Hydrogen Market update: Tax, Tech, and Transport
Off the back of the recent World Hydrogen Congress in Rotterdam, inspiratia takes this opportunity to reflect on how far the industry has come in the last year, and asks where the pieces currently stand
Joint Venture Podcast: Voices from the hydrogen industry
A year ago, there was one question on every pair of lips at events across the budding hydrogen industry – When will green hydrogen reach parity with blue or grey hydrogen? There was plenty of interest, but the commercial case for even the smallest green hydrogen facility was still firmly on the 10 year + horizon. The events of the past 12 months have changed the script so dramatically that it is difficult to keep up with the frantic activity across the value chain – as a whole new industry is attempting to emerge fully formed from the blueprint of collective vision.
inspiratia insights:
- Events of the past year have hardened the will of politicians to get behind hydrogen
- The IRA tax credits will make the USA the key hydrogen growth market of 2023
- There is still everything to play for in the race for electrolyser market dominance
- The EU hopes additionality will ensure that a rapidly scaling hydrogen market is accompanied by an equally rapid expansion in renewable capacity
- Linking hydrogen producers and users is a complex problem that requires international cooperation and infrastructure investment
Geopolitical pressures have set the tune
This past year has seen a number of unprecedented shocks to Europe's natural gas market, largely due to disruptions of supply resulting from the war in Ukraine. The earliest operational projects of the nascent green hydrogen production sector with dedicated renewable generation assets were, at many times during the past months, out competing natural gas derived grey hydrogen. Even now, as European gas stores are full and the mild autumn has kept demand at a manageable level, the lessons learnt in the past year will not be forgotten.
This period has built up a great deal of confidence amongst policy makers with regards to green hydrogen as a sustainable way to build up domestic energy security from a strong renewables market. Germany has been leading the European conversation, as the country doubled down on its green hydrogen strategy to the exclusion of any support for blue (gas based) hydrogen as it attempts to wean itself off gas imports from the east.
Tax credits open the US market
The IRA (inflation reduction act) in the USA, passed into law by Joe Biden's administration in August, is already proving to be a decisive key to unlocking the green hydrogen transition. Under the new legislation, clean hydrogen producers will be able to earn a tax credit worth US$3/kg of hydrogen produced. Given that the lowest estimates for green hydrogen production at source (i.e., without including transmission or storage costs) often range as low as US$3/kg, this could mean that green hydrogen could completely outcompete grey hydrogen at renewable production sites, at prices well under US$1/kg.
Read inspiratia's deep dive into the IRA to learn more about the tax credit mechanisms that will facilitate the energy transition in this article.
Given this competitive advantage and the US$6 billion (£5.3bn €6bn) of grant funding that the department of energy has made available for the construction and development of regional clean hydrogen hubs, it is little wonder that much of the investor interest in green hydrogen has begun to focus on the US market. In the coming year, it is very likely that we will see the US market race to catch up with the EU on the sheer number and ambition of hydrogen projects.
Technology is driving progress
The electrolyser is the key piece of technology that underpins all the world's green hydrogen ambitions. Helped along by projected reductions in operating costs, the PEM (proton exchange membrane) favoured by the UK's leading electrolyser producer ITM Power, is currently leading the pack of contenders. However, this is far from a settled issue. AEM (anion exchange membrane), SOE (solid oxide electrolyser), and even older alkaline based designs are also seeing rapid development.
Notably, companies such as Alchemr in the USA and Enapter in Europe are championing the AEM design as they pursue a cheaper and more modular market product.
Additionality is an essential component for new hydrogen projects
One important concept that has recently come to the forefront of conversations about hydrogen is additionality. How does a green hydrogen project provide additionality? By ensuring that the electricity used to generate the hydrogen is from a dedicated renewable source.
In the EU, additionality is a requirement of all green hydrogen production projects under the Renewable Energy Directive II, with the stipulation that any power used from the grid must be offset by a dedicated supply within a single hour of use. This requirement highlights what many unguarded hydrogen enthusiasts can sometimes miss, hydrogen alone cannot solve the energy crisis because it is not ultimately a source of energy, merely a vector for the transmission and storage of that energy.
The REPowerEU plans have set the targets of 10 million tonnes of hydrogen production per year with an electrolyser capacity of 120GW by 2030. This undertaking will need to be accompanied by an equally enormous roll out of renewable energy generation to meet these targets, lest two thirds of the EU's current renewable assets output be simply diverted to produce hydrogen.
The UK has taken a softer approach to the additionality requirement in its Low Carbon Hydrogen Standard, where it makes up 5% of a project's weighted score when applying for government support.
Building an international hydrogen economy
It is generally accepted that to let this new hydrogen economy grow to its full potential, interconnectivity on the level of projects – as well as on the wider market level – will be key. Largely, this comes down to a question of pipelines and ports.
Moving hydrogen over land in pipelines is one of the most mature and simplest methods of moving hydrogen from place to place. Much of Europe's existing natural gas infrastructure can be retrofitted to transport hydrogen with some investment and expertise. Modern gas pipelines often forgo materials that are susceptible to hydrogen embrittlement, like steel, in favour of new materials such as fibre reinforced polymer (FRP). Click here to read more about the challenges of making gas infrastructure hydrogen ready.
The European Hydrogen Backbone initiative has now attracted thirty-one gas infrastructure companies across Europe to work cooperatively towards building an interconnected system to transport hydrogen across the continent. The country that has perhaps the most developed plans to make its gas grid 'hydrogen ready' is the Netherlands, which this year saw a €750 million (£658m US$745m) investment package between the Dutch government and system network operator Gasunie.
With overseas hydrogen partnerships – between high demand industrial economies and prospective export countries – becoming an ever-larger part of the transmission discussion, ports and their associated infrastructure are an essential element. The ports of Rotterdam in the Netherlands, Wilhelmshaven in Germany, and Humberside in the UK are all key areas of hydrogen innovation on the North Sea. Each of these ports, and many others besides, are the focus points around which complex hydrogen environments are beginning to crystalise.
The technology that is used to move hydrogen from port-to-port is another topic that is up for grabs. Liquification is the preferred method for moving natural gas by sea, but hydrogen has the option of being shipped as a part of denser, more economical molecules at the cost of a conversion process. Ammonia and other LOHCs (Liquid Organic Hydrogen Carriers) are among the considerations for this transportation process. Ammonia also has the advantage of being a useful product for many industrial processes, forgoing the need for a conversion back to pure hydrogen.
Listen to our Joint Venture: Voices from the hydrogen industry podcast episode to hear our coverage of the World Hydrogen Congress first hand.
