Shaping tomorrow’s hydrogen market

Since hydrogen markets will grow exponentially in the mid- and long-term, companies that invest today in hydrogen will be able to capture this growth, become technology leaders and shape the future of the business.

BY BAKER MAKENZIE*

However, there are still multiple barriers to the widespread development of decarbonised hydrogen and each investment will face challenges in the form of policy, regulatory, economic and financial barriers. The speed of deployment of hydrogen in coming years is expected to vary between sectors and countries. These variations come partly from the different level of maturity of the technology required for decarbonised hydrogen development.

The details of different governments’ strategy will affect what opportunities can be taken advantage of. Mastering government strategies, regulations and sources of funding will be crucial. In each region, government strategies and regulatory barriers should first be assessed and then monitored. Governments’ economic strategies create good market conditions and are vital. The speed of development of the decarbonised hydrogen market will depend on how quickly governments require the current and future markets for hydrogen to decarbonise.

Those companies ahead of the curve in factoring government climate strategy into investment decisions are the ones that will lead tomorrow’s hydrogen market. The presence of favourable economic conditions for the development of green and blue hydrogen, in a particular region or country, should be a precondition for any large-scale investment by first movers. Outdated hydrogenrelated regulations should also be monitored. Despite government commitments, regulations can be slow to adapt. Outdated regulatory regimes are significant hurdles to smart power advancement, including hydrogen-based storage. Some of the barriers include, among others: • The absence of “Guarantees of Origin” schemes enabling the distinction between different types of hydrogen based on greenhouse gas emissions associated to their production • The unclear legal status of “power-to-hydrogen” plants that can prevent such plants from being rewarded according to the actual service rendered to the energy system • Counterproductive industrial emissions or safety regulations • Inconsistent funding rules • Outdated market rules in the gas or electricity markets • Government discrimination based on irrational concerns.

To ensure a return on their investment, first movers should assess (i) the effect of existing regulatory barriers on any new investment or project, (ii) the likelihood of such barrier disappearing for a particular market and within a particular timeframe, and (iii) the availability of public support to derisk the investment when needed. Smart movers should use government support to de-risk investment with respect to the cost of hydrogen.

Smart first movers should also rely on direct government support to de-risk investment during the early years of this emerging market. To do so, it is important to act in the right areas and in the right markets, where government support is likely to be abundant. To best use available government companies should understand (i) which countries provide the best focused funding support and (ii) what types of projects governments are likely to support.

Companies contemplating a specific investment in their own region and field of expertise should carry out a thorough analysis of funding opportunities. However, understanding regional and sectoral funding trends as well as expert recommendations can already provide some insight as to government-financing patterns.

In the past, governments have so far, (i) favoured the development of green (as opposed to blue) hydrogen production and (ii) focused on hydrogen-based transportation. In practice, these two efforts are closely connected since 40% of the publicly funded water electrolyzers have been installed to supply hydrogen-fuelled buses or cars. Thanks to these investments, many stakeholders share the opinion that large-scale demand and standardisation, rather than further technological progress, are now the key to the widespread adoption of fuel cells, water electrolyzers, and hydrogen refuelling. A transition of public funding from technological demonstration projects and R&D into projects enabling large-scale demand and standardisation should therefore be expected.

In 2019, the International Energy Agency (IEA) published a report on the future of hydrogen which identified high-potential business opportunities whose funding would give a boost to the hydrogen market and drive down costs and recommended that government seize the following “near-term opportunities”: • Turning existing industrial ports into epicenters for scaling up the production and use of clean hydrogen • Capitalising on existing natural gas infrastructure and increase hydrogen demand by implementing an obligation to mix (low-carbon) hydrogen into natural gas • Making fuel cell vehicles more competitive for vehicle fleets, freight transports and corridors by ensuring the parallel expansion of infrastructure for hydrogen supply, vehicle refuelling and vehicle manufacturing • Stimulating the creation of international hydrogen trade.

One can expect that many governments’ strategy will be reviewed soon, largely in a direction inspired by the IEA’s recommendations.

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