If Fortescue failed, can green hydrogen succeed?

What problem is Fortescue trying to solve?

In 2021, Andrew Forrest gave the Boyer Lecture and explained the problems of an emissions-fuelled economy. Cars powered by oil, fertilisers made from natural gas and industrial products such as turning iron to steel with the use of coal.

In a world committed to net-zero by 2050, emission-free alternatives are required, and Forrest saw the green form of hydrogen, made from renewable electricity as the perfect solution. A like for like replacement for burning fossil fuels, truly green not like batteries where emissions free means emissions from a power station somewhere else and an infinite supply of materials.

There was just one problem.

“We'll go down in history as the first society that wouldn't save itself because it wasn't cost effective.” – Kurt Vonnegut

Hydrogen like a lot of green technologies is expensive, it’s just cheaper to burn fossil fuels and ignore the problems of the future.

But Forrest saw a world waiting till 2050 to solve its problems as “toast”, both figuratively and literally. Through his company Fortescue, he was going to invest in green hydrogen which if he got his business case correct, would mean first mover advantage, outweighing the higher costs.

Fast forward to today, and it hasn’t gone quite to plan with Fortescue just one of the many hydrogen companies having downsized, pivoted and/or reassessed their future.

Will this mean the end of green hydrogen, or can Forrest and Fortescue learn from their misadventures?

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Understanding the market

Any business case starts with a total addressable market and hydrogen has the benefit of customers who need hydrogen. Currently 95 million tonnes of hydrogen is produced each year, mainly used in oil refining and in the production of fertilizers.

For oil refining, heavy crude oil molecules need to be converted into more valuable lighter products such as gasoline, diesel and impurities need to be removed such as sulphur. Roughly 1 kg is required per barrel of oil or about 42 million tonnes per year.

Another 30 million tonnes is used in the production of fertilizer. Currently this is done using the Haber Bosch process to turn natural gas into hydrogen which is used in the making of ammonia (NH3) but it emits 2 tonnes of CO2 for each tonne of ammonia, so an emission free alternative will eventually be required. ?

Fortescue also saw a market beyond these traditional sectors. Petroleum products for cars, trucks and ships also need an alternative with hydrogen being pitched for fuel cell vehicles and ammonia for ships. But in this case, hydrogen competes not just with fossil fuels, but also direct electrification alternatives.

Solving the emissions problem, meant it only needed to be cost effective.

How much does it cost?

To make hydrogen using natural gas requires a steam methane reforming (SMR) plant and natural gas. This makes grey hydrogen but no one is currently announcing these projects due to the issue of emissions. Instead, companies such as Air Products are including carbon capture technologies, and we can use the Clean Energy Complex in Louisiana, USA to understand the cost.

At $7 billion, it sounds expensive, but it can produce 750 million standard cubic feet of hydrogen per day (1710 tonnes/day) or to put that in context, the first 20 years will produce 13 billion kilograms of hydrogen or an overnight construction cost of 50 cents/kg.

For the gas, Henry Hub in the USA is trading at a cheap $2/MMBTU, and you can produce 5kg of hydrogen for each MMTBU of gas or a feedstock cost of 40c/kg. Add in profit for the investors and bankers, a bit of maintenance and running and the cost is about $1.5-$2/kg. And don’t forget, the current SMR plants without carbon capture are cheaper than this.

Can green hydrogen compete?

Fortescue stuck their fingers in a lot of pies including investing in Electric Hydrogen. The American company has a strategy of driving costs down by scaling up hydrogen to 100MW units. They claim to be able to produce an all-in cost of $750/kW giving a construction cost of 25cent/kg which is cheaper than a blue hydrogen plant.

But! A lot of the cost of green hydrogen is the electricity feedstock. Assume today’s prices of $60/MWh and that’s $3/kg. And don’t forget it’s not always sunny or windy. Bring down the capacity factor to more like 50% and you would need to get solar and wind down to $10/MWh. At the moment, this is highly unrealistic.

So is there a business case?

For large scale green hydrogen facilities to meet existing commodity markets, it’s a no.

But sometime in the future, the world will stop using fossil fuels either through government mandates restricting their use such as carbon taxes or when the world runs out of cheap fossil fuels.

The EU has mandated the use of green hydrogen but where will it occur? For oil refining with a crude oil price of $80/bbl, an extra few dollars as a green premium would not be noticed by motorists.

But for fertilizer where the natural gas price used to make hydrogen makes up 70-90% of the cost, a few dollars would see prices forcing a farmer to pay double or triple.

For the USA, The Inflation Reduction Act provides a $3/kg tax credit which may be close to competing with fossil fuel based hydrogen.

But what about today? Is there a market for customers where price is not an issue?

Will the customer buy it?

Customers have different motivations especially when it comes to new products and services. One way to understand their buying strategy is through the framework of a technology adoption lifecycle.

?Bringing a new product to market, means targeting the right customer base.

1. New technology attracts early innovators. Think Australia’s chief scientist, Alan Finkel who had one of the first hydrogen cars. For this market, cost is not a consideration, it’s about being on the cutting edge and exploring what a future world could look like.
2. Early adopters jump in because they see a potential for a competitive advantage. Again, they are not fussed about costs, but they need to see the potential in the future.
3. The early majority have a compelling reason to buy such as solving a pressing problem, and the late majority just want to do what everyone else does. For them, it’s about ensuring there is a competitive environment and picking the market leader.
4. Finally, the laggards who don’t want to change until whatever they currently buy is obsolete

For Fortescue, what are they building that is cutting edge to attract the innovators? If anything, they are the early innovators and they have been making efforts to develop ammonia power ships and mining vehicles. ?

Other early innovators such as the shipping company Maersk have signalled that they are willing to pay the green premium but via biofuel.

On the long haul transport side, innovators are happy to adopt if they get a green subsidy. For the early and late majority, crunching the numbers Is starting to reveal battery-electric total cost of ownership might make more sense.

Fortescue should in theory have a competitive advantage with green steel. But again, the technology adoption lifecycle is looking for leaders in the field, not companies that have spread themselves so thin.

Can they refocus their efforts? Time will tell.