Olga Bezhentseva , Director Commercial Advisory, Mazars
Green hydrogen is often referred to as the energy carrier of the future, and specialists anticipate that the next step of the global energy transition will be based on the hydrogen economy. However, support is greatly needed to close the economic gap associated with the existing costs to ensure green hydrogen is actually a viable energy alternative.
The cost of a green economy
Currently, more than 95 per cent of the hydrogen produced globally is derived from fossil fuels. Green hydrogen, which is powered by renewable electricity, is less common and therefore more costly.
The cost of electricity, local production costs, and the cost of electrolysers are the main considerations when it comes to using green hydrogen to decarbonise the economy, with the cost of electricity being the primary factor, accounting for 80 per cent of the overall cost. One way of addressing this is to develop the production of green hydrogen in countries with high renewable potential and a low levelised cost of renewable electricity such as Chile, Morocco, Spain and other countries.
However, other factors need to be considered such as the cost and availability of electrolysers and regulatory and contractual frameworks to develop green hydrogen projects. In fact, the complexities of contractual frameworks, particularly Engineering, Procurement and construction (EPC) contracts often get underplayed when apprising hydrogen investment cases. EPC contracts enable a project company to pass most of its risks and obligations to various contractors. Some of those risks such as risks related to the enactment of new and modification of applicable laws, health and safety risks and connection of the hydrogen project to the electricity grid are among the most significant risks that force project developers to create buffers in the project cost to cover for uncertainties.
Other factors that are critical for the widespread adoption and development of hydrogen infrastructure are access to affordable financing and investment capital. The availability and reduction of the cost of capital may change the landscape of hydrogen production with some countries in Latin America, Africa and the Middle East emerging as key green hydrogen exporters.
No need to say that the transportation of hydrogen is still complex and costly, so further advancements in hydrogen transportation and storage technologies and the development of adequate business models are also required to make this more efficient and cost-effective.
Enabling hydrogen economy
Governments play a central role in facilitating the growth of the industry, and with the help of multilateral agreements, grants and guarantees, it can ensure the development and standardisation of the sector. In addition, there is a need for establishing clear and supportive regulations to incentivise the development of infrastructure to ignite hydrogen economy.
Carbon capture, utilisation and storage (CCUS) projects are expected to play a significant role in the transition to hydrogen economy in the coming years. These projects are currently larger in scale compared to green hydrogen projects and are expected to become enablers for the development of infrastructure within defined clusters, indicating their potential role in supporting the growth of the hydrogen economy.
Hydrogen strategies have been developed and adopted by various countries that include hydrogen production targets, development of regulatory frameworks and standards and announcements of various measurements to create low-emission hydrogen economies.
Leading the way
The US Inflation Reduction Act has rapidly increased green hydrogen project initiatives in the US, and it may shift the geographical locations of key players in the developing green hydrogen industry.
Although market players still need to understand the full implications of the act, including the small print and main compliance requirements to qualify for incentives, the US is now accounting for 15 per cent of global low-carbon hydrogen projects, and it is likely to overtake Australia as the leading country in the world for announced capacity. The Act has triggered competition among the EU, UK, Australia, Japan and other countries to endorse comparable incentives vital for attracting investments in green hydrogen projects. Despite these measures, the investments in green hydrogen in the US since the announcement of the act have exceeded those in the EU.
In the UK, the government just recently announced an update on its hydrogen strategy. The financial support available through the NetZero Hydrogen fund and the Hydrogen production business model is significantly smaller. However, consistent commitment to support the hydrogen economy was seen through the allocation of funding to 20 projects in August 2023. Future plans involve the launch of Hydrogen Allocation Round 2 (HAR2) later in 2023 for a total capacity of up to 750 MW).
The outlook for 2030 is looking positive, with announced hydrogen projects exceeding demand, however, more long-term projects are needed to meet 2050 demand forecasts. Collaborative efforts, technological advancements, and supportive policies are required to unlock the full potential of hydrogen as a clean energy source and help the market mature. Without this, the future of the green hydrogen industry is less certain.
Notes to Editors
. As at the end of 2021, almost 47 per cent of the global hydrogen production is from natural gas, 27 per cent from coal, 22 per cent from oil (as a by-product) and only around 4 per cent comes from electrolysis. (Irena Org)