Clean hydrogen projects need cash to lift off

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In today’s note, I look at new research from the International Energy Agency to separate the hype from reality around the growth of clean hydrogen.

In Data Drill, I look at the ongoing risks to Europe’s gas markets, amid warnings that further cuts to Russian gas supplies cannot be ruled out.

Thanks for reading. — Rachel

Can clean hydrogen ride to the rescue?

Hopes for the success of clean hydrogen have never been higher, with governments around the world relying on the fuel to decarbonise their economies.

Projects are being unveiled all the time. Lhyfe last week laid out plans for a 70 megawatt green hydrogen plant in Perl, Germany, one of the many similar projects announced this year, including BP’s plans for a low-carbon hydrogen “cluster” in Valencia, Spain. BP’s project could see the London-listed company investing up to €2bn. 

Separating the noise from action can be difficult, however. 

Indeed, only 5 per cent of announced global clean hydrogen projects by volume have received the official green light with a final investment decision, according to figures published last week by the IEA.

The IEA estimates 70mn tonnes of clean hydrogen a year will need to be produced by 2030 under net zero goals. Currently, less than 1mn tonnes is being produced. 

All announced projects would take this to 30mn tonnes annually by 2030. But if you only count those that have investment locked in, the figure falls to less than 2mn tonnes.

What is holding back the rest? 

The IEA points to a combination of policy and regulatory uncertainty, high costs, lack of infrastructure to move hydrogen around and — underpinning it all — uncertain demand for the final product.

Most of the hydrogen produced today is used by refineries and chemical plants. It is almost entirely made using fossil fuels, with no effort to capture the carbon dioxide emissions from this process. 

Replacing that with hydrogen produced cleanly — for example, by using electrolysis with low-carbon electricity — is an obvious first step. But high costs can put off potential customers. 

Meanwhile, there is a long way to go before other cases envisaged under net zero, such as in steelmaking or long-duration electricity storage, are developed at scale.

The UK government was last week left in no doubt of the challenges ahead, when it abandoned a hydrogen home heating trial in the village of Whitby, near Chester, due to local objections.

The demand side “needs to be addressed as soon as possible”, argues Jose Miguel Bermudez, technology analyst at the IEA. “Without [committed demand] it’s very difficult to convince investors.”

A $1bn “demand-side support mechanism” announced this month by the US government is a step in the right direction. In the UK, the government-owned National Highways announced plans last week to fuel excavators and dump trucks with hydrogen instead of diesel.

Daryl Wilson, executive director at the global Hydrogen Council, argues the small proportion of final investment decisions is “completely normal” for such a nascent industry.

“It happened in the wind industry and in the solar industry; there were initially a large amount of announcements and not that large amount of final investment decisions,” he notes. “Then gradually, things came into balance.”

He believes things are starting to move, with regulations supporting demand and supply becoming clearer in many markets. These include, for example, efforts to speed up permitting of new projects, the Inflation Reduction Act providing financial support in the US, and clean energy mandates for some industries. 

“We are trying to build a fully decarbonised energy system — that’s going to take many, many different facets to materialise,” added Wilson. “We’re in that rapid growth phase.”

Joe Davis, associate director at clean energy investor Foresight Group, which is backing Germany energy company HH2E’s planned green hydrogen production site in Lubmin, Germany, agrees. 

“Policy is becoming clearer, and as a result I would expect more projects to achieve [final investment decisions] going forward,” he said.

“There have been low numbers in the past due to regulatory uncertainty; that’s slowly being removed and so I would expect that number to climb.”

HH2E’s project is set to reach final investment decision later this year. Under the plans, it will be capable of producing more than 6,000 tonnes of green hydrogen in its first stage.

China is one of the strongest areas for new clean hydrogen projects. Sinopec in June announced the start-up of its project in Kuqa city, Xinjiang. It says this has the capacity to produce 20,000 tonnes of green hydrogen a year, through electrolysis using solar power.

Despite the challenges, the IEA has ranked hydrogen under “more effort needed” in its clean energy progress report, rather than “not on track”, such as for the development of carbon capture, and efforts to quit coal.

“It’s very difficult to elaborate on the speed of growth for nascent markets and when they might reach a tipping point and start going much faster,” says Bermudez. Hydrogen hopes might yet turn into action.

Data Drill

Cuts in Russian supplies of gas to Europe last year wreaked economic havoc, triggering a cost of living crisis and pushing businesses to the brink.

Following a relatively mild winter and efforts to save energy, gas storage levels in Europe are well above average for this time of year and the IEA says storage facilities could be almost full by mid-September.

Prices have fallen, with the TTF, Europe’s benchmark, down to €24.63 per megawatt hour on Monday.

But has complacency set in over the risks ahead?

In its latest report on the gas market, the IEA warns of price jumps and supply disruption if Russia cuts supplies again and the winter is cold.

“Full storage sites are no guarantee against winter volatility,” it said.

Power Points

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Energy Source is written and edited by edited by the FT Energy and Natural Resources team. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.