| A refinery in the port of Rotterdam in the Netherlands. The city, already a trading hub for a host of commodities, could become the center of Europe's hydrogen economy. |
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This is the second of a five-part series exploring the burgeoning hydrogen economy and its rise — after decades of false dawns — to the top of the energy agenda in 2020.
With 30 years left to eliminate its emissions, Europe is going full steam ahead on hydrogen.
And as the continent once again looks to blaze a path to the next big thing in clean energy, European businesses and lawmakers hope to learn from the recent past. The last green boom saw countries such as Germany spend a fortune to build a world-leading solar industry only to see their homegrown market implode amid cheap competition from China.
"As far as hydrogen is concerned, Europe is again the leader," Fatih Birol, executive director of the International Energy Agency said Oct. 5 during a high-level conference on hydrogen. Birol specifically invoked the boom and bust of the solar industry as a warning to the assembled ministers and business leaders not to make the same mistakes again.
"I hope, this time, Europe does not only lead the marathon for the first kilometers ... but also emerges as the winner," he said.
By taking a lead, Europe hopes to sell critical hydrogen technologies to the rest of the world and decarbonize its economies earlier and more cost effectively than others. Governments see the technology as a potential "oil of the future" that can stamp out emissions in carbon-intensive sectors from refining to steel to heavy transport, which are hard or impossible to electrify.
Over the past six months, the European Commission and a growing number of member state governments — including Germany, France, Spain, Portugal and the Netherlands — have released ambitious strategies to spend billions on stimulating a domestic hydrogen economy and ensure the continent stays ahead of the curve.
That political momentum has spawned new business models, resulted in the first bilateral trade partnerships for hydrogen and kicked off a sprint for dominance in technological innovation and manufacturing. And with one project announcement chasing another, policymakers and industry executives have also started to think about the way buyers and sellers of hydrogen will one day come together and price the commodity.
As part of the commission's hydrogen strategy launched in July, a group of stakeholders was tasked with laying the groundwork for a liquid market for hydrogen by creating a pipeline of projects and solutions for cross-border trade. Using the group's input, the commission is expected to present a document on the regulatory framework for an EU-wide hydrogen economy in the coming months.
"Hydrogen could be a game changer. In Europe, we want to be the ones leading the way," EU Energy Commissioner Kadri Simson said during the Oct. 5 conference.
Trade will be crucial
Despite its ambitious production targets — the EU wants to build 40 GW of domestic green hydrogen capacity by 2030 — Europe is also set to need substantial import volumes of hydrogen in order to fully decarbonize its industry. European countries have already started forming international partnerships on the continent and beyond.
Germany has signed a collaboration agreement with Morocco, with the aim of shipping in green hydrogen produced in the country, and a similar deal is underway with Australia. The Netherlands and Portugal have also signed an agreement to establish trading links for hydrogen.
German Energy Minister Peter Altmaier pointed to cheaper costs for producing hydrogen abroad, particular in sun-rich regions such as North Africa, as the main benefit of forging import ties. Flexible imports would also have other benefits, such as reducing the need for long-term hydrogen storage capacity.
"National solo efforts, as almost always, are no use to anyone," Altmaier said, adding that Europe was likely to remain an energy importer. "That is why we need international partnerships and cooperation, also in hydrogen."
European countries are not the only ones thinking along those lines.
Japan and Australia have already taken the first steps toward integrating their supply chains for hydrogen. On Nov. 27, the state of Queensland said Stanwell Corp. Ltd., a government-owned power producer, would work with Japan's Iwatani Corp. on a hydrogen export terminal. Meanwhile, the Australian government is backing a $36 billion project to build a massive wind and solar power plant that could be used to produce vast amounts of hydrogen for export to Asia.
Zane McDonald, a senior analyst at S&P Global Platts Analytics, said electrolyzer projects have sprung up wherever European governments have announced hydrogen strategies, proving how important policies are in "setting the tempo and trajectory of investments" in the space. But production will also naturally gravitate to places where the fuel is cheapest to produce.
"This is underscored by large investment announcements that have been made in Saudi Arabia, Australia, Morocco, and Chile," McDonald said.
That has got Europe worried it might lose its edge. Although China dominates large-scale production of the cheapest electrolyzers, the innovative technologies needed for producing hydrogen from renewable energy are still mostly in the hands of European equipment suppliers such as Norway's Nel ASA, the U.K.'s ITM Power PLC and Germany's thyssenkrupp AG.
Oil storage tanks in a Hong Kong port. In hydrogen, some market players see a potential "oil of the future." |
But with efforts in China, Japan and South Korea to reach recently announced net-zero emissions goals likely to lean heavily on hydrogen, other countries could decide to aggressively subsidize their domestic industries. That would pose a threat to a European hydrogen industry that could be worth €120 billion by 2050, according to estimates by Aurora Energy Research, a consultancy.
Although about a third of all hydrogen projects are located there, "Europe is not the only place that has realized [hydrogen's potential]," said Ann Mettler, director for Europe at Gates Ventures, the private office of billionaire Bill Gates, which is investing in hydrogen technology. "This is a race to the top."
Shaping markets
Market players and policymakers are already eyeing a suitable commercial center for global hydrogen trade, and for many, the obvious choice is the Netherlands, a country with a long history in commodities.
The Amsterdam Stock Exchange is considered the birthplace of futures trading, and the European oil market uses a benchmark price set in Rotterdam. The region has Europe's highest concentration of refineries, which are already major producers and consumers of more carbon-intensive hydrogen. Consequently, oil companies including Royal Dutch Shell PLC and BP PLC are among those already pursuing green hydrogen projects.
While other cities, such as Hamburg in Germany, are also being floated as potential hubs for hydrogen, the secretary general of trade group Hydrogen Europe, Jorgo Chatzimarkakis, sees the Dutch trading center as the most likely candidate.
"Within three to eight years, we will see the commodification [of hydrogen and] we will see Rotterdam as a marketplace," he said.
The Netherlands has already focused on an international approach, emphasizing its import capacities and potential for cross-border partnerships. The Port of Rotterdam is also actively lobbying for its role as a funnel for exports to other countries.
The early years of an international market might rely mostly on shipping, since some argue that dedicated pipelines across Europe will be tough to finance in the early stages of the market, when volumes will still be small.
Before cross-border trade of hydrogen takes off, many observers believe that the next few years will see a market based around regional clusters of production and industrial off-takers.
Those clusters could serve as testing grounds for regulatory frameworks and standards, including how to trace varying carbon content in hydrogen produced from renewables, gas or even nuclear power. Many companies, especially those already active in natural gas or more carbon-intensive forms of hydrogen, are keen to not see so-called blue hydrogen, made from methane and using carbon-capture technology, excluded from the market.
"Splitting up the product palette into separate commodities would create diminished liquidity, particularly in the startup phase," said Thomas Luncz, director of gas portfolio optimization at power producer and commodities trader Uniper SE.
"Carbon content is the new currency," Hydrogen Europe's Chatzimarkakis said.
With European leaders keen to hold on to their early head start in the hydrogen race, those in the industry also hope that the market will eventually reflect the continent's dominance by establishing a benchmark price in euros, for example.
Jose Bermudez, an analyst at the IEA who coordinates the agency's work on hydrogen, suggested that the European discussions on building a hydrogen market are in themselves a sign that the continent is moving faster than others. With more European countries adopting holistic hydrogen strategies, that momentum is only set to continue.
"I think this message that the hydrogen strategies are sending is putting the focus on Europe for now," he said. "They have sent a clear signal."
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.