Why almost nobody buys green hydrogen

The potential of hydrogen as a carbon-free fuel has generated a great deal of excitement. From the deserts of Australia and Namibia to the windswept straits of Patagonia, companies and governments around the world are planning to build nearly 1,600 plants to produce hydrogen. The gas can be produced cleanly by using wind or solar power in a process that splits the molecule from water. There’s just one problem: The vast majority of these projects don’t have a single customer to buy the fuel.

Read also: Will the tax exemption for hybrid cars in Uttar Pradesh remain or will it be abolished? “Incentives may change”

The few that have some kind of fuel purchase agreement are mostly vague, non-binding arrangements that can be quietly scrapped if the potential buyers back out. As a result, many of the projects now being touted with great fanfare by countries seeking to become “the Saudi Arabia of hydrogen” are unlikely to ever be built. According to BloombergNEF, only 12 percent of hydrogen plants, which are considered low-carbon because they avoid natural gas or reduce emissions, have customers who have contracts to use the fuel.

“No sensible project developer will start producing hydrogen without having a buyer for it, and no sensible banker will lend money to a project developer without having sufficient certainty that someone will buy the hydrogen,” says BNEF analyst Martin Tengler.

It’s easy to see why hydrogen boosters have so much potential. The molecule could be crucial to the world reaching net-zero carbon emissions in the fight against climate change. When burned in a turbine or run through a fuel cell, it generates energy without spewing greenhouse gases into the air. Almost all of the hydrogen molecule used today is derived from natural gas, but producing it from water and renewable energy releases no carbon at all.

Read also: Bharti acquires stakes in British companies alongside Tata, Mahindra and Welspun

Many analysts see no other way to decarbonize steel, shipping and other industries that cannot easily run on electricity. BNEF predicts that in 2050, we will need 390 million tonnes of hydrogen per year globally to eliminate carbon emissions from the global economy. That’s more than four times the amount consumed today.

But the transition is not so easy. Most companies that could use hydrogen would need expensive new facilities to use it. But they don’t dare to do that. Hydrogen produced with clean energy costs four times as much as hydrogen from natural gas, according to BNEF. And it is difficult to build the infrastructure for hydrogen supply – not just facilities for production, but also pipelines for transport – when demand may not materialize for years.

“This is no different than any other large-scale energy development. Natural gas pipelines were not built without customers,” says Laura Luce, CEO of Hy Stor Energy. Her company has an exclusive letter of intent to supply hydrogen to an iron plant that Swedish group SSAB SA plans to build in Mississippi.

Countries with the potential to generate abundant renewable energy, such as Chile with wind power and Australia and Egypt with solar, have announced major targets for production of the fuel, often for export. More than 360 plants have been announced in China alone, according to BNEF.

The European Union has set a goal of producing 10 million tons of carbon-free hydrogen by 2030 and importing the same amount. In the United States, President Joe Biden has allocated $8 billion to create “hydrogen hubs,” clusters of companies that produce and use the fuel.

Read also: Retail inflation falls to five-year low of 3.54% in July, below RBI’s 4% target: Govt data

Andy Marsh, CEO of Plug Power Inc., says his company is working to develop and design European projects that would collectively use about 4.5 gigawatts of renewable energy to produce hydrogen. “If half of that is realized, we’ll be happy,” he says. “If a quarter is realized, we’ll be happy.” Although the EU has set ambitious targets, Marsh says, member states are still incorporating them into their own regulations, delaying private investment.

In the US, industry and the Biden administration continue to haggle over the requirements for claiming hydrogen tax credits under federal law. Meanwhile, projects intended for export face additional hurdles. Unlike natural gas or oil, there is still no global system for transporting hydrogen. To transport it, hydrogen must be supercooled, compressed or transported in another, more manageable form, such as ammonia, which combines hydrogen with nitrogen.

Werner Ponikwar, CEO of hydrogen plant manufacturer Thyssenkrupp Nucera AG, thinks pipelines are a good option, but many potential hydrogen exporters would not be able to reach their potential customers via pipelines. “If you have to bridge an ocean, it’s more difficult,” he says. Many expect a quiet weeding out of more ambitious projects. Some planned plants have already been put on hold.

Today, Ponikwar says, projects that are likely to succeed are those that involve “the whole ecosystem”—that is, locate a hydrogen plant near a clean energy source, with a customer nearby, ready to use. For example, his company is supplying equipment for a hydrogen plant in northern Sweden that will in turn supply an iron and steel plant being developed by H2 Green Steel. H2 Green Steel has secured 6.5 billion euros ($6.9 billion) in funding for the project. The region’s abundant hydropower will provide the electricity, and Mercedes-Benz Group AG has agreed to buy 50,000 tons of the plant’s steel per year. “For green steel, there is a market that is interested in it, and they are willing to pay a premium for it,” Ponikwar says.

Hy Stor has taken a similar path, designing a project that will be located near its customer SSAB. The company’s Mississippi project will use on-site wind and geothermal energy to produce the hydrogen and store it in an underground salt dome. Other customers are now interested in the project’s hydrogen, Luce says. Although construction hasn’t started yet, she aims to have the project operational by 2027. “We didn’t build a project and then try to sell it to people. We built a project around a customer,” Luce says. “I always believe that customer-focused projects find a way to get done.”