Renewable Hydrogen Projects - Delivering on the potential
This is the first in a three-part series about the potential and challenges in bringing hydrogen projects to market. The next installments of the series will address compliance, contracting, and technical challenges. The final installment of the series will include our recommendations for successfully bring a project to market.
Introduction
The potential for hydrogen as a renewable energy source is profound. Transitioning current production methods of hydrogen to green methods would eliminate nearly 830 million tonnes of CO2 emissions. But hydrogen’s potential doesn’t end with production – it can be used as a cleaner energy source for transportation and some of the most polluting industrial sectors. As renewable energy sources like solar and wind become more affordable and abundant, the cost of producing renewable hydrogen is dropping. Given this, hydrogen seems like inevitable solution to a significant part of the energy transition. But to realize this potential, we need to address broad economic challenges and more immediate hurdles to funding and executing these projects.
Immediate project challenges
Far-sited owners recognize hydrogen’s potential and have begun to invest in bringing this vision to reality. Often led by developers in close collaboration with technologists, these projects have different needs than traditional large energy projects. New hydrogen projects face challenges in technical and financial risk, have more aggressive ROI demands, and a new set of covenants with banks and equity partners. These owners must navigate a complex project process, risk reluctant contractors, new technology implementation, and changing government incentives, while still meeting their investors’ demands.
Far-sited owners recognize hydrogen’s potential and have begun to invest in bringing this vision to reality. But these owners must navigate a complex project process, risk reluctant contractors, new technology implementation, and changing government incentives, while still meeting their investors’ demands.
Compliance
As the hydrogen market emerges, projects rely on government incentives to overcome financial hurdles. But the gap between planning for these incentives and realizing their benefits is larger than most realize. Incentives such as the Inflation Reduction Act (IRA) come with difficult to meet requirements such as prevailing wage and a proscriptive apprenticeship program. In addition, these projects have extensive documentation and auditing burden, extending in some cases for up to 20 years of production.
Contractual
The potential for hydrogen projects is its biggest asset and its largest liability. Large scale, financed, zero recourse green hydrogen projects in new locations with new technology and government compliance requirements pose a unique risk. Many of these risks are being transferred to contractors from investors. Contractors are hesitant to take on the entirety of that risk, especially without significant cost and schedule increases. Technologists lack the balance sheet necessary to backstop performance risk to satisfy banking requirements. Owners must create a unique and dynamic contractual system that balances risk appropriately among all project stakeholders.
Technical
A project is only economically viable if it chooses a technology compatible with production needs and timing, the project location, power prices and availability, pipeline accessibility, grid compatibility, electrical infrastructure and more. Accurately determining the correct technology is a specialised process which requires technical, financial, commercial and construction experience. Without a solid technical solution, project estimates and configurations are inaccurate – leading to significant projects cost overruns and production delays, destroying the investment model.
Hydrogen Applications
The market for hydrogen is diverse and growing, with a wide range of applications across sectors. Some of the key markets for hydrogen include:
1. Transportation: Hydrogen fuel cells can be used for various transportation applications, including cars, buses, trucks, and trains. These vehicles emit only water vapor and are seen as a cleaner alternative to traditional gasoline and diesel vehicles.
2. Energy storage: Hydrogen can be used as a form of energy storage, allowing excess renewable energy from sources like wind and solar to be stored and used when needed. This can help to balance the grid and increase the reliability of renewable energy.
3. Industrial applications: Hydrogen is used in a variety of industrial processes, such as in the production of ammonia for fertilizers, in refineries for desulfurization, and in the production of cement, glass and steel.
4. Power generation: Hydrogen can be used in fuel cells or combusted directly in a boiler or gas turbine to generate electricity, either for grid-connected power plants or off-grid applications. Fuel cells are efficient and produce zero emissions, making them a promising technology for clean power generation.
5. Heating and cooling: Hydrogen can be used as a clean fuel for heating and cooling buildings, either directly or through fuel cells. This can help reduce carbon emissions from the heating and cooling sectors.
The potential of hydrogen is being realized slowly; hydrogen transportation infrastructure and commercial hydrogen compatible engines will create a boom in demand. Sectors that will be penetrated first by clean hydrogen must offset its initial costs with significant benefit. These are industries with existing infrastructure and heavy carbon footprints:
- High polluting industrial processes such as steel production, cement, jet fuel, and cargo ships
- Chemical and fertilizer production – one of the largest consumers of ammonia, typically for use in fertilizers
In the United States, federal incentives support these efforts, and have funded large hubs to divert the production of ‘dirty’ hydrogen to clean. These hubs include hydrogen fuelling stations in the Appalachian region, heavy duty trucking and port operations in California and the gulf coast, ammonia production in the heartland, steel and glass production in the Midwest, and more.
