INTERVIEW: HyDeal Espana targets Q3 for final investment decision on Spain hydrogen project

Europe's largest renewable hydrogen production project, the 7.4-GW HyDeal Espana, is eyeing a final investment decision in the third quarter of 2022, with supply contracts based on levelized costs of production below $2/kg for delivery in Spain from 2025.

In a first phase, 4.5 GW of electrolyzers powered by dedicated solar farms in central Spain will produce around 200,000 mt/year of hydrogen to pipe to industrial consumers in the north of the country, HyDeal Espana Chairman Thierry Lepercq told S&P Global Commodity Insights in an interview March 18.

The project will expand to 7.4 GW of electrolysis powered by 9.5 GW of solar producing 330,000 mt/year of hydrogen by 2030, he said.

"People say, 'How do you compare with other announcements?'," Lepercq said. "We compare, because it's concrete. It's real."

HyDeal is finalizing commercial offtake agreements with steel producer ArcelorMittal and fertilizer company Fertiberia based on levelized costs of hydrogen (LCOH) of Eur1.6-1.8/kg ($1.75-$2/kg), making the supply commercially competitive with other energy and feedstock costs, Lepercq said.

S&P Global Commodity Insights assessed calculated carbon-accounted hydrogen production costs at Eur7.45/kg ($8.24/kg) in Northwest Europe on March 18.

"The beauty of this is that we're solving the chicken and egg situation: volumes and costs," he said.

"If you have both at the same time, then you're solving the equation," particularly around transmission and storage, he said.

Contract negotiations

The two companies have formed a joint venture, along with Spain's Enagas and DH2 Energy, to develop the project.

The solar parks in the Castille y Leon and Aragon regions will produce hydrogen on site, to be sent in dedicated pipelines to ArcelorMittal's steel works and Fertiberia's fertilizer plant in the northern Asturias region.

Fertiberia plans to build its own ammonia production facility to serve the fertilizer plant, while ArcelorMittal is to convert its 2.3 million mt/year steel blast furnace to a direct reduced iron process.

"The dedicated pipeline built alongside existing pipelines is going to be a recipe to lower the cost and the time," he said. "It costs 10 times more to move an electron than a molecule, so cost wise there is no choice."

The offtake deals are among the first globally to underpin a large-scale hydrogen production project with commercial agreements.

The 20-year contracts for 6.6 million mt across the period are a combination of fixed pricing based on the LCOH and a market-determined element based on natural gas plus carbon prices, with a discount, transmission and storage fees, plus a floor and cap to the price, Lepercq said.

"A floor because we want to make bankers happy, a cap because if prices go sky high like today, our customer won't be able to buy any product at Eur5/kg, or even at Eur4/kg or Eur3/kg."

High gas prices meant the reference price today would be over Eur5/kg, he said, but noted that prices would not be at that level for a 20-year contract.

Captive solar

Lepercq said the Iberian Peninsula was the only location in Europe where you could source competitive solar power for hydrogen generation, with prices below Eur15/MWh ($16.50/MWh).

"Solar is really the only one that has consistently achieved in some regions cost below Eur15/MWh," he said. "The idea of producing hydrogen from wind is unlikely to happen unless consumers are ready to pay a steep premium."

He said off-grid captive solar saved on expensive and scarce grid connection and transmission. Total installed solar power capacity in Spain is 14.3 GW.

Lepercq also noted a need globally to dramatically scale up electrolyzer manufacturing capacity, saying European producers faced a "steep ramp-up challenge to multi-gigawatt production capacity."

"The history of solar PV and batteries show that Chinese companies have been faster and bolder in similar ramp-ups," he said.

Lepercq is asking producers how quickly they can scale to 10 GW/year capacity, when the leading manufacturers in Europe are still building towards 1 GW/year capacity.

"This is exactly the discussion I had personally with the solar suppliers 15 years ago," Lepercq, a former solar industry executive, said.

Shale gas story

Lepercq distinguished between what he called "policy hydrogen," driven by subsidies and government incentives and "commodity hydrogen," motivated by market fundamentals.

"Commodity hydrogen comes with a very simple idea, that you need to start from the market."

The hydrogen economy would develop in a similar fashion to the US shale gas developments of the 2010s, Lepercq thought.

"When shale gas entrepreneurs looked at their business 20 years ago, they didn't go to Washington and say, we're going to make America great again with shale gas," he said. "They went to customers. They went to Wall Street to raise money. And in the end, they served the market."

"At some point, you need crazy entrepreneurs," he added, highlighting the role entrepreneurs played in shale gas, solar and battery development. "This is how this green hydrogen business is going to be made at scale."

With a similar effort, Europe could replace all of its Russian gas imports by 2030 with renewable hydrogen sourced from the Mediterranean region.

"The demand is there; the prices are there. The only thing that you need to build is the supply chain to get there," Lepercq said. "What we have today is this war against climate change and against dependence on Russian gas. And what we need is to have a shock therapy. I think we're going to get it, and the reason we're going to get it is market prices."