Hydrogen stalls
The green hydrogen projects market, after the hype of recent years, is now facing up to reality. The market is still awash with developers and their projects looking for salvation from either big reductions in costs or a better regulatory framework, or indeed a combination of both. Both are predicted but then there is the need for massive new amounts of renewable energy. Still, the recent financial close of H2GS following on from the financing of the NEOM deal last year shows there is hope.
TotalEnergies is an interesting player in the hydrogen space. As a global energy player, you would have thought it would be a major green hydrogen producer in its own right. It was planning a big project in India with Adani, for example, and had four smaller scale projects of its own in Europe. But last September it decided to put out its own large scale tender for the supply of 500,000 tons per year of green hydrogen to aid decarbonising its European refineries.
TotalEnergies has six refineries in Europe – in Antwerp in Belgium, Leuna in Germany, Zeeland in the Netherlands, and Normandy, Donges and Feyzin all in France – as well as two biorefineries in La Mède and Grandpuits in France, all of which use hydrogen. The company wants to replace the hydrogen consumed in its refineries with green hydrogen produced with renewable energies by 2030. So how is that going?
Patrick Pouyanne, chairman and CEO of TotalEnergies, said last week during the annual results presentation: "I know a lot of people are looking to our tender to better understand where is the market. We'll not get it at US$3 per kg, just to under US$6, it will be okay."
Sounds expensive, even at US$3 it is uncompetitive. But then add in the regulatory issues.
"The demand exists in Europe, and we are refiner in Europe, because there is a policy which is quite a complex, one where you have some emissions trading system [ETS] advantage on credits when using green hydrogen in your refined products," Pouyanne said, adding: "Is there today demand for green hydrogen as itself without this type of framework? No. The reality is no. So that's why you have more supply than demand."
In Saudi Arabia, NEOM, ACWA Power and Air Products were able to get their US$8.4bn green hydrogen scheme to financial close last year with the backing of a 30-year offtake agreement from Air Products and an EPC wrap from the same company. The deal is a statement of intent on the new market from a major global industrial gas company. But following on from that, projects have struggled for a raison d'etre now as opposed to in five or ten years time. Fair enough, this is an embryonic sector – progress will be piecemeal rather than coming all in one go.
The financing of the €6bn H2GS project in Sweden this year is one step. The green steel project is not green hydrogen per se but the scheme uses green hydrogen to decarbonise the steel production. Green hydrogen produced by the electrolysers will be used as the reducing agent for iron ore in the project. An electric arc furnace, powered by renewables, will then heat a combination of the virgin iron and steel scrap, which can later be wound into rolls.
H2GS CFO Otto Gernandt said: “From a customer standpoint, there is a growing need for decarbonised basic materials, whether that’s steel or aluminium, plastic or whatever it is. In terms of commercial rationale, from the customer standpoint there are a lot of tailwinds for this type of product and so we expect to see premiums going up quite significantly over time.”
In Europe a lot will hang on the impact of the European Union’s carbon border adjustment mechanism (CBAM). But one can see the logic behind selling decarbonised materials in these time, even if they attract a 30% premium, with green hydrogen embedded in the process.
However, when taken on its own the cost of producing green hydrogen still seems too high right now. Late last year, the UK Department for Energy Security & Net Zero (DESNZ) awarded its first 11 hydrogen projects totaling 125MW at a weighted average strike price of £241/MWh, or £175/MWh in 2012 prices. Oops. The subsidy will vary relative to changes in the reference natural gas price. DESNZ said the strike price compares well with the strike prices of other nascent technologies such as floating offshore wind and tidal stream. Well yes, but should producing hydrogen be that challenging? Its interesting that DESNZ was due to award 250MW in the first round and is now expanding the second round this year, hoping to award 875MW.
Europe is seeking to make green hydrogen consumption compulsory over the medium term. In the US, the approach to encourage the sector relies on grants to developers via the Inflation Reduction Act. The IRA provides a tax credit of up to US$3/kg for green hydrogen under Section 45V, quite a subsidy.
But there is a catch. New guidance from the US Treasury on how to qualify for hydrogen tax credits is causing major difficulties. Developers will need to develop hourly matching of distant intermittent wind and solar electricity with hydrogen output or, the preferred option, have electrolyser plants next to renewable power supplies. Energy attribute certificates (EAC) will be awarded according to where the energy used comes from and how green the feedstock power is. Projects will have to meet hourly matching requirements starting in 2028 and remain profitable relying on electricity solely from recently built renewable power plants.
