft plans to test a 3 MW fuel system next, which could potentially replace the current diesel-powered backup generators.
- On 31 July 2020, Hazer announced that it is moving forward with construction of the world’s first carbon negative hydrogen commercial pilot project which converts biogas derived from sewage at a wastewater treatment plant in Western Australia into hydrogen and graphite.
- On 3 August 2020, the WESTKÜSTE100 consortium announced the construction a 30MW electrolyser at the Heide oil refinery in Hamburg. The ten partners in this project include EDF, Holcim, OGE, Ørsted, Heide refinery and Thyssenkrupp.
Green hydrogen production challenges
Under the EU Hydrogen Strategy announced on 8 July 2020, the EU will support the installation of renewable hydrogen electrolysers of at least 6 GW from now to 2024, and at least 40 GW from 2025-2030. Hydrogen Europe, which represents the European industry, national associations and research centres active in the hydrogen and fuel cell sector, has outlined plans to construct 80 GW of electrolyser capacity in Europe, Africa and Ukraine to build the hydrogen economy. In conjunction with hydrogen projects in other countries, primarily Australia, China, South Korea, and North America, we estimate that up to 100 GW of electrolyser capacity would be required from now to 2030. Based on our analysis of major international electrolyser producers as detailed in the table below, we believe that this industry will require major expansion to meet demand and to lower costs through economies of scale. We note that 4 of the 9 companies detailed in the table below remain at small scale and are running at a loss.
We note a potential bottleneck in proton exchange membrane (PEM) electrolysers since the large-scale producers are mainly focused on alkaline electrolysers. PEM electrolysers are more suitable than alkaline electrolysers for small- and medium-scale hydrogen plants because they are compact and handle variable power supply from renewable sources more efficiently.
We believe that China’s alkaline electrolyser manufacturers are globally competitive but are not yet competitive in PEM electrolysers as evidenced in sales of PEM electrolysers by Hydrogenics, Nel and McPhy to China in recent years. We believe that until now China has not focused on green hydrogen production technology because of its reliance on grey hydrogen and a relative emphasis on electric vehicles over fuel cell vehicles.
Seaborne transportation is expensive
A significant challenge facing hydrogen projects planning to export hydrogen to distant destinations is the high cost of transport. Hydrogen gas is the lightest molecule and has an extremely low volumetric density at ambient temperature, making it more expensive to transport than other fuels.
We believe that Australian hydrogen projects may choose the liquified hydrogen path, owing to its established LNG expertise and infrastructure. According to Australia’s National Hydrogen Roadmap prepared by the Commonwealth Scientific and Industrial Research Organisation (CSIRO), the current production costs of a moderate scale hydrogen liquefaction plant could be reduced from almost US$5/kg to US$1.8/kg in the best-case scenario. This is a significant reduction, but it is still 51% higher than our estimated industry average hydrogen production cost.
In addition to the costs of liquefaction, shipping liquefied hydrogen from Australia to Japan could add a further US$0.7/kg, according to CSIRO. Hydrogen must be stored at minus 253°C versus LNG at minus 163°C, calling for tankers with more sophisticated insulation. Japan started building the first liquefied hydrogen tanker in December 2019 and expects trial shipments of Australian hydrogen to Japan to begin by March 2021.
Project delays appear likely
Our review of 50 announced projects shows that 60% consist of projects with more than one partner, and a third have more than three partners. We believe that projects with multiple partners enjoy the benefits of stronger financial backing, risk mitigation and supply chain optimisation, but also face a higher risk of cost overruns and schedule delays. A study conducted by Ernst & Young (EY) in 2015 found that the average joint venture takes 18 months to establish but most survive less than five years, with the failure rate being as high as 70%. Overall, the EY study showed that joint venture projects faced higher cost overruns and schedule delays relative to independent projects because of divergent investment rationales, differences in tolerance for project risk, and a lack of appropriate commercial agreements.
Large-scale hydrogen projects are also likely to face the following regulatory hurdles.
- In Australia at present, most hydrogen ventures are pilot projects and are regulated on a case-by-case basis without the need for lengthy formal assessment and approval processes. If the technology is proven, it is likely that these projects will be subject to comprehensive environmental assessments and public consultation that could lengthen project delivery schedules.
- On-site storage of hydrogen is hazardous and is likely to be governed by strict laws, regulations and codes and will likely need to be situated away from population centres.
- As green hydrogen requires significant quantities of water (9 litres of water per kilogram of hydrogen), a key challenge is to secure a sufficient volume of quality water. In the case of a desalination plant, limits on rises in water temperature, as well as brine management and disposal, would be imposed.
Green capital and credentials could smoothen financing risks
Funding risks are a primary concern in the global roll-out of hydrogen projects. Based on the list of announced projects we compiled, we estimate that a total investment of US$75bn will be required up to 2030. Many of these projects have partners with substantial financial resources, but we estimate that around a third do not yet have secure funding. However, we believe this concern can be alleviated for the following reasons:
- Flows from sustainable investing funds are accelerating, with net U.S. inflows in the first half of 2020 at US$10.9bn, which was similar to the total net inflows in the full-year 2019, according to Morningstar. There is also increasing interest in renewables investing from private equity and venture capital funds, with the number of substantial renewable energy deals in Europe rising to 36 in 2019 from 33 in 2018, according to Private Equity News.
- In conjunction with the EU, major European oil companies have pledged to be carbon neutral by 2050. These plans are mainly centred around reducing carbon intensity of existing operations and adding renewable power production. Among these majors, only Shell to-date has plans to invest in hydrogen, but we believe that other European majors are likely to follow suit to meet these goals as hydrogen project scale and economics improve. EU oil majors have committed to building over 100GW of renewable energy infrastructure projects over the coming 10 years or so (BP 50GW by 2030, Total 25GW by 2025, ENI 15GW by 2030 and Equinor 16GW by 2035).
- The sharp fall in alternative energy costs and lower energy prices this year have led to competitive investor returns for renewables compared to oil and gas projects, according to Wood Mackenzie. This is likely to encourage oil companies to take on more renewable projects to meet their 2050 emission goals. We note that in January 2019, a survey conducted by the Oxford Institute of Energy Studies showed that the hurdle rate for most fossil fuel projects were already significantly higher than renewables, signalling a tilting preference towards renewables, and the growing acceptance of the higher risk profile of fossil fuels as carbon emissions risks continue to rise.
The original report by IEEFA can be accessed by clicking here