The Hydrogen Hype Is Proving To Be a Hard Sell

Over the past decade, climate experts have touted the outsized role that hydrogen could play in helping the planet limit catastrophic global warming. Indeed, net-zero models have forecast that hydrogen could provide as much as 20% of the world’s primary energy by 2050, nearly as much as all renewables currently contribute to the United States’ energy mix. Not surprisingly, there’s no shortage of big hydrogen ambitions. 

The European Union has set a target to produce 10 million metric tons of carbon-free hydrogen by 2030 while importing an equal amount. Last year, U.S. President Joe Biden unveiled seven regional hydrogen hubs that will receive $7 billion from the government  as part of the bipartisan infrastructure law.Chile, Australia and Egypthave laid the groundwork to produce green hydrogen for export. Meanwhile, China has announced no less than 360 hydrogen plants. Overall, companies and governments across the globe have announced plans to build nearly 1,600 hydrogen plants. However, hydrogen producers are facing one small problem: Few customers are stepping up to buy their commodity.

According to Bloomberg New Energy Finance (BNEF), just 12% of hydrogen plants have customers with offtake agreements. Even among projects that have signed offtake deals, most have vague, nonbinding arrangements that can be quietly discarded if the potential buyers back out. 

The big problem here is that many industries that could potentially run on hydrogen require expensive retooling to make this a reality, a leap they most are unwilling to make. 

To complicate matters, green hydrogen made by electrolysing water using renewable energy costs nearly four times as gray hydrogen created from natural gas, or methane, using steam methane reformation but without capturing the greenhouse gasses emitted in the process. Quite naturally, it’s hard to build hydrogen infrastructure when the demand may not materialize for years.

“No sane project developer is going to start producing hydrogen without having a buyer for it, and no sane banker is going to lend money to a project developer without reasonable confidence that someone’s going to buy the hydrogen,” BNEF analyst Martin Tengler notes.

“It’s no different than any other energy development at scale. Natural gas pipelines didn’t get built without customers,” says Laura Luce, chief executive officer of Hy Stor Energy. Laura’s company has secured an exclusive letter of intent to supply hydrogen to an iron mill that Sweden’s SSAB SA plans to build in Mississippi.

The situation is quite dire, even in renewables-obsessed Europe, “If half of it comes to fruition, we’ll be happy. If a quarter of it comes to fruition, we’ll be happy,” Andy Marsh, CEO of Plug Power Inc. (NASDAQ:PLUG) told BNEF, referring to the company’s 4.5 gigawatts in engineering and design work underway on European projects to generate green hydrogen. According to Marsh, EU member states are still incorporating their hydrogen roadmaps into their own regulations, delaying private investments.

Werner Ponikwar, CEO of hydrogen equipment maker AG, says hydrogen projects likely to succeed today are ones that include “the whole ecosystem,” in essence hydrogen plants located near a clean energy source, with a ready customer close at hand. 

To wit, Thyssenkrupp Nucera, is working with a northern Sweden that will feed an iron and steel mill being developed by H2 Green Steel, which has already secured €6.5 billion ($6.9 billion) in funding for the project. The plant will generate green hydrogen using the region’s abundant hydropower, while Mercedes-Benz Group AG has agreed to buy the 50,000 metric tons of the mill’s steel per year, likely at a considerable premium.

According to Rachel Crouch, a senior associate at Norton Rose Fulbright, existing use cases for hydrogen–which today rely almost exclusively on gray hydrogen–may be among the first green or blue hydrogen opportunities to be financeable, because the offtake picture is already clear and is likely easier to model. 

Crouch sees petroleum refining as one such area where bankable early green or blue hydrogen projects are likely to emerge because refineries are among the largest users of hydrogen as a fuel stock. She has also predicted that specialty vehicles will become big hydrogen customers because hydrogen is already being used to power fuel cells. Fuel cells are used in specialty vehicles such as forklifts and by energy consumers to complement electricity from the grid, to smooth energy costs and ensure reliability.

Cheap Fuel On The Planet

Thankfully, it’s not all doom and gloom for the hydrogen sector. Although hydrogen gas is rarely found in oil operations, large stores of natural hydrogen may exist all over the world. After all, several known natural phenomena in the Earth’s crust continuously generate hydrogen gas including water-rock interaction known as diagenesis, radiolysis, the activity of certain bacteria as well as friction on the fault planes and also release some H2, but in smaller quantities. 

Two years ago, the U.S. the Geological Survey (USGS) presented a model that estimates there might be a trillion tons of hydrogen than we can tap–enough natural hydrogen to meet global demand for thousands of years.

The Big Catch: Underground hydrogen could be considerably cheaper than hydrogen made from natural gas.

Anglo-Spanish company Helios Aragón says it can produce naturally occurring hydrogen from a giant underground reservoir in the foothills of the Pyrenees for €0.75 ($0.82) per kilogram, about half the cost of gray hydrogen. Helios has estimated the field holds ~500 billion cubic feet (14.16 billion cubic meters) of hydrogen and helium. The company’s project is located around an old oil well first drilled in the area in the 1960s, which found large quantities of natural hydrogen capped with a layer of rock that prevented the tiny hydrogen molecules from escaping. 

Three years ago, South Australia expanded its oil regulations to allow drilling for natural hydrogen. South Australia has plenty of natural hydrogen,  and could become the first to start producing and, possibly, exporting the cheapest fuel on the planet. 

By Alex Kimani for Oilprice.com

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