The green hydrogen economy is captivating both the public and private sector as a gamechanger for the low-carbon transition. In the coming months, we will be presenting a short series of articles focusing on accelerating the commercialisation of hydrogen, and will hold a roundtable at the conclusion.
In this article, we will focus on how to make a commercial return from hydrogen. The commercialisation of hydrogen is not a ‘switch’ in the distant future but is happening already right before our eyes. With the funding and processes needed now in place, the time is right for companies to put the pieces together and make the market happen.
Improving investment climate
As the commercialisation of hydrogen speeds ahead, the main enablers are grant funding and the establishment of incentives. This makes the decision of where to invest, and in which type of hydrogen project, critical for future success.
Currently, a price gap exists between hydrogen and alternatives: green hydrogen is now produced for €5-6/kg ($5.93–7.12/kg) on average in most EU countries, which is about six times higher than natural gas.
Closing this gap through low cost renewable generation and falling electrolyser costs will happen sooner in active markets where early incentives such as tax exemptions, contracts for difference, and carbon pricing exist, which will help to bring the market to scale rather than waiting on technology developments. This highlights the importance for companies of being proactive and not waiting for the market to come to them.
In order to offset early risk, companies and investors should seek out opex subsidies as well as capital grants. Countries and regions offering these subsidies will benefit greatly from first-mover advantage and gain a competitive advantage in the market.
Already, there is no shortage of attractive markets with incentives in place. In the US, $4.5bn in loan funding can be accessed to support green hydrogen production and infrastructure, while more than $17bn has been allocated to support the manufacture of fuel-cell electric passenger vehicles and components.
Across the Atlantic, Germany is moving towards a leadership position in Europe, announcing it will invest €8bn in 62 large-scale hydrogen projects. Meanwhile in China, more than ten provinces and municipalities and over 40 cities and counties have issued special policies to support the hydrogen industry. With clear leaders emerging, it is crucial that companies examine both the scale of financial support available and the pace of deployment to set themselves up best for commercial success.
Unlocking supply-side support through financial innovation
With funding and incentives from governments now in place, the right signals to investors are being sent and infrastructure funds and private equity firms are stepping up to raise investment for hydrogen.
There has been no shortage of enthusiasm from investors to back the hydrogen economy and most recently, in June, Nordea Asset Management and ATP indicated they would subscribe to Danish electrolyser maker Green Hydrogen Systems’ IPO. Meanwhile, investment funds solely focused on investing into hydrogen businesses are being created, such as the HydrogenOne Capital fund, which announced in early July a target to raise £250mn ($345mn) in an IPO on the London Stock Exchange, sizing their fundraise to invest in 20-100MW projects.
Private infrastructure investment funds dedicated to delivering clean hydrogen infrastructure projects at scale have also now launched, such as FiveT Hydrogen, which aims to raise €1bn. As a result of this increasing flow of private capital, infrastructure firms are now making early bets on building new businesses seeking to capture the market early in certain parts of the value chain.
At the same time, innovative policy support mechanisms for hydrogen are being introduced by governments. In the US, fuelling equipment purchased for hydrogen stations is eligible for a federal tax credit of 30pc of the cost. The EU has included hydrogen in its July 2021 ‘Fit for 55’ commitment—reducing net greenhouse gas emissions by at least 55pc by 2030 compared with 1990 levels—and is promising a finalised hydrogen policy by December 2021 as part of the Green Deal.
With financial support ramping up from multiple stakeholders, we are seeing corporates investing into partnerships and technologies. For example, in June, Baker Hughes and Air Products announced a strategic global collaboration to develop next generation hydrogen compression to lower the cost of production and accelerate the adoption of hydrogen as a zero-carbon fuel. And in July, US firms Apex Clean Energy and Plug Power announced a 345MW wind power-purchase agreement, marking the country’s first wind-supplied hydrogen production facility. Meanwhile, energy firms are also forming partnerships, with BP agreeing with Orsted to jointly develop an industrial-scale electrolyser project in Germany.
Commercialisation will not be a linear path for all sectors
It is important to remember, though, that a one-size-fits-all approach to commercialising hydrogen for its multiple uses will not be successful given the diverse challenges each sector faces, and each use will have a different timeframe for bringing it to scale.
Green hydrogen’s use as an industrial feedstock should provide a large and lucrative market. In Europe alone, consumption of hydrogen is about 10mn t/yr, with an associated CO₂ footprint of 100mn t/yr, highlighting the enormous opportunity offered by replacing grey hydrogen with green. Switching from coal to green hydrogen will also reduce CO₂ emissions, as well as allowing companies to charge for the green benefits—and will not require waiting for cost parity. Steel companies such as Australia’s Fortescue Metals Group are already developing plans to start building a green steel pilot plant this year with an eye on bringing green steel to scale for export to its neighbours.
In the transport sector, green hydrogen’s usage is taking off in California and China. The US state has 7,500 hydrogen vehicles already on the road and has a target of 1,000 hydrogen filling stations by 2030, as it partners with First Element Fuel to build a statewide network. Meanwhile, China had close to 10,000 trucks and buses powered by hydrogen by the end of 2020 and is pushing ahead quickly, with Beijing alone expected to have more than 10,000 fuel-cell vehicles and over 70 hydrogen filling stations by 2025.
It may be a slightly longer time before hydrogen’s use in the power sector builds momentum, but giant projects are in planning. For instance, in Australia, Infinite Blue Energy has unveiled plans to build a 1GW green hydrogen power plant that will provide electricity to 1.5mn homes and businesses in New South Wales. Project NEO aims to begin producing power by 2027.
Widescale adoption of hydrogen in the heating sector may take the longest, although some companies are making commercial returns now. In particular, Japan has been an earlier mover and by 2009 had installed close to 3,000 residential fuel-cell micro combined heat and power systems. By 2020, more than 300,000 systems had been installed across the country.
Ultimately, companies must realise that the commercialisation of hydrogen across sectors will come in fits and starts. In order to achieve scale, it will require a diverse set of stakeholders working together, who will all need to achieve commercial success in their own reference frames.
Putting the pieces together
The hydrogen economy is a fast-evolving space where companies are already making a commercial return even before large-scale operations are in place. This highlights the importance of being on the front foot— securing grants now should be a priority for firms. The EY organisation has the experience and capabilities to help companies access grant funding faster, and at a larger scale.
Hydrogen is featured as a key sector to benefit from the EU’s €600bn support under the new multiannual financial framework and Next Generation EU (NGEU) Covid-19 recovery fund, as it can contribute to achieving the EU Green Deal objectives. Funding programmes such as the Recovery and Resilience Facility, Just Transition Fund, InvestEU, Connecting Europe Facility, and Horizon Europe should all be tapped. Hydrogen Important Projects of Common European Interest (IPCEI) also offers another avenue for grant funding, and nations such as Germany have already selected projects for IPCEI. Projects with IPCEI status also avoid any potential conflict with EU state aid rules.
In the US, federal programmes such as H2@Scale and Hydrogen Energy Earthshot are in place to support the rollout of hydrogen. Last year, the Department of Energy provided $64mn in funding for 18 projects. California is a particularly ripe market, committing to spending $230mn on hydrogen projects by 2023.
With an increasing number of companies beginning to see early returns and growing funding options becoming available, now is the time to begin making the market.
For more details, please contact David Roxby David.Roxby@parthenon.ey.com