Surging gas prices in light of the escalating war in Ukraine are bolstering arguments for the green hydrogen industry in Europe, which is now seen to have a price advantage over fossil fuel-sourced grey or blue hydrogen alternatives. To capitalize on this advantage and start building, though, investors and hydrogen businesses still crave regulatory clarity.

Russia's invasion of Ukraine and sanctions implemented in response have added pressure to global natural gas prices, which were already at record levels due to supply constraints. As a result, the price of natural gas-derived products such as ammonia, a key ingredient in fertilizer production, is now up to three times higher than it was a year ago, analysts at Bloomberg NEF, or BNEF, said in a March 3 note.

"This has opened the door for 'green' hydrogen and ammonia produced from renewable electricity to compete," the analysts said.

At today's prices, green ammonia could be an effective hedge against the suddenly pricey incumbents. But there is a caveat: "In reality, few green ammonia or hydrogen projects are currently in operation," BNEF pointed out.

Because the current phenomenon of favorable pricing for green hydrogen in Europe is fairly fresh, there has not yet been enough time for companies to move on it and make equipment orders, said Will Kirkness, a hydrogen analyst at Jefferies. "We should see an increasing rate of it," Kirkness said in an interview March 11.

Green hydrogen has its own price challenges. Its key input is renewable electricity, which is facing cost pressure from surging steel and polysilicon prices. Demand and prices in the market for green power purchase agreements have risen substantially in recent months.

That said, green hydrogen still emerges as a winner from the energy crunch over its grey gas-derived alternative, said Pierre-Etienne Franc, CEO of green hydrogen fund FiveT Hydrogen. "It's not greenflation, it's fossil-flation," the executive said in an interview. "An increase of the [capital expenditure] cost by 10%-15% is, of course, an impact, but it's not the same as having a multiplication of four of the natural gas price."

Regulation still a showstopper

Franc conceded that longer-term inflationary pressures would burden green business models. "It should not stay like that, especially if inflation is raising interest rates. That is not good for renewable project financing," Franc said. "But I think so far it is helping green hydrogen more than grey hydrogen."

The market seems to agree. Stocks of key hydrogen manufacturers including Nel ASA, ITM Power PLC and McPhy Energy SA have gained more than 30% in the last two weeks.

Since the European Commission launched its hydrogen strategy in mid-2020, though, many in the industry have been disappointed by delayed policy frameworks to incentivize uptake. The electrolysis technology is ready for scale, but uptake from industry remains a barrier, Franc said. "We want to move to green processes for industry, from refining to chemicals and transportation. If the bridge to that is well funded, the thing will move."

Investors, too, are still holding back for a lack of regulatory stability, Kirkness noted. While a flurry of projects has been proposed in Europe since 2020, only a small fraction has actually reached financial close.

"When we talk to infrastructure funds, the reason why contracts are not converting is because of a lack of regulatory frameworks around energy pricing, incentives, subsidies and integration with the grid," Kirkness said. "They remain frustrated that we're not seeing it."

The invasion of Ukraine has brought further urgency to this issue, and on March 8, the European Commission came out with a strengthened renewables and hydrogen package dubbed REpowerEU. With the aim of weaning the bloc off Russian gas, the plan cuts regulatory hurdles for renewables and increases green hydrogen capacity targets. The commission boosted its annual renewable hydrogen target for 2030 by 15 million tons, of which 10 million tons will be imported, likely from regions such as the Middle East or even Australia.

After the EU commission's proposal, Norwegian electrolyzer-maker Nel said it stands ready to increase equipment production, but more clarity on the revenue streams is needed. This could come in the form of carbon contracts for difference, under which governments guarantee a fixed price for CO2 emissions reductions beyond price levels in the EU's carbon market.

In fact, such a support system is now being developed at pace, the commission wrote in its REpowerEU plan. Alongside this, the commission said it wants to boost manufacturing capabilities for innovative clean-tech equipment such as electrolyzers.

"We are committed and ready to deliver on the promise to help make Europe the first climate-neutral continent in the world," Nel CEO Jon André Løkke said in a March 9 statement. "It's time to turn Europe's hydrogen ambition into a reality. We need a clear and predictable regulatory framework which provides certainty and appropriate incentives for renewable hydrogen technologies."

Case for blue hydrogen 'evaporated'

While green hydrogen may get a boost from the current crisis, the picture for blue hydrogen is more downbeat.

In light of rising gas prices, the business case for blue hydrogen, made with gas and carbon capture, has become challenging. Europe's deficit in molecules is now greater than its deficit of electrons, and policy focus may shift to producing molecules using renewables, said Roman Kramarchuk, head of future energy outlooks at S&P Global Platts. "Blue hydrogen would not help with this molecules deficit and — given efficiency losses — can make the deficit worse," Kramarchuk said March 10.

"The case for blue hydrogen based on costs relative to renewable hydrogen has evaporated. At this time of high energy prices, support for EU industry in the transition to renewable hydrogen is key," Eleonora Moro, a researcher on energy and industry at think thank E3G, said in a response to EU proposals March 8.

"The problem with blue is that it has the cost of grey plus the cost of carbon capture and storage," Kirkness said. Blue hydrogen has been given a place in the energy transition, with mainstream models including that of the International Energy Agency featuring it as an interim technology, Kirkness said. "The pricing dynamics of natural gas and the security issues do change that somewhat."

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