Why Europe’s Hydrogen Economy Dreams Remain Just That
Alex Kimani

Four years ago, the European Commission unveiled the landmark European Green Deal wherein it laid out a series of policies aimed at making the region a “climate-neutral bloc” by 2050. Among the key policies, Europe set a target to consume 20 million tons/year (Mt/y) of renewable hydrogen and install 62 GW in electrolyzer capacity by 2030. Unfortunately, the continent is quickly acknowledging a cold reality: hydrogen, really, is a hard sell. In its latest annual report, the EU Agency for the Cooperation of Energy Regulators (ACER) paints a bleak picture of the state of the continent’s hydrogen sector, saying those targets are unlikely to be realized without tackling serious challenges that include production cost and infrastructure.

“The current renewable hydrogen consumption remains minimal, and while EU renewable energy and decarbonization targets could drive the demand, uptake so far has been slow,” ACER researchers wrote.

Around 62 MW of electrolyzer capacity was installed in the EU at the end of 2023, good for a mere 0.1% of the continent’s 2030 target. According to ACER data, EU countries consumed 7.2 Mt of hydrogen in 2023, a -2.5% Y-o-Y drop, mostly in chemical manufacturing and heavy industry like steel production. More than 99% of the EU’s hydrogen supply was the gray typeproduced using natural gas or other fossil fuels.

To be fair, the EU set those lofty goals two years before Russia’s war in Ukraine triggered a global energy crisis, a situation so dire that even shunned sectors like nuclear have received a new lease of life. Since the beginning of 2022, Europe has been on a gas buying spree, adding more than 36.5 billion cubic meters (Bcm), or roughly 1,289 Bcf, in regasification capacity. According to the Institute for Energy Economics and Financial Analysis, Europe’s import capacity could exceed 406 Bcm/year, or 14.3 Tcf/y, by 2030 as more import projects come online.

Hard Sell

Europe is not alone here. A few years ago, climate experts touted the outsized role that hydrogen could play in helping the planet limit catastrophic global warming. Indeed, net-zero models have forecast that hydrogen could provide as much as 20% of the world’s primary energy by 2050, nearly as much as all renewables currently contribute to the United States’ energy mix. Not surprisingly, there’s been no shortage of big hydrogen ambitions.

The European Union set a target to produce 10 million metric tons of carbon-free hydrogen by 2030 while importing an equal amount. Last year, U.S. President Joe Biden unveiled seven regional hydrogen hubs that will receive $7 billion from the government as part of the bipartisan infrastructure law. Chile, Australia and Egypt have laid the groundwork to produce green hydrogen for export. Meanwhile, China has announced no less than 360 hydrogen plants. Overall, companies and governments across the globe have announced plans to build nearly 1,600 hydrogen plants. However, hydrogen producers are facing one small problem: Few customers are stepping up to buy their commodity.

According to Bloomberg New Energy Finance (BNEF), just 12% of hydrogen plants have customers with offtake agreements. Even among projects that have signed offtake deals, most have vague, nonbinding arrangements that can be quietly discarded if the potential buyers back out.

The big problem here is that many industries that could potentially run on hydrogen require expensive retooling to make this a reality, a leap that most are unwilling to make.

To complicate matters, green hydrogen made by electrolysing water using renewable energy costs nearly four times as gray hydrogen created from natural gas, or methane, using steam methane reformation but without capturing the greenhouse gasses emitted in the process. Quite naturally, it's hard to build hydrogen infrastructure when the demand may not materialize for years.

“No sane project developer is going to start producing hydrogen without having a buyer for it, and no sane banker is going to lend money to a project developer without reasonable confidence that someone’s going to buy the hydrogen,” BNEF analyst Martin Tengler notes.

“It’s no different than any other energy development at scale. Natural gas pipelines didn’t get built without customers,” says Laura Luce, chief executive officer of Hy Stor Energy. Laura’s company has secured an exclusive letter of intent to supply hydrogen to an iron mill that Sweden’s SSAB SA plans to build in Mississippi.

The situation is quite dire, even in renewables-obsessed Europe, “If half of it comes to fruition, we’ll be happy. If a quarter of it comes to fruition, we’ll be happy,” Andy Marsh, CEO of Plug Power Inc. (NASDAQ:PLUG) told BNEF, referring to the company’s 4.5 gigawatts in engineering and design work underway on European projects to generate green hydrogen. According to Marsh, EU member states are still incorporating their hydrogen roadmaps into their own regulations, delaying private investments.

Werner Ponikwar, CEO of hydrogen equipment maker Thyssenkrupp Nucera AG, says hydrogen projects likely to succeed today are ones that include “the whole ecosystem,” in essence hydrogen plants located near a clean energy source, with a ready customer close at hand.

According to Rachel Crouch, a senior associate at Norton Rose Fulbright, 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 sees petroleum refining as one such 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. She has also predicted that specialty vehicles will become big hydrogen customers because 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 to ensure reliability.

By Alex Kimani for Oilprice.com 

 

 

 

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

 

 

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