Hydrogen's chicken and egg

EDITOR'S NOTE

It's almost a year since I moderated a fascinating roundtable of 20 of the Middle East's green hydrogen industry leaders, during which NEOM Hydrogen's CEO shared how they overcame challenges to secure their project financing. In contrast, some peers in the room shared frustrations with either securing financing or customer contracts. Aside from strong sovereign fund support, what struck me as a fundamental difference was the integration of NEOM's key customer, Air Products, as an owner in the project, effectively sitting them on both sides of the market. Fast forward to today and Air Products is once again making headlines. They announced their ability to produce hydrogen in the USA without the additional government support that their competitors are petitioning for. Coincidence? Or is Air Products the "Redbull F1 team" of the hydrogen industry, with a winning formula that others have yet to discover?

HYDROGEN'S CHICKEN AND EGG

A common discussion point in the industry is how to accelerate converting hydrogen promise into projects. One underlying challenge can be characterized as a stalemate between customers who are hesitant to commit due to supply chain risks, such as a lack of hydrogen and delivery infrastructure, and supply chain developers who are unable to secure funding without signed customer contracts. The question of which should come first - the customer commitment or the supply chain development - is a familiar chicken and egg conundrum associated with emerging industries. Someone needs to risk moving first.

History can be of use in pointing towards solutions to similar scenarios. The North West Shelf Venture (NWSV) is one such example.

NWSV was an LNG gas project conceived in the 1970s, faced with similar challenges to the current hydrogen project landscape:

• Significant commercial risk due to distance from its market; complex and difficult production, storage and transport; and high exploration and construction risk and cost ($15bn).
• Low market maturity: the global LNG market started in the 70s with Japan imports, with substantial customer demand growth only kicking in two decades later as demand from European and North American grew.
• Cautious customer and investor enthusiasm leading to a potential chicken-egg stalemate between suppliers and customers.

Key to overcoming these challenges was a deep understanding and long-term partnership between potential competitors and stakeholders, to increase certainty and to share the "first mover" risk.

Key to overcoming the challenges was deep understanding and long-term commitment between partners.

The partnership built single common user processing, transmission and port assets. This approach eliminated the need for competing operations to duplicate infrastructure, resulting in substantial savings. Partnering further built credibility and collective bargaining power that led to a state agreement and subsidies, easing financial risk and helping to unlock further investment needed to progress the development.

Another more recent example is the emergence of the Electric Vehicle (EV) market. There are at least 6 failed manufacturers for every major success (manufacturers selling over a million cars per year); Tesla took 20-years to become profitable, even after over $4bn in government subsidies and cheap loans; and yet it would however be hard to argue that it wasn't all worth it.

In the case of EVs the key challenges also shared similarities with hydrogen:

• Significantly more expensive than the fossil fuel alternatives.
• High initial investment required to build high-tech factories.
• Low customer awareness and/or customer hesitancy.
• Relatively lower maturity technology (compared to traditional cars).

In the case of EVs, aspects of the incubation support and survival mechanisms to overcome these challenges were notably different from NWSV: there was little in the way of partnering; and government support was more evenly split between incentivising both customers (demand) and suppliers (supply) compared to supply-side focussed support for NWSV. Supporting both supply and demand with incentives helped Tesla overcome its early barriers, including avoiding bankruptcy and reducing buyer hesitancy, to create the self-sustaining market that we see today.

Supporting both supply and demand helps overcome initial barriers, to buy time for self-sustaining markets to establish.

So what can hydrogen learn from this?

The likes of USA's Inflation Reduction act and Australia's Hydrogen Headstart are supporting through subsidies, however what we aren't seeing is the extent of partnership seen in the NWSV example. There are some isolated cases, for example NEOM partnered with key customer Air Products and key input energy supplier ACWA Power to increase investor confidence and attract the finance it needed. Similarly Fortescue is partnering with the Kenya government who will act as both energy supplier and ammonia customer. But these are few and far between and not on the scale of competitor partnership seen on NWSV.

Uncertainty impedes dealmaking.

On the demand side various emissions credit schemes exist, a form of subsidy where customers earn credits from purchasing green hydrogen and displacing higher emissions alternatives eg coal. The positive impact of this mechanism is uncertain because its value is driven by either taxes on carbon (you can use the credit to offset emissions) or the market for credits (you can sell surplus credits to those that need to offset). Uncertainty impedes dealmaking. A more direct and determinable value mechanism could be more effective eg a customer discount.

Lastly an often overlooked aspect common to both examples is geography. NWSV focussed on a world class gas resource and initially sold to a domestic market. This proved the concept, reducing risk as perceived by potential export customers. When the venture did eventually start exporting, they narrowed their focus on a single market in Japan, who were both willing and in relatively close proximity. Similarly Tesla's primary market focus was California, where they knew there was proactive government and public support for emissions reducing vehicles. California was the easiest location and acted as a proving ground to then attract more finance for global expansion.

Could Australia's LNG blueprint be adapted for hydrogen?

What the hydrogen deal landscape would look like if hydrogen leaders partnered more extensively, on fewer projects, focussing initially on only the most favourable locations (with domestic customer potential, favourable government and good hydrogen resources). Time will tell, but I sense that those that do are most likely to succeed.

MYTHBUSTERS

MYTH: Green hydrogen is the Swiss army knife of decarbonisation

TRUTH RATING: 0

This myth is an analogy for one solution solving many problems. First of all, if any of you ever owned a Swiss army knife, how many times did you use any of the other tools apart from the knife? If like me it was "zero", then green hydrogen is already better because it has multiple practical decarbonisation applications, including making green fertilizer, steel and margarine (see here for more). On the other hand it definitely isn't the miracle cure for saving the planet. As yet nothing is. Hydrogen can't solve methane emissions from livestock (flatulence and manure). Similarly electricity can't decarbonise fertilizer. We therefore need an array of different solutions all working side by side, selecting the best "tool" for the job in each case.

NEWS

Thyssenkrupp seek 150,000T/year of hydrogen for green steel

Thyssenkrupp Steel Europe launched a tender for the delivery of 150,000 tons of green hydrogen per year, starting from 2028. The hydrogen will be used to decarbonise conventional steel making, that traditionally uses coal.

Fertilizer giant OCP partners with Fortescue

Vertically integrated fertilizer producer OCP is teaming up with Fortescue's hydrogen team promising large scale investment in green fertilizer manufacturing. This is a promising partnership because it vertically integrates key green fertilizer inputs (green energy, green ammonia, phosphate rock mining, phosphoric acid production) as well as a key customer (OCP would most likely purchase green ammonia) and government backing (OCP is 95% government owned) into a single project. Project details have yet to be released but expect a large solar powered green fertilizer project to be announced soon.

Leaders disagree over USA's hydrogen incentives.

Following USA's launch of industry leading subsidies for green hydrogen production of up to $3/kg, a public hearing was held last month to garner industry feedback. Many hydrogen industry leaders appealed for relaxation in the "temporal matching" requirement to access the subsidy, which requires new additional green energy generation to be online at the same time in the same location as the green hydrogen produced, citing the requirements would make projects commercially unfeasible. In stark contrast, international industrial gases manufacturer Air Products appealed to retain the requirement, adding that they were able to comply in a commercially feasible manner.

Australia's first electrolyser "Gigafactory"

Fortescue hit the headlines again this month as it opened its mass production electrolyser manufacturing facility in Queensland. Fortescue cited capacity to produce up to 2GW of electrolysers per year based on Proton Membrane exchange technology.