Beyond the hype: hydrogen gets serious

Hydrogen, touted as key to the energy transition, has faced many hype cycles and is yet to deliver at scale. “Hydrogen is the fuel of the future…and always will be,” goes the industry joke. But hydrogen is now getting serious.

Low-carbon projects are finding a pathway to final investment decisions (FIDs) through careful renewable power procurement, matching hydrogen production with anchor offtake agreements and state support. At the same time, the outlines of a global market for low-carbon hydrogen and its derivatives are taking shape, as early movers sign supply contracts and conduct trial shipments.

This all comes despite policy uncertainty, cost inflation and difficulty securing competitive offtake agreements. For sure, the nascent sector still faces enormous challenges. Just 7% of announced global clean hydrogen projects have taken positive FIDs. Electrolyzer costs have risen 20%-45% since 2021, with reductions of only 15%-30% expected by 2030, according to an analysis from S&P Global Commodity Insights.

But there are bright spots and concrete progress is being made around the globe, albeit slower than originally envisaged and slower than developers would like to see. Incumbent producers, companies tapping subsidies and industries where the end-product cost increase is small are making the first moves.

US leads with blue hydrogen

Generally, blue hydrogen produced using steam methane reforming (SMR) with carbon capture and storage (CCS) is cheaper than green hydrogen produced via electrolysis. Platts assessments showed grid-based alkaline electrolysis costs in the Netherlands averaging $5.38/kg in July, versus $2.69/kg for SMR with CCS. Platts is part of Commodity Insights.

Incumbents such as industrial gas and fertilizer companies need low-carbon hydrogen volumes associated with existing SMR assets and, in addition, avoid the costs associated with developing an entirely new production pathway.

As such, some of the largest clean hydrogen projects to have taken positive FIDs are in North America, with two operational carbon capture-enabled plants in Canada and more planned in the US.

Air Products’ Louisiana blue hydrogen and ammonia facility is planned to produce over 750 MMcf/day, capturing 95% of CO2 emissions when it comes online in 2027. The company already supplies hydrogen to customers through its Gulf Coast pipeline, where there was “significant demand for blue hydrogen,” CEO Seifollah Ghasemi said.

However, US project developers now face similar issues to those developers in Europe grappled with a few years ago, with uncertainty around policy stalling investment decisions. Proposed tax credits under the Inflation Reduction Act offer subsidies of up to $3/kg but require strict additionality criteria for renewables and hourly power matching, which industry representatives say could choke off the US hydrogen industry in its infancy.

First mover advantage

In Europe, the finalization of a hydrogen policy and demand mandates has given developers more certainty to underpin economic decisions, while the European Commission’s approval for state support programs is unlocking private sector investments.

The EU and national governments such as Denmark and the UK have also awarded first subsidy schemes, and developers are securing offtake agreements from early movers looking to decarbonize operations. The electrolyzer industry is scaling up, with hydrogen project developers increasingly focused on medium sized projects of 100 MW and above that are better placed to weather the cost increases of recent years and take advantage of economies of scale, learning from smaller pilot plants.

Hy24, a joint venture between investment manager FiveT Hydrogen and private equity firm Ardian, is among the backers of Sweden’s H2 Green Steel 700-MW hydrogen project, one of the first in Europe to reach FID with agreed loans now in the administrative phase. Such projects typically do not need third-party funding from either public or private entities, and can progress more quickly toward FID and construction, executives at electrolyzer supplier Thyssenkrupp Nucera said. Industry participants said the premium for green hydrogen was a small part of the endproduct cost, with low power costs supporting the business model.

Export-oriented plants

Meanwhile, project developers in India, the Middle East and other regions are eyeing hydrogen and ammonia exports to demand centers in Europe and East Asia. In Saudi Arabia, Air Products is part of the state-backed 2-GW Neom green hydrogen project now in construction. Elsewhere in the Middle East, the Abu Dhabi National Oil Company has sent a test cargo of blue ammonia from its existing Ruwais plant to Germany, with plans to expand CO2 capture and storage at the site.

Low-cost loans from Indian government companies REC and Power Finance Corp. have helped developers reach financial close. ACME’s 1.2 million metric tons per year Oman renewable ammonia project is under construction after reaching FID for a first phase with the help of a $487 million loan from REC in July 2023. ACME subsequently secured an offtake agreement with Yara.

ACME, Greenko and Reliance were among winners of India’s $2.4 billion hydrogen subsidy plan, and have pledged to accelerate their projects. ACME also has an offtake agreement with Japan’s IHI Corporation from its 1.3 MMt/y renewable ammonia project in Odisha, India, with commissioning expected by early-2027.

Emerging global trade flows

Even as the low-carbon hydrogen and ammonia production landscape takes shape, front-runners are testing the waters with early shipments. Outline contracts and trial shipments indicate potential future trade flows, with production centered in the Middle East, Australia, the US and India.

Exporters are targeting demand in Europe, Japan and South Korea, where energy decarbonization policy is driving market formation. Ammonia is the preferred means for transporting hydrogen over long distances, using existing infrastructure and avoiding the technical challenges of handling hydrogen, which requires temperatures of minus 253 C for liquification, compared with a balmy minus 33 C for ammonia.

For now, however, non-binding agreements currently dominate deal-making. Announced volumes from strategic partnerships since 2020 amounted to 8.9 MMt as of May, including non-binding memorandums of understanding, letters of intent, joint studies and joint ventures. A further 1.7 MMt of binding deals have been struck for low-carbon hydrogen and ammonia under tenders and firm offtake agreements.

Commodity Insights analysts see two principal blue hydrogen export hubs developing in the US Gulf Coast and the Middle East.

“Both regions have low-cost gas, port infrastructure and sequestration geology,” said Brian Murphy, senior analyst at Commodity Insights. “Projects in these two regions are explicitly considering exports as key early stage markets and many have companies from abroad directly involved in project development.”

Since 2020, over 25,000 metric tons of low-carbon hydrogen and derivatives have been shipped globally, mostly in the form of ammonia produced with CCS and mostly from the Middle East. There has also been one demonstration shipment of liquid hydrogen from Australia to Japan. Most activity in AsiaPacific is centered around Japan and South Korea, which have plans to co-fire ammonia with coal in power generation.

Market transparency is improving as participants seek to assess market value and stimulate growth.

Producers are also eyeing the fertilizer industry and new sectors such as marine fuels, but remain cautious.

“We continue to explore green hydrogen projects, but we don’t anticipate spending any meaningful capital until we have a high-quality contract that ensures low risk and higher than portfolio average returns,” an executive at India’s ReNew said. The company signed an agreement with Japanese power generation company JERA in April to supply renewable ammonia.

Though in its early days, the low-carbon hydrogen market is clearly developing in a more realistic phase. The hype bubble may have burst, but the leading projects are now gathering steam, poised to power the sector as it gains maturity.

This article first appeared in the September 2024 edition of Commodity Insights Magazine.