By Fitch Solutions
- Despite a slight fall in the regions Hydrogen Index score since Q421, NAWE remains the global leader due to a strong renewable base, low risks and policy support for green hydrogen production.
- The US and Canada remain as the global and regional leaders. However, since Q421 the US has overtaken Canada as the top market in our hydrogen Index, owing to the implementation of the Inflation Reduction Act (IRA).
- The EU is also showing strong commitments to their hydrogen sector, especially after US policy threatens to take the EU’s hydrogen market share. However, uncertainty remains over their commitments, and the subsequent impacts.
- We note slight growth in the region’s hydrogen Index scores between 2022 and 2031 with Germany and the Netherlands representing the largest growth markets.
Despite a slight fall in the regions Hydrogen Index score since Q421, NAWE remains the global leader due to a strong renewable base, low risks and policy support for green hydrogen production. In our Green Hydrogen Suitability Index, which measures a market’s attractiveness for green hydrogen investment, NAWE’s regional average for the hydrogen suitability score is 67, which is well above the global average of 47. With the exception of Iceland, all markets also scored above this global average. Although the region has high scores across all parts of the Index, the graph below shows that the region scores worse in the Rewards profile, with declining scores since Q421, and higher for the Risks profiles, which either did not change or improved since Q421. The former trend is due to the poorer macroeconomic environment in 2022 that has meant our Country Risk team forecast GDP growth to be roughly half what it was in 2021 for NAWE, which has reduced demand and investment. The Renewables Rewards Index has seen the largest drop since Q421, with Norway and Sweden accounting for the strongest shares of this. We expect this is from both poor macroeconomic environment and a near-term slowdown in growth of an already saturated market. Overall, the decline in the Rewards score pulled down the region’s score, with 12 out of 19 markets’ scores falling since Q421. However, we expect growth in the long-term with strong renewables targets and growing renewables to support both hydrogen segments and power needs. The final graph demonstrates this through the region’s increasing Hydrogen and Renewables Rewards Indexes between 2022 and 2031.
The US and Canada remain as the global and regional leaders. However, since Q421 the US has overtaken Canada as the top market in our hydrogen Index. The US lead globally because they have a very strong combination of healthy hydrogen demand and energy policy that support our high Hydrogen Rewards and Industry Risks scores. The US’s current hydrogen demand comes from a strong oil refining sector, fertiliser production and other refining and industrial processes that require hydrogen. For example, our Oil & Gas team forecast that the US will have the largest oil refining capacity in 2022, worth 18mnb/d. We also forecast strong future demand in the form of high freight and other transportation sector demand, as well as strong steel production and gas consumption.
Canada performs best on its Risk profile with the lowest Country Risk score, made up of political and economic risk indicators, in the region. This is due to Canada’s very low short- and long-term political risk scores, which is supported by Canada’s strong political institutions, low levels of unemployment and stable political environment, making it attractive for projects to mean it is one of the largest producers of hydrogen, globally. Moreover, a stable economic environment and strong energy policy supports growth in the hydrogen and renewables markets. For example, Canada’s renewables sector will be driven by federal and provincial policy frameworks that support the replacement of coal-fired power plants with low carbon alternatives. They also adopted a Hydrogen Strategy in 2020 to reach their goal of being net zero by 2050. In addition, the federal government will invest USD300mn through their Strategic Innovation Fund’s Net Zero Accelerator Initiative, which will further drive Canada’s hydrogen sector.
Despite Canada’s very strong position in the hydrogen market, the US has overtaken Canada in its suitability score because of the recent Inflation Reduction Act (IRA) that was signed into law in August 2022, which is set to be transformative for the energy sector. As well as significant sector funding, the government will provide companies with tax credits worth USD216bn. In 2023, renewable electricity and clean hydrogen plants will receive production tax credits of 2.6 cents per kWh and up to USD3 per kg of hydrogen for the first 10 years of operation lasting until 2032, encouraging investors to install plants in the first year of 2023 to receive full benefits. Green hydrogen projects are also eligible to claim for both renewables and hydrogen tax credits. In addition, the government also announced in August 2022 that USD8bn will be utilised for the development of hydrogen hubs through the Bipartisan Infrastructure Law. These hubs will facilitate the hydrogen market through the development of networks, and infrastructure support for production and deployment of green hydrogen. The US government also announced USD40mn of funding for research and development of clean hydrogen innovation to support their target of carbon-free electricity by 2035.
The EU is showing strong commitments to their hydrogen sector, particularly after US policy threatens to take investment. However, uncertainty remains over their commitments, and the subsequent impacts. The EU, which includes most of NAWE with the exceptions of North America, the UK, Iceland and Switzerland, has implemented hugely ambitious targets of producing 10mnt and importing 10mnt of green hydrogen by 2030, equitable to an estimated 80GW of electrolysers. However, we expect the EU to fall on these targets under the current pipeline. We note a small number of large projects in the pipeline in our Key Projects Database (KPD), although this does show a large capacity to have moved through the pipeline compared to other regions. The EU has responded to the US’s IRA with calls to amend the subsidies, which they believe threaten Europe’s hydrogen investment. The EU plans to increase support for their hydrogen sector through their Green Industrial Plan that adds hydrogen manufacturing targets, reduces regulatory barriers, as well as increases subsidy and tax cuts to retain hydrogen investment in Western Europe. However, clarity over the EU’s taxonomy of green hydrogen is needed. Current plans allow hydrogen producers to use grid-electricity and offset fossil fuels with PPA agreements but are still in the preliminary stages. The EU also launched a new European Hydrogen Bank that will capitalise on USD3bn to support the buying of hydrogen with the details of how still to follow, supporting our view that EU hydrogen plans are too uncertain to forecast how these new developments will impact on the region, and in particular on the US’s hydrogen segment.
We note slight growth in the region’s hydrogen Index scores between 2022 and 2031 with Germany and the Netherlands representing the largest growth markets. Germany moves from 4th to 2nd in the region between 2022 and 2031 due to a large increase in its Renewable Rewards Index. This is due to the government’s strong renewables targets and auction scheme that will support the addition of 80.9GW between 2022 and 2030 and double Germany’s renewable installed capacity and generation output between 2022 and 2031. This strong renewable energy support and commitment to a green hydrogen economy, such as through the ambition to become a global leader and exporter of green hydrogen technology, support our view that they will become a leader in the region. Germany has demonstrated their leadership by installing the first ever passenger train hydrogen refuelling system. And through a strong project pipeline with the highest number of projects in the region being in Germany. Although, this includes projects in planning, which are still at preliminary stages and at risk of being cancelled. HH2E, a Hydrogen developer, plans to install a huge 4GW of electrolyser capacity in Germany by 2030 with potential for more capacity. This capacity growth will also be supported by USD8.1bn of government funding for hydrogen technology and USD2.3bn for International partnerships.
The Netherlands will also see strong growth between 2022 and 2031. Again, this can largely be attributed to their increasing Renewables Rewards score from renewables capacity and generation doubling in size between 2022 and 2031, with a lot of this growth supported by offshore wind. The government has selected three new areas in the North Sea that will home 10.7GW of capacity to help reach their 2030 21GW target. Like Germany, the Netherlands is a strong market for hydrogen from a strong renewables base, aggressive green policies and is therefore an attractive market for investors. For example, both the Netherlands and Germany are among the markets with the largest funding programmes for clean tech. Germany will invest EUR100bn and the Netherlands will invest EUR45bn. The Netherlands will be the strongest European market because of their having the highest subsidies per gigawatt of electrolyser capacity at EUR1.43bn, according to Rabobank, a Dutch financial services mulitnational.
This article has been sourced from Fitch Solutions and can be accessed here