Renewable Hydrogen: Key to Defossilising Hard-to-electrify Industries - Africa’s premier report on the oil, gas and energy landscape.

Renewable Hydrogen: Key to Defossilising Hard-to-electrify Industries

By Olivia Breese, CEO, Power-to-X, Ørsted

When it comes to renewable hydrogen, there is a clear gap between ambition and reality. On the one hand, there is widespread recognition that renewable hydrogen is the only real option for defossilizing hard-to-electrify sectors like shipping, aviation, and steelmaking, which contribute around 30 percent of global greenhouse gas emissions.

This is why governments have been dramatically scaling their targets. Today the global production of renewable hydrogen is around 0.1Million tons per year; by 2030, the EU alone is aiming to produce 10Million tons per year.

Based on the need for global climate action and the stated ambitions from governments, renewable hydrogen therefore seems an urgent priority. On the other hand, only around four percent of planned renewable hydrogen projects have reached Final Investment Decision – the signal that a project will move from planning to reality. There are simply not enough signatures on contracts and spades in the ground.

What explains this gap?

In a word: offtake. Renewable hydrogen currently comes with a clear cost premium compared to fossil-based hydrogen. This means that the potential offtakers – shipping, aviation, steelmaking – are wary of signing contracts to buy green hydrogen, which makes it difficult for both developers and the supply chain to invest and grow.

The way through this impasse involves simultaneously addressing supply and demand: providing financial support to kickstart the industry, while legislating to level the playing field for market actors and create a reliable demand-side pull. It also involves connecting supply and demand by building the pipelines that will transport renewable hydrogen from production sites to the regions where it is most needed.

In the EU, existing financial support such as the Important Projects of Common European Interest (IPCEI) has set the wheels in motion but could be more impactful if the question of timeline is addressed. Between submissions of applications and awards, fundamental changes in the economic environment – increased interest rates, costs of raw materials, bottlenecks in supply chains – can dramatically alter the business case and the amount of funding required. The past three years have shown that it may be difficult to scale such mechanisms quickly enough to kickstart an industry.

More recent initiatives in the EU are heading in the right direction. The European Hydrogen Bank provides a 10-year fixed-premium of up to €4.5 per kilogram for renewable hydrogen, which is a bold and welcome step. However, the total amount available in the first auction (€800Million) may struggle to make a major impact, and any awards cannot be combined with other potential funding mechanisms available in the EU. In addition, while auctions can work well for mature markets, they are by nature competitive and therefore uncertain, while developers and suppliers crave certainty so that they can invest in new supply chains.

In the US, the Inflation Reduction Act is an exciting development, but market actors are eagerly awaiting guidance on how the proposed tax credit for hydrogen production, 45V, will be implemented – not least to achieve the full credit at $3 per kilogram. The ongoing debate and delay create uncertainty once more: developers and suppliers cannot yet be sure that their projects will be financially viable.

On the demand side, the regulatory framework to create an offtaker pull is coming together. The new Renewable Energy Directive (REDIII), and the ReFuelEU and FuelEU regulations, set clear targets for the use of renewable hydrogen and derivates in industry, aviation and shipping. However, EU frameworks are still to be transposed into national laws in the coming months, and there is significant lack of clarity on enforcement and penalties for non-compliance. In addition, some industries will need to make major upfront investments in new facilities to switch from fossil fuels use to renewable hydrogen, as is the case in steelmaking, and it is only slowly emerging how they will be supported in this endeavour.

All of this is not to sound gloomy about renewable hydrogen. Massive progress has been made and the industry is here to stay. Spades are in the ground, including in Northern Sweden, where Ørsted is building FlagshipONE, the largest e-methanol facility in Europe to have taken FID. Governments and investors have put real money on the table; only the structure and mechanisms need revision.

Renewable hydrogen will undoubtedly be a major part of the future energy system. But if it is to fulfil its potential in time for global climate goals, the cost premium must come down and the supply chain must be scaled. For that, it’s crucial for policy to work from two sides in tandem: support the supply and boost the demand – and build the pipelines to connect the two.

 

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