Hydrogen power has been on the market for decades but has never really been able to break the glass ceiling of mass-market appeal, mainly due to a host of technical and cost issues. But some experts now believe that the hydrogen economy is ready for take-off, with Goldman Sachs predicting hydrogen generation could become a $1 trillion per year market. The EU has hatched a highly ambitious plan to install 40 gigawatts of electrolyzers within its borders and support the development of another 40 gigawatts of green hydrogen in nearby countries that can export to the EU by 2030. The EU has also pledged to cut Russian gas imports by two-thirds by the end of the year and has doubled down on green energy fuels by increasing renewable hydrogen production.
But for all the buzz surrounding green and blue hydrogen, few low-carbon hydrogen project financing deals have actually been closed to date. That's the case because financing low-carbon hydrogen projects requires cataloging and allocating risks in a manner that is familiar to project financiers--something that is proving to be a hard nut to crack because expectations around how financing and offtake deals will be structured tend to vary widely.
Varying Expectations
Currently, there is no merchant market for hydrogen. For hydrogen projects to become financeable, they must have a bankable offtake scheme. But expectations around how financing and offtake deals will be structured vary widely, adding complexity to the contracting process, as Frank O'Sullivan, managing director at venture capital firm S2G Ventures, has told the ACORE Finance Forum. There's also no shortage of investors interested in the hydrogen sector, but many are sitting on the sidelines and watching to see how the first round of deals pans out.
"There isn't a single model that defines, this is how the hydrogen play works. There will be several models, and those models have not emerged yet," O'Sullivan has said.
It's a viewpoint reiterated by Greg Cameron, executive vice president and chief financial officer of hydrogen fuel cell maker Bloom Energy (NYSE:BE). According to Cameron, on one end, there's the acquisition of energy needed to drive electrolysis. On the other end, there are the off-takers, who may come from diverse industries with different expectations for how a contract should be structured.
Luckily, O'Sullivan says that the path to getting actual hydrogen infrastructure off the ground is relatively clear. The capital costs associated with electrolysis are declining, while access to renewable energy that's cheap enough to generate hydrogen from water and still sell a cost-competitive fuel is on the horizon.
Rachel Crouch, a senior associate at Norton Rose Fulbright, has proposed that 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 suggests ammonia is one such area because a market already exists for ammonia, and several green ammonia projects have been proposed or are in the early stages of development.
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She sees petroleum refining as another 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. In this case, early-stage hydrogen projects may contract with refineries as offtakers, and notes that several pilot projects are already being developed in this sector.
Crouch adds that specialty vehicles are also showing early promise where 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.
Biden's $9.5B Hydrogen JackPot
Here in the United States, the U.S. government is likely to play a key role in launching the hydrogen economy.
After years of failed efforts in Washington to overhaul physical infrastructure, last year, President Joe Biden signed the more than $1 trillion bipartisan infrastructure bill into law, unlocking funds for transportation, broadband and utilities. Buried deep into the historic plan was a provision for $9.5 billion in funding to build at least four hydrogen hubs--places where the gas can be produced and used in a self-reinforcing cycle.
A hydrogen economy that runs factories and power plants on the fuel may be years away; however, that has not stopped multiple U.S. states from scrambling for Biden's hydrogen bonanza, never mind the fact that many have not even worked out the details of how they intend to realize their hydrogen dream.
According to Bloomberg, many states are forming strategic partnerships to increase their chances of landing funding. For example, New York has formed an alliance with Massachusetts, New Jersey and Connecticut to produce green hydrogen. Their plan appears to make sense considering that none of the four states is endowed with natural gas, the raw material used in the production of natural gas through steam-methane reforming. New York is also home to one of the country's hydrogen behemoths: Plug Power Inc. (NASDAQ:PLUG).
In May, McDermott (OTCPK:MDRIQ) announced that it will design and build two 500K-gallon double-wall liquid hydrogen spheres for Plug Power's new green hydrogen production facility in New York. Plug says it expects the production facility, which will leverage its proton exchange membrane electrolyzer technology, to produce 45 metric tons/day of green liquid hydrogen, making it the largest green hydrogen facility in North America.
Arkansas, Louisiana, and Oklahoma have forged another partnership that will use existing infrastructure to form the basis of its hub. Hydrogen is already produced in the region using natural gas and used in some manufacturing processes, such as lowering the sulfur content of fuels from refineries. To qualify for the federal money, the carbon dioxide released by stripping hydrogen from gas will need to be captured and stored, most likely underground. The three states intend to use their hydrogen to decarbonize heavy industry and transportation.
A third alliance involving Colorado, New Mexico, Utah and Wyoming also seems to be taking an "all-of-the-above" approach. The sprawling combination of states includes plenty of natural gas and renewables, particularly wind power, and their agreement to seek funding highlights both.
Back in February, a coalition of businesses that includes Equinor ASA (NYSE:EQNR), Mitsubishi Power, Marathon Petroleum Corp. (NYSE:MPC) and United States Steel Corp. (NYSE:X) said they would help work on a hub that would knit together Ohio, Pennsylvania and West Virginia
Some states like Joe Manchin's West Virginia have decided to go it alone.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More
Comments
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