Financing the future of green hydrogen

TIM BUCKLEY

Financing the future of green hydrogen

TIM BUCKLEY

Director Energy Finance Studies, Australia/South Asia, IEEFA

In this ongoing global energy system transformation, the outcome is as inevitable as it is overdue.

A number of factors are accelerating the shift from the current green hydrogen (GH2) cottage industry to the global gigawatt-scale commercialisation that will take place this decade.

Energy cost deflation

Investors understand the power of experience curves, coupled with ongoing technology innovation and massive manufacturing supply chain scaling up.

The power of industry disruption was proven with mobile phones and the internet. Now the focus is on decarbonising energy, propelled even faster as the power and transport sectors converge, with ongoing deflation in battery costs and improved performance.

China is massively committed to dominating zero carbon growth industries of the future. It is on track to quadruple global polysilicon manufacturing capacity by 2024 vs last year. Solar installs globally could double or treble again within three years.

Tie this to the huge change in the economics of GH2 and ever-lower variable renewable energy (VRE) costs, and we have electricity market deflation and disruption.

Australia is clearly showing the world’s electricity market the future. On sunny days –10am to 3.30pm daily – electricity prices are now negative. EVs, batteries and pumped hydro can absorb some of this negative cost electricity, but low-capacity factor GH2 facilities will profiteer on spilled electricity as electrification of everything drives decarbonisation.

Electrolyser manufacturing is scaling up

The move from tiny batch manufacturing to gigawatt (GW) scale manufacturing is moving at lightspeed, a key driver of the expected massive initial capital cost reductions in GH2.

Nel moved from 40 megawatts (MW) to 500MW in 2021; ITM Power from 100MW to 1000MW. Thyssenkrupp targeted a fivefold expansion to 5GW of manufacturing capacity online by 2025, and FFI and Plug proposed 2GW of manufacturing capacity at Gladstone, Australia.

Electrolyser facilities are scaling up, too

Electrolyser unit sizes are moving from 0.2MW to 5MW − a massive twentyfold scaling up again. BNEF estimates electrolyser capacity globally at 15GW by 2024.

Global production was 70MW in 2020, which itself was a doubling from the prior year, according to the IEA.

The capital cost of electrolyser units will come down dramatically with manufacturing supply chain scale and facility scaling up.

In February 2020, the largest operational GH2 facility (10MW) opened in Japan. In January 2021 Air Liquide opened a 20MW facility in Canada.

At the same time as this facility was commissioned, construction started on a 100MW facility in Germany and Shell’s Rhineland electrolyser, known as Refhyne. Assuming completion on time, this is another fivefold expansion in just four years.

In January 2022, thyssenkrupp and Shell announced a 200MW unit in Rotterdam, to be commissioned by 2024/25 − another doubling even before the 100MW facility is built.

New Zealand is even more ambitious, with Meridian and Contact Energy proposing a 600MW facility for a 2025/26 start-up.

IHS Markit in mid-2020 aggressively predicted 100MW facility sizes by 2030 −18 months later that timetable has been accelerated five years.

All-in electrolyser capital costs by 2030 could be down 50% from today, or even 80%. And the learning experience will be huge, with tenfold expansion every couple of years.

Government decarbonisation commitments give GH2 policy support

Last year’s ambitious pledges for net-zero emissions by mid-century were staggering, if long overdue. With this comes the policy framework to reset the rules of industry engagement, destroying some companies’ social licence to operate. It is also accompanied by government funding of everlarger pilot projects.

China pledged peak emissions by 2030 and net zero emissions by 2060. Japan and Korea pledged net zero emissions by 2050. These countries are Australia’s largest fossil fuel export destinations, and have now become a trade risk for the country.

In December 2021 China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) committed the five largest utilities in China (and the world) to have more than 50% of their total capacity (not generation) in renewable energy by 2025, just three years from now. They will probably double China’s VRE installs annually.

Japan’s JERA and MHI this month announced government approval and sponsorship for two GW-scale pilot projects for 50% ammonia co-firing of coal-fired power plants, central to Japan’s pledges.

Although the U.S. is late to the GH2 party, President Biden announced the Department of Energy’s Earthshot of $1 for 1kg of clean H2 in one decade in October 2021. This is predicated on electrolyser capital costs dropping 90% this decade, coupled with renewable energy costs dropping another 60%.

Pricing of CO2 emissions is building, globally

Most economists agree the most effective way to deal with climate change is to price in this massive externality. Currently, fossil fuel firms and their product users don’t pay the externalised cost of CO2 emissions.

That is changing with a trebling of the EU emission trading scheme (ETS) price in 2021 and, interesting in the absence of policy, a trebling of the Australian carbon credit unit (ACCU).

The huge momentum in CO2 pricing globally over 2021 demonstrates the snowballing of policy, finance and technology. The EU ETS at one point last year trebled to a record €90/tonne, a tenfold rise in five years.

The largest ETS in the world was launched in July 2021 in China, and in January 2022 government reports already suggest a pending significant tightening of free permits.

In Australia gas company Santos expects taxpayers to subsidise its carbon capture for enhanced oil recovery (CCUS-EOR). In the rest of the world, CO2 remaining an un-costed externality is rapidly losing currency.

Corporate commitments require a credible pathway, and global investors are demanding corporates now have a credible path to zero carbon with credible interim targets.

The world’s largest financial institution, BlackRock with US$10 trillion of assets under management has demanded all corporates it invests in have credible short, medium and long term plans dealing with CO2 emissions, a path to net zero emissions, alignment with the Science Based Targets initiative (SBTi), observance of the Task Force on Climate-related Financial Disclosures (TCFD) and newly formed International Sustainability Standards Board (ISSB) standards, and a ramping-up of the Climate Action 100+, corporate engagement and proxy voting.

While IndianOil takes stride towards being an integrated energy company with increasing focus towards clean energy to realize India’s vision of net-zero emissions in the future, the company also lays equal emphasis on conservation of natural habitat. Adopting the Indian Single Horned Rhino as its Brand Mascot was indeed a step towards protecting this endangered species. The Corporation will also be steering the ‘Cheetah Introduction Project’ at Kuno National Park in Madhya Pradesh, India.