(Oil Price) – The conversation about low-carbon hydrogen continued last week at the annual World Utilities Congress, hosted by the multinational energy and water company TAQA in Abu Dhabi.
While the hoped-for future trade between Europe and the Middle East and North Africa (MENA) remained in focus, a shift in emphasis appeared. While national goals look increasingly dubious, progress is occurring in specific industry sectors guided by international agreements. Meanwhile, MENA countries confront the imperative to develop domestic markets for their clean hydrogen.
Looking for good news
Industry observers strained to find good news during a discussion called ‘Low carbon and green hydrogen: navigating challenges to open opportunities.’
High cost, lack of demand and regulatory uncertainty were named as the main factors holding projects back.
Even the world’s premier project – NEOM Green Hydrogen in Saudi Arabia – is in danger of delays. TotalEnergies will buy 70,000 tons per year in a long-term contract, about one-third of planned production, but there are no other buyers yet according to a report by Bloomberg News last week.
In Europe, with EU mandates and pipelines for hydrogen under development, there is ongoing criticism of the regulatory regime being shaped by the EU, which many participants believe is too onerous. Europe’s incentive schemes and contract for difference programs are producing just a small part of the green fuels required to meet EU goals.
And the outlook for hydrogen in the US remains precarious, where incentives may be revoked to offset tax cuts.
Chicken and egg
There’s a basic ‘chicken and egg’ problem afflicting the nascent industry, in which there’s no market without demand, and no demand without a market.
“We’re trying to create a market out of essentially nothing, we’re at very early stages,” said Frederik Beelitz, Head of Advisory for Central Europe, Aurora Energy Research.
“Bridging the gap between the levelized cost of hydrogen and the willingness to pay is currently the big challenge, mainly on the demand side,” he said.
“Potential offtakers for green or low-carbon hydrogen are just not willing to pay the relatively high cost that it now incurs.”
Producers want long-term off-take agreements, but off-takers such as industrial companies and utilities want shorter agreements in anticipation of the cost of hydrogen falling as production ramps up and technology improves.
“No one can commit to a 10-year price, no one can carry that risk,” said Jan Haizmann, CEO, Zero Emissions Traders Alliance.
“But we’ve seen how quickly renewables scaled and hydrogen might follow the same path if the conditions are right.”
In Europe, the chicken and egg problem is being met with push and pull policies. On the supply side, pull factors taking the levelized cost of hydrogen down include support mechanisms for capital cost and financing. On the demand side, push factors act to raise the capacity or willingness or buyers to pay. Auction devices such as Germany’s H2Global, now going into its second auction round, provide critical price information while subsidizing the difference between suppliers’ long-term prices and buyers’ preference for short-term contracts. However, it’s unclear whether these programs will build meaningful scale.
Sector specific
At last week’s conference and other recent events, there’s been less use of the term ‘hydrogen industry’ and more emphasis on industry sectors. Hydrogen and its derivatives are now seen as high value fuels for very specific applications.
In Europe, the Renewable Energy Directive (RED III) sets clear targets for the maritime and aviation sectors, in the form of the percentage of ‘renewable fuels of non-biological origin’ (RFNBO) that fuels must contain.
This should create demand for derivatives and synthetic or e-fuels produced with hydrogen. Such fuels include ammonia and e-methanol in the maritime sector and e-kerosene in the aviation sector.
In aviation, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) has entered Phase 1. Airlines can purchase carbon credits in the voluntary market, which must meet the high CORSIA standards, or they can purchase sustainable aviation fuel. The amount of emissions covered will expand greatly when Phase 2 starts in 2027 with the inclusion of Brazil, India, Russia and China in the scheme.
In global shipping, the International Maritime Organization (IMO) has issued draft rules mandating greenhouse gas emissions reductions for ships (5,000 gross tonnage or greater) and imposing penalties for non-compliance.
These rules will effectively impose the first ever global carbon price for international shipping and create demand for green and low-carbon hydrogen derivatives and biofuels. They should compel shipowners and the fuel producers and bunkering companies supplying them to substitute renewable and low-carbon fuels, including expensive-to-produce e-methanol, in place of fossil-derived fuels.
Demand for low-carbon hydrogen should also arise in the power sector, with more electrification of transport and industry and increasing demand for electricity produced from renewable energy systems.
As the price of renewable power continues to decline, it will make hydrogen more competitive because much of its cost is based on electricity prices. Where seasonal power demand variations occur, it can play a critical role in seasonal storage.
In fact, hydrogen production and storage could help utilities to hedge against low power prices in Europe, where renewable energy has exposed them to very low and even negative prices.
Carrots and sticks for domestic markets
For MENA countries, the prospects for large-scale green hydrogen exports look increasingly unlikely in the near future. Yet countries such as Saudi Arabia and the UAE have already invested a lot and risk stranded assets. The question is critical for Saudi Arabia, where the biggest electrolyser production in the world will launch at NEOM next year, and this hydrogen will need to find 100% offtake for 600 tonnes per day produced.
“To have it all go out on ships is very ambitious,” said Jan Haizmann. “They will have to think about what to do with the remainder, as export opportunities may not be realized.”
The countries are already large consumers of hydrogen in their refining and chemicals industries. They have green hydrogen targets in place and plan to develop domestic demand for green and blue (with carbon capture) hydrogen.
“Countries in the region need to build their own internal markets with clear rules and binding targets that drive demand,” said Haizmann. And he emphasized that they will likely need incentives to create demand.
They will need ‘carrots and sticks’, including binding targets that compel companies to procure certain volumes of low carbon fuels for their operations or face penalties, because a purely voluntary system that mostly relies on export scenarios is unlikely to work.
As an example, he pointed to the incentives that, over time, supported the rise of renewable energy systems in many regions.
“With every new technology, there is a need to incentivize it to get to high volumes, and when high volumes are achieved, then prices come down,” he said.
“The production opportunities for hydrogen in MENA are fantastic, almost unrivalled, because of the sunshine here,” he said. “But it doesn’t remove the need to do something to realize the opportunities.”
By Alan Mammoser for Oilprice.com
